In this article I’m going to focus on the accumulation of wealth. Money personalities and the importance of rational (unbiased) and informed decision-making have been discussed previously. It’s now time to see where lawyers are at with their money. Do they have a considered strategy in place for making their money work for them, rather than the other way round, with no prospect of reversal?
I asked survey participants to identify the main strategies they have employed to date to create wealth, including any de facto or ad hoc strategies.
Main strategies to build wealth
Buying a family home (77%)
Buying a family home was the most popular strategy, with 77% acknowledging it as their main plan to build wealth. This comes as no surprise. We know lawyers are predominantly Family Stewards and, of course, a top priority is to buy a home for their loved ones. For many New Zealanders (not just lawyers), this is the main (if not only) financial asset.
Statistics New Zealand shows home ownership trending down, with just under half of all people living in a house they own or partly own, with a decline in home ownership seen across the board from people in their 20s to 70s, with the largest falls for those in their 30s and 40s.
This concern was echoed in our interviews with younger lawyers experiencing major challenges in getting into the property market. They are not on low incomes by any stretch of the imagination, compared to others at the same life stage. However, “mortgaging to the hilt to buy the most expensive house you can” is simply not within their reach.
Buying a home is not a one-stop shop. Taken properly into account, several hidden costs and hassles significantly reduce your effective return. Apart from the lack of diversification, they are typically illiquid assets with high transaction (entry and exit) costs. And, if your property is funded with a loan, an increase in interest rates will increase your repayments and decrease your disposable income. You can’t sell off a bedroom to access cash in a hurry! It is all or nothing.
Don’t get me wrong. I believe that creating a comfortable home environment is essential to create a happy family life, but we need to be careful not to fall into the trap of keeping up with the Joneses. Lawyers surveyed who had deliberately kept a modest family home (and car) were happier and had their financial house in better order than those with expensive and multiple lifestyle properties.
The second most popular wealth-creating strategy was broadly defined as investing. Excluding the family home, that definition included other property investments and financial assets, such as term deposits, shares and bonds. An unanticipated angle came from lawyers adamant that their collectables, such as horses, extensive art collections, classic and racing cars, wine cellars and jewellery, were high-performing financial assets.
Property investing was the clear front-runner in the investment category. Lawyers with a share portfolio invested mainly through a professional fund manager, due to the stringent “insider trading rules”. When investing in property and, to a lesser extent, shares, it is important to look at how the investment is financed. Lawyers surveyed mentioned a few concerning and often conflicting relationships with debt. One relationship that stood out, uncomfortably, was the number of lawyers who saw debt “as their friend”. One senior lawyer was convinced the biggest contributor to his wealth was debt. To be fair, he appeared to view debt as a tool to keep him disciplined in reducing his mortgage and focused on accumulating wealth, rather than as a means of uncontrolled spending on consumables that tend to evaporate.
There is no right or wrong when it comes to debt but if you are using debt to get ahead, use it wisely and purposefully. Pay if off as soon as you can so it doesn’t become a monkey on your back.
Increasing income (52%)
For many lawyers, increasing their income is part and parcel of their career progression, unless they decide to get “off the treadmill”. My hypothesis is that lawyers are the lucky few who often beat their peers in other professions at each stage in their careers. Maybe this explains why law schools are mushrooming around the country. While it is important to follow your star, joining a “lucky” profession sounds like a winning strategy.
The facts show that in 2013, the average income for legal professionals was $102,400. By contrast, Statistics New Zealand reports as little as 6% of all employed New Zealanders aged 15 and over had incomes over $100,000.
The average private-practice salary increases for years 1 & 2, 3 and 4 respectively, are 18.3%, 17.8%, and 16.5%. This provides a significant opportunity for lawyers early in their careers to start creating wealth.
The average salary for a lawyer (excluding equity partners) in private practice with 10 or more years’ experience is $108,245. However, earnings of equity partners and directors are considerably higher (excluding barristers sole), with a mean of $244,460.
The clear message from the income data is that lawyers are indeed the “lucky” few who earn high incomes by national standards while they are working and that they are in a unique position to create wealth for the future. This is the great “present self” for lawyers, but the question is how well they are leveraging this to create an equally attractive “future self”. This is a powerful message for young lawyers, who, from the moment they start climbing the ladder of high incomes should be focusing on a long-term strategy of continuously creating wealth for themselves.
Contributing to a superannuation scheme (28%)
A total of 28% of interviewees acknowledged superannuation schemes as a strategy to build wealth. They were either already contributing to a scheme such as KiwiSaver or planning to do so. Only some mentioned a corporate or self-managed superannuation scheme). The 28% was mainly made up of younger lawyers using KiwiSaver as a wealth-creating strategy, while at the same time acquiring and paying off a family home. They particularly liked the ability to draw down funds when purchasing a first home (while being mindful of the conditions). Although the average balance of KiwiSaver accounts across all KiwiSaver funds is only $9,000, there are plenty of opportunities for lawyers to grow their fund balance throughout their working lives.
I am not advocating that KiwiSaver should be the only or main strategy to build your retirement “nest egg”, but the Government is certainly creating the right incentives for young lawyers to start saving for their retirement early and to get into the right habits.
Starting or buying a business (15%)
On the surface, starting or buying a business is not a common strategy for lawyers, unless we view law firms as entrepreneurial businesses. Nevertheless, and somewhat surprisingly, New Zealand law firms are now being considered for business excellence and entrepreneurship awards. However, partners in large law firms can hardly be described as entrepreneurial unless they “jumped off the cliff” and established their own barrister chambers or boutique law firm.
The trend of lawyers taking the leap is certainly upwards and it has become a popular and expected “next step”. A surprising 15% of interviewees chose this as a main strategy to build wealth. Benefits highlighted by lawyers “doing their own thing” included more control over their work, closer client contact, a more enjoyable work environment, better input into firm processes and management, and, importantly, higher profitability, due to significantly reduced costs without high rent and staff salaries. But while a smaller firm environment may extend your career and earning power, it doesn’t necessarily create a saleable asset for retirement.
Unfortunately, for each success story, there are many more stories of companies failing, with roughly 25% of small businesses going under within the first three years in New Zealand. This should not be a deterrent, but rather a reminder that it may be a risky strategy for a lawyer to put his or her hard-earned money into a start-up business, especially if they have to rely on others to make it work while they continue the daily grind in their legal practices.
No financial strategy (15%)
A total of 15% of lawyers admitted to not having a financial strategy. Some had ticked some of the above strategies, but they were de facto or ad hoc, and not part of a considered plan. Don’t panic – it’s never too late to put your house in order!
Very few lawyers acknowledged that they had built wealth through the assistance of an inheritance at some point in their lives. Many in the middle-aged stage of life mentioned there may be a death of a parent in the next 10 years, but the majority said it would be of little or no impact financially. With life expectancy continuing to increase (currently at 83 years for women and 79.3 years for men in New Zealand), inheritances from parents are likely to be further delayed. Maybe this should be viewed as the “icing on the cake”.
Do these rules of thumb sound familiar?
At the end of the wealth-creation section of the survey, some lawyers were looking for an easy answer. I understand this, since they are busy people, but they realise the importance of the topic and want a quick fix. They were looking for validation of a few rules of thumb that had been bandied around the board table, such as “Two houses and two million – that’s all I need for retirement” or “Ten million they say will be plenty”. These sound like great round numbers, but aren’t particularly well thought through and tailored to each individual’s needs and circumstances. I am afraid to say, financial planning isn’t that easy!
Continue reading: I have posted the “7 golden rules of money” on my site www.theprivateoffice.co.nz.
Laetitia Peterson is a personal wealth adviser and is married to competition barrister, Andrew Peterson. She has worked with companies such as Goldman Sachs and boutique funds management firm Liontamer, which she co-founded with Janine Starks. She is now the CEO (and founder) of The Private Office, helping successful lawyers achieve the financial goals.