2014 / Planning
10 Big Financial Obstacles Attorneys Face
Most of the lawyers I know – and my Bay Area financial planning practice brings me in contact with a lot of them – are smart, busy people. Most spend so much of their time protecting other people’s interests it often precludes them from giving the necessary time and attention to their own financial interests. As a consequence, many lawyers can’t even imagine leaving their law practice at the time of their own choosing because they haven’t been able to amass the wealth to do so.
The unfortunate reality is that an increasing number of lawyers are simply not financially prepared to retire on time. But, it’s not because they’re not smart, ambitious, or well-intentioned; rather it’s due, in large part, to the way they are taught to think, operate, and view the world as lawyers, which can shut down nearly every behavioral instinct necessary to be successful long-term investor.
I’m sure that this will rustle a few feathers; however, that’s not my intent. I’ve had these conversations hundreds of times with lawyer friends and clients, and, while many of them were slow to acknowledge their shortcomings in the investment arena, nearly all of them readily admit they’re not where they should be financially. So, my goal here is twofold:
• To open this conversation to all lawyers and encourage a dialogue about a phenomenon few seem to discuss, and…
• To help lawyers recognize those traits and behaviors typically ascribed to them that prevent them from becoming successful investors.
I think there is unanimous agreement that there are a common set of mental, emotional and behavioral traits are common to the legal profession. Some of it borders on the stereotypical, but, most would agree that lawyers have superb analytical and negotiating skills; they’re exceptional problem solvers, and they know how to get things done. The general view is that lawyers are successful, knowledgeable and leaders in their community.
Then there’s the legal training, which develops a set of skills as well as an attitude. In law school, where students are trained to “think like a lawyer,” a subtle but powerful shift occurs in a lawyer’s world-view and how to manage it. For the legions of lawyers entering the legal field each year, the characteristics and traits developed during their training are not only acceptable as a way to conduct themselves in practice, they are essential to their success. However, as many lawyers find after years of trial and error, these natural default settings don’t always function well in the world of investing. But, rather than just pointing out their shortcomings as investors, this article seeks to offer lawyers a rationale as to how these traits and characteristics can actually become obstacles to building real wealth. Perhaps then, they will be more inclined to change the settings when it ______________???
The 10 Financial Obstacles Attorneys Face In Building Wealth
Unquestionably, lawyers are smart; super smart. They have to be. In fact, they are highly paid to be the smartest person in the room when it counts. The issue is whether they want or need to be the smartest person in the room in any other situation. After seven or eight years of attending the top schools and working their way to the top in the best law firms, it would be difficult to accede intellectual superiority to anyone without a similar pedigree. So, you can imagine why lawyers might scoff at the one percent fee investment managers want to charge to manage their money, when they know they are smarter than the investment manager. This may be the primary reason why many lawyers attempt to manage their investments on their own which is often a fatal mistake.
We’ve all familiar with the age-old adage: A person who is own lawyer has a fool for a client. The same can be said for investment management. It’s not that investment management is rocket science. It’s not. In fact, anyone can learn most of what they need to know about investing in a $25 book from Barnes and Noble. But that just teaches you the “science” of investing. The “art” of investing can’t be learned from a book because it involves controlling those behaviors which get most investors in trouble – i.e., jumping in and out of the market, trying to pick the winners, chasing returns, following the herd in times of panic or exuberance.
The main reason a person whom represents themselves in court is a fool is because human nature makes it nearly impossible for us to separate ourselves from our emotions, and few things can make us more emotional than our money. Investment advisors earn their pay, not through the development of an investment strategy, but by keeping their clients focused on what really matters.
Actually, you’re a workaholic. You were conditioned early on in your career that, in order to be successful, you had to work seventy or eighty hours a week. From the beginning, you have been willing to sacrifice all else and delay personal gratification in order to advance your career. Of course, that means you have little time, and perhaps little inclination, to focus on something as mundane as finances and investments. Besides, giving up any time to talk with a financial advisor or even think about your financial situation can literally cost you $500 to a $1,000 an hour.
In investing, time is your most valuable resource – that is, having the time to allow your money-at-work to compound each and every year – it’s how wealth is built. You are already at a tremendous disadvantage with a late start in your career and a mountain of debt to erase, so the pressure to chalk up billable hours prevents you from thinking about your future outside of your career. You think that, perhaps, when you reach your peak earning years you will be able to catch up with your investing, but you fail to consider that you will also be funding your peak lifestyle years; so, like too many lawyers, your time will run out.
You spend an inordinate amount of time analyzing risk and ensuring you have the downside covered, because that’s what your clients pay you to do. You can’t tolerate uncertainty and ambiguity. You know that if something goes wrong with a case you get the blame. Your excessive caution, while prudent in your practice, makes it difficult for you to take risks and make decisions in other aspects of your life.
Investors need to understand risk and how to utilize it to harness market volatility and increase stability in their portfolios, because, without risk, there are no returns. Lawyers who bring a “prevent-offense” mindset to the world of investing typically compensate for the uncertainty of the markets by adopting a conservative investment strategy, and that can lead to financial disaster. When investing, lawyers need to focus on building wealth from nothing, not protecting against losing everything.
Of all the traits lawyers tend to possess, the one on which they score the highest is skepticism. And, again, considering what you do for a living, this can be quite functional. You need to question everything and, this “critical thinking” is essential to your practice. However, critical thinking, when applied to life outside of the practice really becomes “negative thinking,” forcing you to view the glass as half empty, and focusing on the world’s problems rather than on what’s right with the world. When anyone offers you advice, your first reaction is to uncover the real motive behind it. You question any assertion made by someone else, making it all the more difficult to trust others. This steady diet of negative thinking drowns out any optimism which can result in missing the half-full glasses.
Faith in the future is the most important guiding principle for long-term investment success, because it is grounded in the belief, supported by the evidence of history, that optimism is the only valid perspective one can take as they view the future. The stock market has increased in value more than 100-fold since World War II. This in spite of multiple recessions, increasing global strife, massive debt and deficits, and a financial meltdown that nearly crippled the world’s banking system. In that time there have been as many bear markets as bull markets, but with each bull market, the losses of the preceding bear market decline were made up and the gains of the prior bull market were extended. Successful investors view the future optimistically because to do otherwise would ignore the historical record. It is, therefore, the practical view.
Next to a stock market crash, divorce is the quickest way to lose half of your portfolio value. As a financial advisor, I avoid counseling my client on marriage issues, but the one critical piece of advice I do offer is to do what it takes to work on your marriage. A troubled marriage is one of the bigger impediments to building wealth, but a divorce can be a wealth destroyer. Not that concerns over money should be the only reason to save a marriage, but, for the relatively minor changes each spouse needs to make to make the other spouse happier (or him or herself happier), it’s never worth the ensuing financial devastation a divorce causes.
The divorce rate among attorneys is significantly higher than that of other professions. Let’s face it, you may not have all of the traits or characteristics listed here, but you still need to recognize that nearly all of them are marriage-straining attributes. Whether it’s your need to be in control, your skepticism, defensiveness, ego, or perfectionism, when coupled with the ingrained training to “think like a lawyer,” it crowds out most of what a marriage needs to endure.
Instead of trying to fix what is broken, many lawyers revert to trying to solve the problem with logical reasoning while avoiding personal involvement in making any changes. Lawyers need to learn how to flip the switch on their default settings to be able to listen without judging, accept feedback (criticism), admit mistakes, and communicate from feelings. It’s not easy, but those who can flip the switch often find themselves happier in their marriages, and wealthier in the end.
This may not be you, but most lawyers have a need for external recognition. It’s not always good enough to just be right. Winning the case is often proof enough that you’re right, but there is still a need for validation from peers, and in most cases adulation by clients. On the flip side, this keeps you from admitting mistakes or seeking to understand what you did wrong and why.
Warren Buffett often says the key to successful investing is simply to avoid mistakes. Yet, one of the main reasons why many investors have underperforming portfolios is their propensity to make mistakes. But, perhaps the biggest reason why investors end up failing miserably is their inability to learn from their mistakes. Men, especially, are more likely to repeat their mistakes. For instance, of men who reported waiting too long to sell an investment, 61% repeated the mistake (while only 48% of women did.) Why the difference among the genders? Men are more egotistical and aggressive than women. And, when it comes to investing, men think they know what they’re doing, even when they really don’t know what they’re doing – all traits attributed to lawyers.
Lawyers have a high sense of urgency – for everything. There is a tendency to rush to action while expecting immediate results. Most lawyers lack the patience for the planning involved in long term projects, such as their own financial plan. When lawyers do invest, they tend to focus on returns in the here and now without regard for any long-term investment objectives. As such, they are likely to react to the events with a pessimistic view, which invariably leads to underperformance.
The behavioral instinct of lawyers to rush to action, especially when they feel the need to contain the damage in a case gone bad can translate very poorly in the investment arena. The need to do something in reaction to extreme market events, almost never ends well. Successful investing requires a vigorous optimism about the future in which patient investors may not know when everything is going to turn out all right; they just know that it will eventually. Successful investors are able to withstand the pain of missing some of the upside of the market, or riding out a market decline in order to minimize the typical and often devastating mistakes that unsuccessful investors make.
Many lawyers are unhappy their job, but they don’t know why since, ostensibly, they are well on their way to achieving their dream of a prestigious and lucrative career. The law can be depressingly boring, and, even though they’re paid to be cynical, it can wear on the psyche. An increasing number would leave their job tomorrow if it weren’t for the sinking feeling that they being a lawyer is the only thing they’re suited to do.
For people who are unhappy in their jobs, there’s typically transference to life in general. Lawyers suffer additionally from delayed gratification in all matters outside of their job. Relationships and family functions are postponed to some future time when the pressures of the career subside; except, for many that time never comes. This is one of the primary reasons why few lawyers can even envision themselves in a life of leisure after their career. It’s for that reason they don’t rush into building a financial plan or setting long-term objectives, without which there is no real inspiration to start a comprehensive investment plan.
For fear of making a mistake, which any lawyer can ill-afford, you have to make sure that everything is done perfectly. That means, if is to be done right, you need to do it yourself. That’s why you need to control everything – the people around you, the process and, if possible, the outcome. Of course, this trait also translates poorly outside of your career often resulting in stressful relationships and a largely cynical view of other people’s opinions.
The evidence clearly shows that investors who try to micromanage their investment portfolio in attempt to achieve perfection usually underperform the market. Just checking your investment account each day, or even each month, increases the anxiety of wondering if you should be doing something differently. For investors without a long-term investment strategy, the need to control the outcome – that is, the weekly or monthly returns on their portfolio – drives them to make changes, which rarely turn out well. Of course, if you feel that, the only way to ensure something is done right, is to do it yourself, you’re certainly not going to listen to an investment advisor even though he or she offers the best chance for you to stay out of trouble.
Your whole career is based on delayed gratification. You lived like pauper during law school, and when you began collecting your first paycheck a big chunk of it went to pay off debt. So, naturally, as your income increased, you allocated larger and larger portions to upgrading your lifestyle. After all, lawyers have an image to maintain. Increases in income equal increases in lifestyle. To get to where you want to be you delay starting a career, you delay family life, you delay many of the things that make for a normal life outside of a career, which is why, when you have it, you spend your money as if you were going to be living in the here and now forever.
Big spenders make lousy savers. The mistake many lawyers make is to assume that they can wait until their prime earning years and then max out their contributions to their retirement plan and acquire additional non-qualified investments. First, it’s far more costly to wait as the basic “cost of waiting” tenet tells us. Secondly, practitioners in their prime earning years are also in their prime life-style years making it more difficult to reduce their consumption in order to increase their savings. It’s far easier in the early to mid-stage of his career to smooth out his consumption in order to increase savings. More importantly, lawyers who begin their retirement accumulation early create the condition that enables them to commit a much smaller portion of their earnings to savings during their prime earning years. This enables them to enjoy a better life style in their late stage.
Granted, this may not be you, at least not in its totality. But, all it takes is just one of these obstacles to keep you from achieving your wealth dream. The first step in overcoming them is to recognize them and acknowledge their power over your ability to make your dream a reality. It doesn’t require change, and it certainly doesn’t require psychological help (though that’s not a bad thing for anyone in a stressful career); all it requires is that you be able to switch off the default settings of “lawyer think” to be able to view the world of finance and investing differently than the way you view the legal world. It may be easier said than done, but for the 10 obstacles listed here it may require nothing more than temporarily flipping the switch:
- 1. (Your too Smart) Realizing that, although financial advisors may not be as smart as you, the right ones know how to keep you out of trouble.
- 2. (Your too busy) Realizing that you may be giving up hundreds of dollars in billable hours now, but the time you spend with a financial advisor can be worth millions of dollars to you in the future.
- 3. (You’re too risk adverse) Risk in law is bad and should be avoided or eliminated. Risk in investing can be good if you understand how to harness it and make it work to generate higher returns.
- 4. (Your too skeptical) Realizing that critical thinking becomes negative thinking in the real world. Turn it off, and a whole new world of positive thinking opens up.
- 5. (The divorce thing) It’s just a cautionary note to consider. You may think it won’t happen to you, but, if you sense the potential of divorce, flip the switch immediately if you want to save your marriage and your wealth.
- 6. (You’re egotistical) It’s OK to be egotistical, who isn’t, but only the egomaniacs among us will never admit to their mistakes and will be bound to repeat them. Don’t be that guy (gals are less likely to repeat their mistakes).
- 7. (Your impatient) Patience is not about doing the right thing; it’s about avoiding doing the wrong thing. The world is not going to end tomorrow; and, as it has for more than a hundred years, the stock market will continue to climb.
- 8. (You’re unhappy in your job) Perhaps there are some things you can’t change about your job; however, unless you take the time to step outside of it and envision your future, you may remain forever unhappy.
- 9. (You are a perfectionist) Perfection may be a requirement of your job, but it’s not a requirement in life. You’ll be happy to know, however, that there are few things more perfect than the stock market. It’s highly efficient, and it rewards patience and discipline.
- 10. (You’re a spender) You really can’t know what you should be spending today if you don’t know how much it will cost to secure your financial future. You may be surprised that, with some planning and a sound, long-term investment strategy, you may not have to sacrifice too much today to live well the rest of your life.
Why Lawyers Need A Coach
Anyone who is attempting to achieve a level of performance beyond his or her current experience needs a coach. The most successful C-level executives, entrepreneurs, and athletes probably had a coach or mentor. The most successful business people and athletes recognize that a huge chasm separates theory from practice, a plan from action, and activity from results. And, as is the wont of human nature, it often takes an external source of energy to compel any of us to move beyond our comfort level. We all need a good coach to keep us attuned to the discipline and detached from our emotions.
A good financial advisor, who also functions as an investment coach – willing to educate and counsel you – will be able to help you ferret out the elements of a sound investment philosophy that fits your investment profile like a glove and is one whom you will be able to entrust with your utmost confidence. More importantly, we all need someone who is impartial and objective yet firmly in our corner who is not afraid to confront us when our emotions get the best of us.
Image made available by Tracy O on Flickr through Creative Common Licenses.
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