Do Young Lawyers Need Financial Planning?
Executive Summary
Young lawyers don’t think they need financial planning because they don’t have enough money or assets to need financial advice. While money and assets used to be a prerequisite for financial advice, that is no longer the case. Financial advice is more than managing money, it’s about making better financial decisions. Lawyers know not to represent theirself in court, yet many believe they can represent themselves with their personal finances. Ultimately, the true value of a financial planner is the subject matter expertise and objectivity they bring to a client’s financial situation.
“I don’t have enough money to need financial advice” is the most common phrase I hear from young lawyers who do not work with a financial advisor.
Do young professionals, especially young lawyers, need a financial advisor? I would say yes, but I am biased. Let’s see what other young professionals say:
Two Broadridge studies found that:
If 31% of millennials have or are already working with a financial advisor and 65% of the other 69% of millennials are likely to work with a financial advisor over the next two years, then in about two years, potentially 75% of millennials may work with a financial advisor.
Do these millennials have enough money to work with a financial advisor?
The Census Bureau reports the average income for a professional between the ages of 25-44 is around $80,000.
If you are a young lawyer making over $80,000 without a financial advisor, you likely have the money for financial advice from a professional.
Are you falling behind your peers that do work with a financial advisor?
Possibly. It is hard to establish the exact value an advisor provides, but Vanguard and Russell have both tried to quantify it:
Young lawyers attend additional years of school, take on possibly large amounts of student debt, pass the bar, and work more than most of their non-lawyer peers to work in a rewarding career both professionally and financially. So the real questions is can young lawyers afford not to work with a financial planning professional?
Figuring out personal finance on your own is like a non-lawyer representing themselves in court. A non-lawyer representing themself in court likely results in worse legal outcomes because the non-lawyer lacks subject matter expertise and objectivity.
In the same respect, both lack of expertise and objectivity results in young lawyers likely making less than ideal financial decisions when they personally manage their finances. Working with a financial planner allows lawyers to collaborate with a professional who has the technical knowledge to guide them towards better financial decisions and 3rd-party objectivity when advising on their financial situation.
If you decide to work with a financial planner, there are a few considerations you should know. The first is expertise.
Expertise Matters
Technical knowledge is the bare minimum. Having experience with similar challenges and decisions that you are making is a difference-maker.
Lawyers are uniquely suited to understand the difference between overall technical knowledge and area-specific knowledge. After all, if you had a personal injury case, would you go to a tax attorney for representation?
You will find many financial advisors and planners offer similar services. Many of these professionals will also have designations that represent their technical knowledge. They know their stuff, but which one is right for you?
A valuable differentiator is a financial planner who specializes in working with people just like you.
If you are a retiree, look for a financial planner that works on retirement planning and understanding social security and Medicare.
If you work at a start-up, you will likely be awarded stock options. Work with a financial planner who specializes in planning around stock options.
Finally, if you are a young law professional, work with a financial planner whose firm offers financial planning for young lawyers.
Notable designations
You went to law school for three years and spent hundreds of hours studying for the bar exam to establish a “minimum competency” of knowledge. Once you are barred, your state designates you as someone who may practice law there.
The financial advising industry has a similar minimum competency requirement. To give financial advice for a fee, you must pass the Uniform Investment Adviser Law Examination, also called the Series 65 exam. On average, this will take someone 50-60 hours to pass the exam. The Series 65 is hardly in the same ballpark as the bar exam.
But do you have 50-60 hours to spend studying this material to only have a bare minimum amount of knowledge regarding your finances? You could be spending those 50-60 hours on billable hours that could qualify you for a bigger bonus.
Now even though the Series 65 exam is a “minimum competency” exam, you will likely want a financial professional with much more expertise than 50-60 hours of studying before allowing them to advise you on your financial decisions.
There are three prominent designations in the financial advice industry that are well respected and signal a higher level of personal finance expertise: CFA, CFP, & CPA.
CFA
The CFA is considered the global designation for investment analysts and portfolio management. Holding the CFA designation conveys that you have the integrity and competence to analyze financial investments at a high level. The CFA requires an education requirement and passing three exams. Each exam usually takes an average of 300 hours of study time.
CFP
The CFP is a designation for financial planners. The CFP designation signals that the professional has the technical skills to provide comprehensive financial planning and work as a fiduciary. The fiduciary standard is a higher standard of care than financial advisors who work in the “best interest” of the client. While a fiduciary and a best interest standard of care sound similar, there is a difference between these two. The CFP designation requires the completion of an education requirement, a work experience requirement of 2-3 years, and passing the CFP exam, which takes on average 200-250 hours of study time.
CPA
A CPA represents an individual licensed to provide accounting services. Unlike the other two designations, the CPA is a state issued license to practice, similar to a lawyer licensed to practice in their state. A CPA has technical knowledge of accounting principles and taxes. Both areas of technical knowledge are relevant to anyone’s financial situation. The CPA requires the completion of an education requirement, a work experience requirement, and passing all four of the CPA exams, which on average take 300-400 hours of studying.
Other designations
While these are the three most prominent designations, there are over 100 other personal finance designations. Each designation represents the expertise and high level of technical knowledge in the designation’s specific area of focus.
What does a financial planner do?
To quote Robert Burns, “The best-laid plans of mice and men often go awry” so why would you work with someone who makes financial plans if life never goes according to plan?
Because the alternative, not having a financial plan, makes it difficult to make the right financial decisions even before life inevitably changes.
Recently, I moved cities and my schedule completely changed. The things I used to do and the places I used to do them all changed too. When we first moved, I wanted to work out every day. I never planned when I would work out, but I knew I wanted to work out. Well, day after day went by where I did not work out. It is not because I did not want to. Instead, other things would come up, and I would do those things. Two weeks later, I had only worked out once.
Something needed to change. So I started planning my day and blocking off time for working out. Since I began planning working out into my daily schedule, I have not missed a workout. Some days, life did not go according to plan and I did not workout at the originally planned time. Instead, I adapted the plan for that day, and I still completed my work out for the day.
When has making a plan benefited you?
Everyone has made a plan at some point. Likely you have made a lot of plans over your life.
So why does having a plan make a difference?
Because having a plan means you are consciously making a goal your priority. Life is messy and uncertain. Making a plan provides clarity on how to respond when unexpected events happen.
If you want to achieve something in the future, a plan helps you make better decisions to get you to your goal. If you make it a goal to retire by age 50, you are more likely to invest more of your income into a retirement fund than spend it on something you want but do not need.
A financial planner understands the value of planning for present and future financial decisions. They also understand that plans will need to be modified as time goes on. Working with an ongoing financial planner means you will always have someone to help you decide on the next steps when life inevitably changes your plans.
So what does a financial planner do?
A financial planner collects and organizes all of your financial information plus they learn what is important to you. The planner then creates a plan given your current financial status to achieve the things you truly want in your life.
For example, next summer, you would like to explore the Amazon. A financial planner works with you to save up the money to afford this trip while also saving/investing towards retirement and taking advantage of your employer benefits. If you want to buy a home in the next 5-10 years, a financial planner maps out what you need to do between now and then so you can buy the home you want without settling.
Some solutions offered by financial planners are:
- Analyzing ways to save, spend, and invest your income so you can maximize your current and future happiness.
- Identify the goals you want to achieve in life and create a plan to achieve them.
- Deciding which employer benefits are best for you.
- Determining if you need insurance like car insurance, home insurance, life insurance, and disability insurance. Then help you decide how much coverage you need for each type of needed insurance.
- Looking over your current taxes and anticipating future taxes to decide how to pay only as much tax as you are required to pay.
- Creating a student loan repayment plan to pay off your current student loans and creating an education fund for your children so they hopefully do not have to worry about student loans.
- Planning for becoming a partner at your law firm and everything that entails including: affording the buy-in, paying taxes as a partner instead of a salaried employee, modifying insurance policies, and planning for varying annual partnership distributions.
Should a lawyer manage their finances?
To obtain a comparable amount of financial knowledge as many personal finance professionals, a lawyer would possibly need to go back to school, change careers, and study to pass numerous exams.
Almost any high-performing lawyer does not have the time or interest to do this.
As a lawyer, you recognize the importance of subject matter expertise. Would you feel comfortable with an estate attorney working on a land-use case? Probably not.
You know it is a bad idea for someone without legal experience to represent themselves in court. They do not have the knowledge or the objectiveness to make the right legal decisions. Do you see how this can also apply to handling your finances without professional guidance?
Financial advice can make a huge difference over your lifetime
You know how much better people do with legal representation. It is so important that our forefathers made it a constitutional right with the Sixth Amendment.
Does working with a financial advisor make a difference?
Yes, it does. But it is hard to quantify how much it helps. Analyzes done by Vanguard and Russell Investments believe that working with financial professionals increases an average person's annual returns by 3% to 4.4%.
Does 3%-4.4% make a big difference?
Yes. That is because of the financial concept of compounding growth. Compounding growth describes how even a small additional percentage of growth each year progressively adds more to the total value. As each year passes, these small additional growth percentages lead to a significantly higher value.
Over 30 years, earning 3% more a year would result in a 110%-143% larger portfolio. An annual additional 4.4% return would result in a 195%-264% larger portfolio.
Please be aware that both Vanguard and Russell Investments are in the financial services industry. So their results have an inherent conflict of interest by producing an analysis that suggests that working with a financial service professional leads to better results. These values are also estimates. You are not guaranteed to outperform your neighbor just because you work with a financial advisor.
While a healthy amount of skepticism is necessary, you should not completely discount the consensus that working with a financial advisor does improve your chances of financial success. Would you doubt an American Bar Association report that says clients who have legal representation do better in court?
When does a lawyer need to seek out financial advice?
I think lawyers should seek out financial advice as soon as possible.
But when you are a young lawyer, you likely have more student debt than retirement savings/investments. What financial advisor would work with you?
Until recently it was hard for young lawyers to find anyone who would work with them until they had a certain level of financial assets. But the financial advice industry has been changing with the growing prominence of fee-only financial planners. Young lawyers now have an opportunity to get high-quality financial advice without meeting asset or income minimums.
Now that you have the opportunity to get financial advice, is there an excuse to not get financial planning advice right now?
To illustrate how waiting until later to take your financial future seriously can affect your future financial outcomes, here is a hypothetical example.
Two 25-year-old lawyers plan to start saving for retirement, one lawyer invests $10,000 today and one waits for 5 years to invest $10,000 because the second lawyer thinks they have plenty of time to invest. Both of their investments grow at 8% each year. At age 55 (30 years later), the lawyer who invested for all 30 years will have roughly 47% more money than the investor who only invested for 25 years. Making smart financial decisions as early as possible makes a huge difference in your life.
If you:
Earn an income as a law professional?
Want to pay off your student loans?
Know you need to invest for your future?
Have employer accounts like a 401(k)?
Want to feel confident about future financial decisions?
Want to retire early and/or want retirement amounts beyond pensions and social security?
Believe in fee transparency
You are likely a great fit for the Developing Financial Process.
The best time to start making better financial decisions was yesterday. The second best time to start making better financial decisions is today. So just get started!
Schedule a complimentary Meet & Confer meeting right now to take the first step towards making more confident financial decisions.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.