Building an Unshakeable Castle: 5 Blind Spots in a BigLaw Financial Plan
Concert Financial Planning is both proactively planning for clients’ needs as well as being responsive to ad-hoc client issues that arise each year. As part of our proactive planning cadence, we focus on financial Resilience in the months of June and July. What makes up financial resilience? We break it into five broad categories:
Is the liquidity position adequate?
Have the estate planning documents been executed? If so, when were they last reviewed? Do we have copies of the documents?
Are the life and disability insurance policies in place? If so, are they still providing the appropriate coverage? Do we have copies of the policies?
Are liability insurances in place, adequate, and do we have copies?
Is there meaningful data security in place?
Admittedly, this is a pretty tedious season of planning as compared to the more exciting stuff (investing, primarily). However, we must put things into context: BigLaw attorneys and their spouses/partners have worked tremendously hard for a long time to get to where they are. They may have incurred significant debt along the way, whether it be student loans, mortgages, or others. These households typically have their entire financial security based upon a prosperous career, and just like most Americans, their financial lives are largely stored online.
Given the amount of sacrifice that goes into a BigLaw career, I am frankly mortified by how often I see the entire thing at such significant risk of catastrophe. The reality is that the risk is generally not visible, and remains out of sight out of mind. Plus getting the required things in place can be a time-intensive undertaking, not to mention the expense. But in the context of a BigLaw career, these speedbumps pale in comparison to the risk of not getting it done. I often find myself thinking, “What are we doing here?” when I think about the tremendous sacrifices that are made and the vulnerabilities that remain present.
Liquidity
In an ideal world, a household will have 7-months of expenses worth of liquidity available, both for emergency use but also for large, annual expenses like property taxes, insurance payments, and private school tuition. However, for many households, 7 months worth of expenses can be a very high number.
It can vary per household, but let’s say a balanced “cash-on-hand” target maxes out at $100k, because money kept in cash is a drag on wealth creation over time. We are balancing a robust cash cushion with the resulting inefficiency that comes with holding cash, so it can get out of balance if we start holding, say, $150k in cash-on-hand.
So what do we do if 7 months worth of expenses is more than $100k? The answer is that we preemptively establish lines of credit to serve as safety nets in cases of severe financial hardship. We’ll dive into the details of how we construct a client’s liquidity profile in a forthcoming blog.
Estate
Very few people think they need “estate planning”, and even fewer are motivated to do it even if they know they should. That ends here. We will be relentless in our efforts to guide clients to get this done, because it is that important.
When reviewing estate plans, our goal is to be the first line of defense and to offer conversation topics for clients’ discussions with their estate attorney. We do not give legal advice nor draft legal documents, but we do have a basic knowledge of common pitfalls in estate planning, the most obvious of which is having no plan at all.
However, “no plan at all” isn’t exactly the right way to say it. The better way to say it would be, “I have chosen to leave decisions around my healthcare, finances, and my children' s guardianship and finances to the state court, because I can’t make time to make those decisions myself.” It’s harsh, but it’s also true. If a person has not proactively drafted and executed legal documents that are valid under the jurisdiction they are in, it doesn’t mean that the intuitive things will just happen if a crisis arises.
Will your parents/spouse/siblings be able to tell doctors how to care for you if you’re incapacitated? Maybe. Will they all agree with one another? Maybe. Will they suffer significant mental anguish if they are put into a position of having to trust themselves to make the right call? Yes, they will.
If you pass away, will your affairs be wound down by somebody you trust? Maybe. Will whoever the court puts into the position of winding down your affairs be able to access documents and accounts without significant struggle? Probably not. Will they know where to find things? What to shut down? I so frequently hear, “I don’t have anything of value to worry about” and yet I haven’t even touched on the financial aspects of this. Everybody has something valuable to worry about: What will your loved ones or friends have to deal with after you pass, in addition to grief?
We’ll talk more about this in a future post.
Life and Disability Insurance
The question is not whether a client has life insurance or disability insurance; these are basic benefits offered through most employers, particularly BigLaw firms. The issue is that they are usually basic. Whether a client needs more life insurance coverage than is provided by the firm is a toss-up; it depends heavily on each specific situation. However, disability insurance is different.
In the case of employer-provided disability insurance, it is almost always inadequate, and that is by design. Insurance companies want to avoid “moral hazard”, meaning they don’t want to encourage people to purposely jump off their roof to get hurt, and start cashing disability payment checks while they sit on the couch and eat Cheetos. The short-term pain may be worth it if the disability checks replace 100% of your prior income.
Because of this, insurance companies typically want to only provide insurance that would cover 60-70% of your gross income. So, it is extremely common for your workplace benefit to cover 60% of your comp. But you have to think about it a little more than that:
What counts as “comp”? Salary sure, but what about those annual bonuses you’ve been getting? Are those replaced? If not, is the policy really covering 60% of the comp you live on?
Is your benefit taxed when you receive it? If so, you’re not keeping the full 60%.
Does your workplace policy have a cap on benefits? Many do, and it may range from $15k/month to $30k/month. Yes, that is a lot of money. But multiply it by 12 and ask yourself how much of your compensation is actually covered…you make a lot of money and therefore have a lot of money to replace if you can’t work.
Will your benefit increase with inflation over time in the event you have to make a claim for an extended period of time? Usually, no. So as your lost future income would have been increasing (at least with inflation), your disability checks start replacing less and less of the income your financial security was relying on.
All of this to say, it is only in very rare cases that a client does not need to obtain supplementary disability insurance on top of what is provided by work. And even then, the best case scenario is that your firm’s policy and a supplemental policy will still only cover up to 70% of your gross income. So, we need to get as much as we can, depending on price.
Finally, if a client does have these insurances in place, are they still appropriate? Life insurance needs tend to decline while disability insurance needs tend to increase over time. We’ll talk more about this in a future post.
Liability Protection
How exposed is a client’s wealth to a lawsuit? I am often told by my wife that just because a lawsuit isn’t winnable doesn’t mean somebody won’t file it anyway. I have been led to understand that the US is a very litigious society.
The good news is that most of my clients have some protection in the form of car insurance and homeowners insurance. Within each of these policies are line items for liability coverage. It’s a great start. We just have to make sure the coverage is adequate. If it isn’t, we can work with a client’s insurance broker to procure more coverage, or potentially add more liability coverage through what’s known as an “umbrella” policy - insurance that will kick in if the first layers of coverage in the auto and home policies are soaked up by a claim.
If you have accumulated wealth where the value of assets exposed to creditors in a lawsuit are $1,000,000 and your auto policy only covers $500k, you are risking quite a lot of what you have worked for. Again, more on this in a future post.
Data Security
While the first four categories discussed so far are probably fairly common topics among financial planning firms, I’m not so sure that a focus on data security is common yet. Frankly, many people (including financial professionals) don’t love technology and are unsure what to even do when it comes to data security.
However, our financial lives live online, primarily. Your wealth is just numbers on a screen most of the time, until and unless you start spending it. What happens if those numbers change when they’re not supposed to? What happens if you can’t access those numbers? What happens if somebody else says they are you and accesses those numbers without your knowledge?
Let me tell you, it’s not good. Let me also tell you that it is incredibly time consuming to fix, may be incredibly expensive to fix, and damages your feeling of security in a very deep way. However ambivalent you are about dealing with technology, you should be far more afraid of dealing with the repercussions of not taking it seriously.
So, we prioritize this discussion with clients. We break down data security strategies into five categories, all of which we will elaborate on in a future post:
Password Vaults - Let a system create and store unique passwords for every site. It stores a lot more than passwords as well.
Multifactor Authentication - Getting those annoying text codes on your phone is a first step, but for financial logins we suggest using a more secure authenticator app. This second layer of security remains annoying, but not as annoying as having your identity stolen.
Identity Monitoring - Utilize a tool to monitor your identity online, particularly on the “dark web”, where stolen personal data is typically sold or auctioned. This means monitoring your financial accounts, yes, but also your credit reports, social media accounts, home title, email accounts, and more. If something is compromised, you need to know as soon as possible; not when a vendor catches something suspicious or when you go apply for a loan.
Secure Document Storage - Keeping paper records is fine, but make sure they’re in a fire-proof container. If you are one of the many, many people who do not reliably keep paper records, secure cloud storage is probably for you. It’s not enough to keep everything in a file on your desktop. Important documents need to be protected. Use a simple cloud storage system to keep your life organized and secure.
Digital Estate Planning - As mentioned, your financial life lives online, as does much of your broader life. If you were to become incapacitated or pass away, is there anybody that would be able to know what accounts you have and how to access them? A great solution is often found in the Password Vault (see #1 above) using an emergency access-style feature.
Not only can you share passwords with loved ones when appropriate (e.g., parents sharing one login to the school communication system), but you can also designate a person to be granted full access to your account in the event you are unable to. Each vendor may have a different process, but the idea is that the vendor will take some given set of steps to contact the account owner, and if the account owner cannot be reached in a given time period, the person designated for emergency access will be granted access. This can be an enormous difference in the burden placed on a loved one in a time of crisis.
Conclusion
Cash is a drag. Insurance is lame. Estate planning is tedious. Technology is annoying. All of these things are costly, either in dollars, energy, or both. Nonetheless, these are non-negotiables in the context of a BigLaw attorney’s financial health. What is the point of doing all this work, making all these sacrifices, if it can all just be taken away from you?
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