Sometimes a glance in the rearview mirror can be invaluable –say, if you're being pursued by your evil nemesis in a high-speed car chase, or if you're Smarty Jones running the stretch at the Belmont Stakes and the horse behind you is gaining fast. Advisors, too, often feel a need to glance over their shoulders, looking back for competitors coming to horn in on their clients and profits. A few years ago, the buzz was all about how accountants were coming to eat advisors' lunches, and for years, the wirehouse behemoths have lumbered about in planners' nightmares, their massive marketing budgets causing advisors' knees to knock and lips to tremble. But forget about them for a minute. Here's something else to worry about: Law firms.
If you want one-stop shopping for everything from trusts and estates to investment management and tax preparation, step right up, says Joe Votava, an attorney, CPA, and planner at the Rochester, New York, offices of law firm Nixon Peabody, LLC. Want an estate attorney to draft your will? A CPA or tax attorney to review your tax returns? A CFP to direct your investments and review your insurance coverage? A trust officer to manage your family foundation? Think of anything on a menu of finance-related services, and chances are that Votava and his colleagues can provide it.
Granted, in many states, law firms aren't allowed to manage money at all. One exception is Massachusetts, where several large law firms manage billions of dollars on behalf of their clients, thanks to an exception in securities laws. "Lawyers have been managing money in Boston for 100 years," says Votava. But the law firm of Nixon Peabody, which has offices in 16 states, has surmounted this hurdle by forming Nixon Peabody Financial Advisors LLC, a financial planning subsidiary wholly owned by the law firm and registered as an RIA. "There are rules out there that permit lawyers and accountants to give financial advice that's incidental to their profession, but we had a pretty big business going that wasn't incidental anymore," says Votava, 50, who now serves as president of the four-year-old subsidiary. "We couldn't register the law firm as an investment advisor, so we formed the subsidiary and registered it instead." Votava's financial planning clients generally invest through the Schwab or SEI platforms, but thanks to a recent merger of Nixon Peabody LLC and a Boston-based law firm (Hutchins, Wheeler & Dittmar) that's been running a full-service trust operation for decades, they can even have their trusts managed in-house, too.
The all-in-one approach isn't without its legal and regulatory headaches. "We didn't build this because it was an easy business model; it's a very hard model," Votava says wryly. Yet if he had it to do all over again, Votava says he wouldn't change a thing. Clients love the fact that they can get expert advice on such a wide array of financial issues, and as the financial services industry evolves, he expects that firms like his will become more common and popular. "We have to struggle with [the limitations of being a planning firm owned by a law firm] every day, but clients see the broad perspective and counseling we can offer and say, 'Jeez, this is fabulous.' When you get 10 family trusts going, and a foundation, and two private businesses going, after a while, the sheer amount of paperwork just blows people away," he says. "We aren't charging small potatoes"–an understatement, since client fees often range from $20,000 to $100,000 per year–"but if clients had different firms doing all of the different pieces of the puzzle for them, it could easily cost them twice as much. I think that, long-term, it's a winning model."
Unusual Roots
Nixon Peabody didn't set out to become a purveyor of financial wisdom; indeed, the law firm's path into planning has been a sinuous one. The firm first began offering financial counsel to individuals in 1969, when it began advising the executives of its client corporations on such matters as tax law changes and insider-trading rules. Within a few years, the firm was counseling individuals on their tax shelters, and as an added service, offered to have the firm's paralegals and staff prepare clients' taxes. As the tax shelter industry hit its stride in the early '80s (and brought with it a slew of compliance rules), the firm got serious about accounting and hired several CPAs, including a certain Joe Votava, then a CPA and attorney at Coopers & Lybrand. Then, when many popular tax shelters got the axe in 1986, the firm turned its attention to clients' increasingly self-directed retirement planning, specifically their 401(k)s, and Votava began taking a more comprehensive approach to clients' financial planning. "We started doing asset allocations, and putting net worth statements together, and talking about investments and insurance," he says.
Clients paid for planning services just like they paid for legal services: on an hourly basis, tracked in six-minute intervals. Votava also began studying for his CFP certification, which he received in 1994, and he got involved with the International Association for Financial Planning (IAFP), first locally and then on the national level. "Getting involved" is a bit of an understatement: Votava was the IAFP president when it and the Institute of Certified Financial Planners (ICFP) merged to become the Financial Planning Association in 2000.
Over the years, the firm's financial advice business became less and less "incidental" to its legal and accounting work. As business continued to grow, "we kept saying to ourselves, 'You know, we're doing a lot of financial planning and investment counseling, and we're probably looking at $2 to $3 billion that our clients have,'" says Votava. "'That's a lot of money! And we're giving them a lot of significant advice on it. Maybe we should be registered as investment advisors.'" When clients began asking for help in implementing the financial advice they were receiving from the firm, the decision finally made itself. Unable to register the law firm as an advisor, Nixon Peabody formed an RIA subsidiary instead.
Interestingly, Votava says that the decision to open the RIA was less about beefing up revenues through asset management fees than about reducing hassle and extra costs. "We're not in that part of the business to make money; we're in it to reduce the flow of paper–the duplicate statements and confirmations and tax documents [from clients' money managers]. If we can get electronic downloads of all that, we can do our work much more efficiently," he says. "We want to manage money not to make money on the process, but to reduce our cost of the hourly work we're doing. If we didn't do this, we'd eventually price ourselves right out of business." Votava's clients generally pay a total of 75 to 150 basis points for asset management services, inclusive of mutual fund expenses, if any.
Privileges and Conflicts
Whatever its genesis, the subsidiary is something of an odd bird. From a legal standpoint, it is its own separate little island, yet all of the six people who work there, including Votava, have one foot in the RIA and one foot on the law firm's mainland; they split their time between the two entities. Clients of the subsidiary often consult partners in both entities, say, a CFP in the subsidiary and a tax attorney in the law firm. They also may consult the same person in different capacities. For example, one day Votava might advise them as their lawyer, the second day he might provide advice as an advisor. Confused yet? Clients sometimes are, but Votava says they're willing to put up with some confusion to gain the practical benefits of one-stop shopping.
The real sufferers in this scenario may actually be the planners and attorneys who have to keep everything straight. For instance, as any "Law & Order" or "CSI" buff can tell you, the conversations between a lawyer and a client are privileged under the law; if a client tells a lawyer something, the lawyer is legally obliged to keep the client's secrets. The conversations between a planner and his client, however, are not privileged, so Votava and his colleagues have to be very clear about when they're acting as lawyers and when they're acting as planners. "If they don't have privilege, we just have to tell them that," he says. On the issue of privacy in general, however, Votava says, "I think we would just err on the side of doing whatever we would do as lawyers–maintaining the same principles of a very high degree of confidentiality and privacy in the advisory subsidiary that we do in the law firm."
