Welcome to our listener-supported podcast, Money Talk, unpromised absolute financial truths behind financial perceptions with hosts Ed Sutkowski and Chuck LeFebvre. Let’s listen in.
Chuck: Welcome to Money Talk. This is Chuck.
Ed: I’m Ed.
Chuck: Ed, what do you think the number one complaint, how it’s voiced when people are complaining about lawyer fees?
Ed: Yes, let’s talk about lawyer fees, legal fees. Now, we’re speaking of fees that are paid by an individual, or by a close-held business organization, or in connection with the administration of an estate, for example. We can also talk about the contingent fee approaches that some of the personal injury, most of the personal, perhaps all of the personal injury lawyers, and some business lawyers’ use. The issue is communication. It seems to me at the outset, and then the reporting, and when do you bill, how do you bill, how much do you bill? If you are a normal client, whenever I receive a whatever bill is far too much.
Chuck: Yes. I think it’s a very hard time for people to know whether they’re being billed a reasonable amount or not. So, what I’ve heard people say and I haven’t heard anyone say this about me because they’ll complain about my bills to other people. But, what I’ve heard them complain to me about when they’re talking about other lawyers is, they’ll say something like, “I called the office. I wanted to check, we had an appointment for Thursday at 8:00. I wasn’t sure if I had it right on my calendar, so I called to check, make sure I had the time right. That call cost me $50.” When they see something like that, they know that they’re being unreasonably charged for something really specific, even if they have a hard time looking at a bill and having a sense of whether, globally, they’ve paid too much or too little.
Ed: Oh, we start with the proposition then I’ll address that question, which is more of an unfortunate way of charge, a charge for– I remember a client – we were at a board meeting and there was an invoice of mine for $50, that same kind of an issue. I said, “Gee whiz, I never remember charging only $50 for anything.” His response was, “That was the time we called and couldn’t get you.” Yes. That was early on in my career. Guess what? Anyway, we do have, as the basic rule that, “A lawyer shall not make an agreement for charge or collect an unreasonable fee.”
Ed: What’s an unreasonable fee?
Chuck: I think that clearly, from what I’ve seen, is a question that is in the eyes of the beholder. I have seen some fees that I thought were extremely unreasonable. I’ve been hired by people to challenge fees in court and, for instance, probate situations. What I’ve discovered through that process is that judges, most of which are former lawyers themselves, are very hesitant to make a conclusion that an attorney’s fees are unreasonable, even if they are multiples higher what you would expect them to be in certain situations.
I think from the standpoint of the ethical rule, it’s kind of hard to figure out where the boundary is. I think about this from the standpoint of, you really have to think about what the value is that’s being conferred by the legal services and how that relates to the size of the fee. To me, I know a lot of lawyers would disagree with this, for instance, but let’s say someone has a small claim case and they’re trying to collect $3,000. It may take a little bit of work to get that done, but charging $10,000 in order to collect $3,000, I know that wouldn’t violate this rule, but, to me, it seems unreasonable.
Ed: Which isn’t really the question or the perception of, “What is the nature of the service that you, Mr. Client expect of me? What’s your budget? What’s your timing? You understand that if I do X for you, I can’t do Y for the other client.” The replacement cost, if you will, and I think the problem is communication.
Ed: We, as lawyers, and I must admit I’m clearly at fault on this, fail, especially on a new engagement to adequately communicate those issues. Budget, what do you expect, or more specifically, what are your fears and your concerns? Not what do you expect, because what do you expect is, of course, a monumental result for a little, if any fee, and the perception of value.
Ed: Love, politics, religion, and value.
Ed: Very difficult to quantify that. And so, is that perhaps a function of the degree of difficulty, the uniqueness of the services, or is it a commodity-type service? Can we talk about that for a minute?
Chuck: Yes. So, I think that the industry standard is based on the idea that services are somewhat of a commodity. The more you’re getting into specialized work or work that is a little more bespoke, the more these industry standards have a hard time applying, at least in my mind.
Ed: Yes, the standards are nice, but they don’t apply when the product is something that’s very narrow and very deep.
Ed: What would be the value, for example, of a client looking at their plan in the Illinois estate tax, which is atrocious, which is silly, which, matter of fact, to say that it’s stupid would be an understatement, but in any event?
Chuck: One of the very few states left that has one.
Ed: It really upsets me. In any event, in this situation, visit with a client and the estate tax that would be saved from moving to Illinois across the river to St. Louis.
Ed: Across the river, was $2.8 million.
Ed: What is the value of that judgmental advice to that client? I’m going to charge them a third of their– They’re not going to realize the savings until the passing of the survivor. Am I going to bill for something now that may, or may not happen in the future that may become insolvent? Anyway, the issue is how do you charge for that sort of thing?
Chuck: Right. That’s the reason why in the tax world, as much as we would really love to be able to charge on a contingency basis and take a percentage, it can’t be done because quite often, those tax savings are speculative. You’re right, it’s a conversation that, obviously, takes less than a minute to say, “Hey, if you move across the border, you’ll save $2.8 million.” It might take a little longer than that to do the calculation, to have the whole conversation. You’ve only spent a couple of hours maybe at most on that particular piece of advice.
Ed: How many hours have I spent coming to that conclusion, being educated on how that Illinois taxes is computed and when it’s payable? What’s the base? In other words, there’s all the predicates that go into the issuance of that advice.
Chuck: Well, in that particular example, part of it is understanding all the alternative ways of reducing or eliminating Illinois estate tax. Embedded in that advice is weighing those alternatives that are not mentioned in the discussion, but are still part of the analysis, right? Obviously, if you sent the client a bill and said, “Here’s $500,000, which is a drop in the bucket compared to the tax I saved you, you’d probably be shot.”
Ed: No. I would be shot. No probability there.
Chuck: You’re billing it on an hourly basis, even though in that case, it’s the bargain of the century.
Ed: Yes, the difference should be, we should address the difference between a commodity-type relationship in a unique one, but more specifically, a current ongoing client and a new client. Now, the ongoing client, I’m not even sure you have an engagement letter. You’re doing the work over a period of decades, over multiple generations. You send a bill, and the bill, by the way, is very detailed. It’s a text bill, not just a quarter hour, $25, or something. It’s a text of everything that occurred. It’s an opportunity for the lawyer to review what has occurred, a bit of a checklist, and it’s a communication device.
Chuck: It’s more like a file memo.
Ed: It’s exactly right. Yes.
Chuck: He’s not meeting with a client. Here’s what we discussed at the meeting with the client.
Ed: The malpractice defense counsel say, “What are you nuts? Tell them all that stuff.” Do one line and say this, “Well, I’m sorry that I don’t have to worry about a malpractice issue if I’ve communicated the issues to the client and understand there are other issues we haven’t discussed.”
Ed: It’s really a client relationship issue than it is a billing issue. How do you know client’s happy with the services, Chuck?
Chuck: I think one gauge that I have is how quickly that bill gets paid.
Ed: Matter of fact, that’s–
Chuck: When the check arrives, immediately after sending the bill, I’ve noticed, over time, a correlation between that and the clients who express satisfaction, or being thrilled with your service, or making referrals of other people to come in because they’re very happy. I see that correlation versus the– Of course, there are some people that they get a bill and they’re very rigid. They work on a calendar. They say to themselves, “Well, the due date is 30 days from the day this bill was sent, and so I am writing to check on the day 30,” kind of a cash management thing. That may not necessarily be a communication that they’re dissatisfied, but certainly, the ones that paid right away are almost always, those are very satisfied clients.
Ed: Yes. I’ll give you an example. Several years ago, a long time ago, work was performed for an out-of-state high-profile individual. I sent the bill out and I got the check by Federal Express. Do you think I would do whatever that client within the constraints of being ethical? I’ll jump through hoops for that folks.
Ed: That individual.
Chuck: Which is, I think, their intention.
Ed: Well, guess what? It worked.
Ed: The issue of billing is communicating. Now, the real issue as I see it, is the nature of the services. Is it a commodity? Let’s talk about residential real estate transactions.
Chuck: Right. Very much a commodity. Because so much of a commodity that in a lot of jurisdictions, it’s not performed by lawyers anymore. Illinois seems to be, again, a little bit of a whole. It’s less unique here, but a little bit of a holdout in involving lawyers, essentially, in every real estate transaction. There’s a lot of states, that’s done by title companies and so on. Lawyers don’t even get involved, unless there’s some conflict that arises.
Ed: If defaulting-wise, you do have to handle one. I will tell you; I don’t do real estate among many things, I don’t do. Mostly I don’t even work, seems like a counselor. Getting back to that issue, the number of calls that you’ll receive, title company, property and casualty insurance company, the broker, the others, a lawyer, you go crazy the number of calls.
Chuck: It drives me nuts for several reasons, first of all, because it’s very hard to confer any real value there. Second of all, I don’t want this to sound like I’m being dismissive of lawyers to do it, but in a way, it’s not really legal work. I say that because there’s so much of what goes on that is not governed by what the law is. It’s based on standard practice or local traditions or whatever.
Then I always feel, if I’m involved in a real estate transaction with a client, it gives the client what I think is a false impression that they’re dealing with an “enforceable contract” that has all these legal consequences. You and I both know that, while that’s true on a technical level, from a practical level, I’ve always felt like the very last type of contract I would ever really want to try to seek enforcement of a court would be a residential real estate sales agreement. Right? There’s all kinds of problems with really getting a legal remedy if push came to shove on behalf of clients in connection with that type of a contract. That, in my mind, is the ultimate commodity work.
Ed: Yes. You’ll see the contract and there’ll be attachments financing. You could have a contract that appears to be two pages, with 20 attachments.
Ed: I’ll give you an example that just occurred. Represent a group of licensed professionals, leave it at that, and have for years with multiple transactions among this group. I received an email from the new president saying, “Here’s this 30-page contract I got from our Association. I just wanted to have you check to see if it’s logical.”
“Logical?” I said to myself, “Peter, you don’t need a lawyer. You need a typist, and so pick up your files.” Because how can you satisfy that individual?
Ed: Comes to the table with a different mindset? I can’t create value there.
Ed: If I can’t create value, first of all, it’s not much fun to me. If my dog Jack, or Peter Pan, or the skillful real estate lawyer can– and by the way, there are some that are five-star in that area. Really are good at what they do in situations where there may be some title issues. Why should I get into that when someone can do a better job?
Chuck: Right. Probably less money.
Ed: Yes, you reckon he’s got–
Chuck: Less money than you want to charge it.
Ed: I can’t charge because I’ve had a little different overhead base than the average duck. That’s my problem. If I were in an outlying community, my rent was $100 a month, rates vary based upon that.
Ed: If much larger than that, “Wait a minute here. This is not a 501(c)3.”
Ed: Again I get this question on communicating what is you want me to do? Not your expectations, but what are your concerns and what are your fears? What’s your budget? What’s the timing? Tell me about, do I need an engagement letter? I must tell you, Chuck, I don’t have engagement letters. I don’t do engagements.
Chuck: I do them pretty rarely. Yes, and part of it is because of the engagement, of course, this is the reason why people would say that we’re supposed to have them. But, in my mind are the reason why I tend to generally not use them, and that’s because engagement evolves over time.
Ed: Right. I have an analogous situation. The prenuptial agreement. If you are doing a prenuptial agreement for the husband, I can assure you that after the marriage is concluded within 18 months, you no longer represent either the husband or the wife, or the business organization. That’s just the way it is. That the engagement letter, I’ll call it the prenup agreement, which is a form of engagement letter, right? It’s a contract.
Ed: You drafted that and you’re on his side, and guess what? You’re done.
Ed: Actually, I shouldn’t say you’re done. Never hear or just no more work comes in.
Ed: Pick up your files. This is very difficult. And, if you view a two-part engagement, there is the mechanics and then there’s the counseling, which if you do the counseling first, maybe you shouldn’t be doing this.
Ed: How should you be doing this? There is where I think the value occurs and the part of the provider of the value, after that meeting, you’re dead. I got to tell you, those conferences average, we book conferences, each one is two hours. At least two hours. You do more than two a day, you’re foolish because you’re spent.
Ed: This issue of counseling multigeneration family members and the younger generation, you charge too much. “You do this for dad, you should do it for me for nothing. Why are you charging me this for?” You get to those issues. “Give me the money now.” “He just died two weeks ago. When do I get the money?” The issue is the audience, the perception of what you’re going to perform, and you move to St. Louis, you’re going to save $2.8 million.
Ed: I don’t know the answer. Chuck, you have the answers. Tell me the answer.
Chuck: No. I think that what you and I do that’s unique compared to most lawyers that I talk to, is I think just the level of detail in describing the work on the invoice beyond what is sort of standard. When I’m writing those time entries, I’m asking myself the question, “If I were the client, I got this, would I understand from reading on this?” Not just what Chuck did, but why that was beneficial to me.
Ed: Okay. Let’s talk about net net gift, a situation you’ve encountered with. Briefly an overview, what is a net net gift?
Chuck: That’s where you make a gift to somebody that’s going to attract gift tax. The person who is receiving the gift agrees via contract that they will pay the gift tax. That, normally, would be an obligation of the donor. The donee says, “No, no, no. I will pay the gift tax in exchange for getting this gift.” The gift is a net gift in the sense that what–
Ed: There’s a mortgage on it, if you will.
Chuck: Yes. What’s gratuitous about it is really the portion of the gift that exceeds the gift tax and then you call it a net. Then, typically, when you have that type of agreement, there’s a second tax that is a potential tax, which is that, if the donor dies within three years of making a gift, the fact that there was a gift tax paid, will attract additional estate tax. Typically, if you have a net gift there’s this agreement will say, “Oh, by the way, if there’s any estate tax resulting from this gift, I will pay that too.” The donee will pay not just the gift tax, but also the estate tax. That makes it a net gift tax, net estate tax gift, or we, typically, say net net gift. That’s what we’re talking about with a net net gift.
Ed: Okay. Now I’m the client and I see this on the narrative on the bill. I’ll say, “Chuck, I’ve gone ahead and gone through the internet, and the stuff about the net net gifts or net net net gift,” is a generation skipping transfer tax, maybe.
Ed: What’s that all about? What can you say?
Chuck: Right. You can explain what it is just like–
Ed: Just say you have.
Chuck: Just as I have. Of course, what I didn’t explain is what the benefit of that is, which is tax savings. The result of having the donee pay the gift tax instead of the donor, is that the amount of the gift itself, which is the number that attracts the tax is reduced by the amount of the tax, so therefore, the tax itself is reduced. There’s tax savings involved in that type of structure. Of course, if a client has gone to the internet and looked this up, they will discover that there’s an awful lot of math involved in, actually, calculating the degree that the gift, and therefore, the tax is reduced.
Ed: Yes. Interrelated–
Chuck: It gets technical very quickly.
Ed: Interrelated computation.
Chuck: Yes, it’s an interrelated calculation and it gets more complicated when you layer on the estate tax or the generation skipping tax on top of that.
Ed: We have not only the income tax, self-employment, FICA, FUDA. Then we have a transfer tax.
Ed: Whether it’s to an immediate descendant or a remote descendant, a generation skipping tax. Then you have this net net or triple net gift situation. How do you explain that in an understandable fashion to anyone? The answer is, you can’t.
Chuck: Right. You can summarize it. You can say, “Well, this reduced the overall tax by X dollars just like you did with moving to Missouri.” When you present it by saying, “If you move to Missouri, move to St. Louis, it will save you $2.8 million in estate tax.” Well, that’s something the client can understand. If you go through the description of how the tax is calculated and the way Illinois taxes assets of people who live out of state versus in state, they never get to the number. They never understand wait a minute what does this mean for me? The way you have to describe this if you’re wanting to describe it to the client is, “This saved you X dollars in tax.”
Ed: “If you don’t like it, here’s the revenue ruling. Here are the papers, you figure it out.”
Ed: Or, you take it to another lawyer to figure it out, take it to your account and figure it out. They will say, “Oh, no. I’m not getting into that. I’m not getting into the weeds.” I think of the fee question of DeBakey, that world renowned heart surgeon in Texas, when the Medicare people reviewing his statement and it was $5,000. The auditor said, “Doctor, what’s your hourly rate?” DeBakey said, “Oh, for performing a surgery operation, oh, it’s about $1000, but when to do it, that’s $4,000.” It’s called judgment. If the client doesn’t perceive the value of the judgment, you may have the wrong client.
Chuck: Well, yes. Or you may be in the wrong line of work, right? Because I think one of the things that characterizes the distinction between the commodity type practice and a more esoteric practice, is that the commodity work requires less of that judgment to begin with.
Ed: Yes. It’s the 80-20 rule. You’re spending 80% of your time and thinking about problem, and 20%, actually, doing it. If that is not the case, then you’re into a commodity situation, which is that many of those transactions must be done. I’m not denigrating anyone who does it. I think it’s a great opportunity for a lot of people to enjoy a very fascinating aspect of the journey called life.
Ed: On the other hand, this question of, how do you determine value? It’s very difficult for a new client. I don’t know about you, but the new client and while you are talking about value, well, I’m not sure that I understand it. The other option is and I think we think about it almost every week is, what else could you do to have more fun? I don’t know. Maybe driving a truck.
Chuck: Yes. On that question of value, whatever that is, however, if you can quantify it, if it’s something that you can say, “Okay, the value of this service is X.” The fee, it seems to me, is that most people, they thought about this and the way I think about it is that, the fee needs to be less than X. I struggle with engaging in any field of legal practice where I can’t figure out how to have a fee that’s less than what I perceive the value of my own work being.
There’s a lot of legal work that’s done where the people pay fees for it. I think that they’re satisfied paying those legal fees. They, apparently, perceive value that I, in my own mind, don’t take into account. To me, I look at it and I say, “Wait a minute, the value of that was only such and such, and yet you can’t really get the work done for less than some number that’s–”
Ed: You write it off.
Chuck: So, I intend to — that has been a driving force in terms of me deciding what kind of work I want to do and kind of what work I don’t want to do. Because I don’t want to engage in work that requires me to constantly, either write off a bunch of my effort or to send out a bill that I believe exceeds what I perceive the value of my own work being.
Ed: Chuck, I want everyone to understand that we’re talking about a relatively narrow and a very deep area. We are not talking about criminal law. We’re not talking about Social Security appeal law. We’re not talking about divorce, bankruptcy, personal injury, collections. We could go through a whole range of areas that this doesn’t apply to, and each one of those is different.
Chuck: Right. Criminal law, like how would you place a value on freedom? That’s going to be the most valuable thing there is.
Ed: The technique, I can tell you, when I first started practicing and– Anyway, a fella came in on a criminal matter. I don’t know why it was sent into me, but it said, “Pete.” I opened up the big red book with all the legislation. I said, “Okay, you’re accused of X, Y, Z, and here’s the penalty.” “How much is that worth to you?” “Oh, worth whatever it is,” or whatever the charge was back then was maybe $300, translates to much more than that now. But the point is, it’s perception of what is the value. If there is no value being rated or conferred, guess what?
Chuck: Or perceived
Ed: You’re right. That’s the correct word. What is the perception in the mind of the client as to the presence of value?
Chuck: Right. Getting back to this real estate stuff, we’ve concluded it here a little bit. There is value being conferred there by the attorney, but the perceived value I think is far lower than the actual value of the lawyer services. That’s one of the reasons why that is a commodity.
Ed: The value there being how are you going to take title? Your name alone or joint tenancy, tenancy by the entireties? Are you going to cause title be in a trust? You going to send to the kids? That end of the transaction there is some value because you’re planning for the future.
Chuck: I told my colleagues who I run across who do a fair amount of this and I say, “If you look at that closing statement, you look at how much the bank is charging, forget about their interests that they’re going to earn, just the closing fees that they’re charging. What the appraisers charge, what the inspector charge, what the real estate agent earned as commission.”
All of these people have numbers, they’re getting paid out of this closing far more than the lawyer. Let’s say that goes sideways, who’s going to be sued for malpractice out of all those people in that? The only person really putting their neck on the line is the person getting charged, the person charging the least amount of money. Why is that lawyer having their neck on the line? Because, whether people want to admit it or not, they’re the ones that at the end of the day, they’re really relying on it.
Ed: Yes. It gets to the largest question of this is, if it is a commodity, stay away from it as a lawyer.
Ed: There are a lot of commodities floating around there, and the future of the profession is in jeopardy. There’s no question about that, being invaded, perhaps correctly, by the way, by other semi or actual professionals. We have a transaction in Arizona where there’s a group that acts as a fiduciary.
Ed: They’ve cut off a little area of legal representation, acting as a fiduciary.
Ed: I say, “Wow, this is really cool,” because they’re doing some things that lawyers shouldn’t really be doing.
Chuck: Right. We need that around here. We can see that.
Ed: That’s right. The idea is, there is a need for what I call specialization. We’re defaulting into that and allowing that not to occur, and I haven’t slightest idea why, but I see it with the law schools, forgetting about this area to teach. It’s really into, everyone wants to be Clarence Darrow and have the big buck. If that’s what you’re after, you should go sell shoes.
Ed: Is there anything else? We’ve beat up– We seem to be beating up everyone here, including our own profession.
Chuck: Including ourselves, to some extent. Yes.
Ed: No question. I must tell you, communicating fees, costs, and expenses is very difficult. I’ve been at it more than a couple of years, and I still find it the most difficult part of the practice.
Chuck: I agree.
Ed: Thanks for your time.
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