De-Risking Attorney Balance Sheets - A Case Study

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I have worked with hundreds of attorneys as an expert witness in securities litigations. I have also worked with many attorneys managing their assets, including attorneys from AmLaw 20 firms, regional firms, and small boutiques.

Despite their different practice areas, firms, and locations, one thing is consistent: they collectively face a number of common risks that arise from being attorneys. In this case study I use the framework of Company Town Risk™ to unpack these exposures and to show how they can be reduced across an attorney’s TotalWealth.

You can access the case study here.

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I won't go through all the details of the case study, which walks through the balance sheet of a representative AmLaw 100 attorney, living and working in Manhattan. However, I will touch on the unique frameworks I use to unpack the risks attorneys face.

Total Wealth

All individuals have four primary types of wealth. These different types of wealth have been well documented in the economic literature and can be referred to collectively as “Total Wealth”, which include:

• Human capital;
• Real estate;
• Pensions; and,
• Financial assets.

What differentiates Total Wealth from other approaches is that it effectively capitalizes an attorney's future earnings as an asset on their balance sheet. In this case study, that asset is worth over $19 million and is the biggest piece of the representative attorney's balance sheet. Most financial advisors completely ignore this asset.

This is not only naive, but dangerous.

By capitalizing future earnings on the balance sheet many previously hidden risk exposures are revealed and can be dealt with proactively.

Company Town Risk™

The Company Town Risk™ framework is something I developed years ago and have written about in my blog posts.

For much of the 20th Century, you could find “company towns” all across America.  These communities typically existed because of one local company that employed virtually everyone in the community and owned almost all the stores and housing.

In such cases, individuals working for the company had virtually all their Total Wealth directly or indirectly exposed to the company. Their income came from a company job, and their human capital consisted primarily of skills the company needed and had trained them for.  Their pension was funded by the company, and their house was owned by the company. If anything happened to the company, the workers could have their Total Wealth decimated overnight.

Historically, such decimation was not uncommon.  A train trip from New York City up the Hudson River to Albany is at once bucolic and a testament to the gales of creative destruction.  Dozens of once thriving mills and factories mark the path northward.  These former enterprises supported vibrant company towns, but they, and the communities they spawned, are gone.  All that remains are the husks of the old factories, slowly falling in on themselves.

More recently, over the past 16 years I have been involved in securities litigations where investors with high Company Town Risk™ exposures were essentially wiped out when those risks were realized.  Those cases involved employees of Kodak, living in Rochester, NY, and, more recently, residents of Puerto Rico.

Without doubt, working for an AmLaw 100 firm while living in Manhattan is a high-tech version of an old mill town.  The accoutrements may glitter more, but the risks are the same.  This has only been proven by the COVID-19 pandemic and subsequent shuttering of much of Manhattan.

For the representative attorney in this case study there are four discrete Company Town Risk:™:

• Capital Markets;
• Firm;
• Healthcare Sector; and,
• Manhattan.

Most attorneys have a similar mix, depending on their practice area and location.

In the case study, I go examine how each of these risks apply to each element of Total Wealth and how they can be reduced.

De-Risking the Balance Sheet

In order to reduce these Company Town Risks™ it is necessary to treat the financial assets as a completion portfolio and to allocate them last. This enables the attorney to diversify away from the Company Town Risk™ that exist in her non-diversifiable assets, such as her human capital.

In most cases, this can be done without sacrificing returns. Most importantly, it significantly reduces the tail risk of having all components of the attorney's Total Wealth declining at the same time. As we have seen with COVID-19, such scenarios are not far-fetched.

You can access the case study here.

NOTE: Nothing in this blog post should be considered individual investment advice. If you need investment advice, please email Jack Duval at jack@bant.am or call 845.605.1007.