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It is a truth universally acknowledged that new partners often have more money than time or investment knowledge. And that’s an invitation to financial abuse. An entire industry of brokers, advisers, and money managers — some of whom are shameless scoundrels — eagerly wait to swipe a chunk of your hard-earned profits. Beware. Client service in the financial industry frequently isn’t even close to what one expects from professionals like lawyers and doctors. And lawyers in D.C. firms make tempting targets and unsympathetic victims. Learn to protect yourself. Here are some basic tips to guard savings from those ogling the earnings of partners (and counsel and associates). I write these suggestions not as an industry insider trying to peddle services, but rather as a fellow lawyer who grew interested in investing and adopted these conclusions for my situation. Legal practice provides such generous sums partly because of the training required, the difficulty of the problems involved, the high dollar value of the stakes, and the bar’s monopoly power over legal services. It’s a mistake to expect such a generous return from investing, a field simpler and easier to enter. Rather, risk and return are inextricably bound in investing. If you get greedy, you risk watching years of savings disappear. Earning an average 8 percent or 9 percent annual return from a balanced and diversified portfolio is historically realistic. If anyone is promising much more, be wary of a needlessly speculative investment or, at worst, a scam. Your legal practice is what will make you rich. Prudent investing merely takes those earnings, guards them for the future, and protects them against inflation and other financial risks like market crashes. Play offense with your legal-practice development; play defense with your portfolio. In investing, your goal is not to lose. YOU’RE NO BUFFETT One easy way to lose, of course, is to pick stocks that underperform the market. That is surprisingly easy to do. Over the long run, most mutual-fund managers — despite extensive education and research — nonetheless fail to add value. The failure rate varies, but as a general rule, fewer than 20 percent or so of all managers do better over the long term than an unmanaged index that simply buys all the stocks in a category of assets. And efforts to beat the market often involve frequent trading — which increases the tax burden and thereby lowers returns. Can you do better than the professionals on your own? Consider the odds: They have MBAs with specialized training in investing, full-time research staff, and the ability to devote themselves full time to investing. And they still fail. In contrast, you as a lawyer start with disadvantages. You probably have no training in how to value a business or in the multiple statistical ways of evaluating stock. What you do have is a busy law practice, which often doesn’t even allow you adequate time for yourself and your family. Be honest: Do you really want to spend your limited leisure moments poring over 10-K filings? If you nonetheless try to pick individual stocks, you are facing a ruthless opponent. Up against you is a very efficient market, where the price of a stock already reflects all public information and much privately available information. What makes you think you can see something that everyone else can’t? Yes, Warren Buffett Jr. and his lawyer partner Charles Munger may beat the indexes. But you are almost certainly not Buffett with his near-supernatural ability to select undervalued companies, and if you try and fail, you may put your retirement at risk. An alternative exists to playing the loser’s game — one that doesn’t rely on trying to outguess the market by picking individual stocks. The answer is called an index fund. It’s a type of mutual fund that tracks an entire asset class, such as stocks of large U.S. companies, real-estate investment trusts, or stocks of companies in emerging markets. Buying an index fund means that you give up the fantasy of market-beating profits. But it assures you of the market return. That’s victory enough, particularly given your constraints as a busy lawyer, and it’s better than most professional stock pickers can manage. COSTS MATTER Even better, an index fund typically will let you beat most investing professionals while spending less money on investment costs. The financial services industry is eager to separate you from your money. With some mutual funds, for example, “loads” take away a portion of your investment as a sales fee, possibly as much as 5 percent of the initial investment. And beyond this, management fees can average around 1.5 percent of all money invested. Thus, in a $10,000 investment, close to $650 could be irrevocably lost in the first year. The impact of all these costs is significant. Every dollar in investment costs is money that won’t be compounding for you, so the loss from the excess fees can grow for decades. And remember that a balanced portfolio historically might be returning on average only 8 or 9 percent a year. If 2 percent of that amount is lost in costs, you might be paying 25 percent of your annual return to enrich intermediaries who may be underperforming the indexes. And if future returns are lower (a good possibility, given the historically low dividends in the U.S. stock market), the percentage damage would be even worse. Costs matter, as John Bogle of the Vanguard Group likes to say, and one easy way to improve your investment returns is simply to prevent money from being lost to investment fees. Are you really working so hard at your legal practice just to make your fund manager rich? Fortunately, good alternatives to high-priced funds exist. Index stock funds from major mutual-fund companies have fees as low as 0.10 percent, a mere sliver of the average fee. And for investors looking for bonds, low-cost alternatives to costly bond funds include certificates of deposit, government bonds from Treasury Direct, and even Series I savings bonds. AVOID ANYONE ON COMMISSION In legal practice, it would be misconduct worthy of disbarment to recommend an inferior course of action that harmed a client in order for lawyers to enrich themselves by the client’s loss. Yet in the brokerage industry, such conduct is not uncommon, as brokers recommend mutual funds that pay them commissions instead of better-performing index funds, or advise frequent trading that increases commissions but lowers overall return. Sure, a few honest advisers or brokers might exist who can outperform the indexes over the long term and deliver an additional return greater than the cost of their services. But finding such gems (before a hedge fund snatches them up) is no easy task. A simpler rule of thumb is to shun any adviser who receives commissions for selling certain investments. Such commissions are routine among brokers and advisers, but they create an inherent conflict of interest. The adviser is rewarded for selling the product, regardless of whether it’s best for the client. And when the adviser isn’t paid to recommend a product, a disincentive exists to mention it, however beneficial it might be. You would never knowingly hire an expert witness who was taking money from your litigation adversaries to give you particular advice. Yet any commission-based adviser is in essentially the same compromised position as this witness. There’s a reason that mutual funds pay brokers to sell their products, and it’s not to earn money for the unfortunate souls who buy the stuff. IT’S YOUR MONEY What type of advisers are left? If you are going to delegate your portfolio management, find a fee-only certified financial planner, a designation that indicates a higher degree of knowledge. And pay the fee-only CFP by the hour. Many advisers prefer to take a percentage of assets under management, often at least 1 percent a year. Resist this. Once the portfolio is established, maintenance is fairly simple, and it’s not worth 1 percent of your annual return for a few hours of basic effort. Pay your financial professional the same way your legal clients pay you — by the hour. It would be best, however, if you learned to manage your own portfolio. Compared with most sophisticated legal practices, portfolio design and implementation are relatively easy. If you’re a new partner in a D.C. firm, the task is well within your intellectual ability, and you can assure yourself of a manager who cares about your financial success as much as you do. If you’re new to investing, the place to start is the book The Four Pillars of Investing by William Bernstein. It will tell you essentially everything you need to know. Add to that the columns of Jonathan Clements in The Wall Street Journal and Scott Burns in The Dallas Morning News, and you are well on your way to being a knowledgeable investor. It’s your loot. Learn to protect and manage it for yourself.
Robert L. Rogers is associate opinion editor of Legal Times .

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