On June 30, securities litigator James Benedict, 66, walked out of his office at Milbank, Tweed, Hadley & McCloy for the last time as a partner and caught a plane to Vail, Colorado, to begin the next chapter of his life.
Benedict, who had been responsible annually for $35 million to $40 million in billings defending investment advisers in their biggest lawsuits, had been planning for this day since 2004. That’s when he, then Clifford Chance’s litigation head, convinced a first-year partner, Sean Murphy, to join him in a move to Milbank with the understanding that Murphy would eventually take the reins of the practice, then $10 million to $15 million. Over the past 12 years, Benedict has made good on that promise: In January, Murphy, 46, first-chaired the defense for insurer Axa Financial Inc. in an excessive-fee derivative claim involving $1 billion in investment advisory fees, the first of several upcoming trials defending new clients that the two originated together.
Benedict’s retirement at 66 represents a very rare exception to Milbank’s mandatory partner retirement age of 65. Unlike most firms, which either never had or recently dropped the mandatory age cap, Milbank has mostly held fast to its traditional policy. Hand in hand with mandatory retirement is a generous pension plan, which assures retired lawyers with at least 22 years in the partnership a quarter of their highest-compensated years for life. (Benedict, whose tenure at Milbank lasted 12 years, gets a proportionately lower payout.)
Benedict’s turnkey succession plan and his firm-guaranteed pension are exceptional, but his retirement is not. His age puts him in the leading edge of the largest wave of retirements that law firms have ever experienced. The aging-out of the generation, which began when the first baby boomers turned 65 in 2011, has been picking up speed ever since, with heavy ramifications for firm business. “There’s been this looming tsunami of generational change confront the profession for a long time,” says Altman Weil Inc. principal Alan Olson. The changeover “is happening now, and over the next five years.”Until recently, Olson was on a lonely campaign to warn firms about the crisis. Now, a growing number of consultants and firm leaders have turned their attention to the issues that the graying of The Am Law 200 poses to firms already reeling under years of anemic growth, eroding realization rates and an overheated lateral market.
The boomer generation—75 million Americans born between 1946 and 1964—and a tiny cadre of over-70s Silent Generation lawyers currently make up just under half of partners at Am Law 200 firms. As partners with the greatest seniority, they constitute a majority in the equity and management ranks, and control an outsize share of client relationships. The impacts of retirement are amplified because a long surge in hiring and promotion that began when boomers entered law firms has halted since the financial crisis. From 1985 to 1999, for example, Am Law 100 firms grew by 4.75 percent per year in head count; from 2000 to 2008, by 5 percent; and since 2009 by just 1.2 percent on average annually, according to Am Law 100 data. In the next five years, one in six—16 percent—of current partners will retire, and 38 percent in the next decade, according to the preliminary results of legal search firm Major, Lindsey & Africa’s 2016 Partner Compensation Survey, which will be published later this month.
The primary risk posed by all the retirements is the loss of substantial client relationships. That loss has been somewhat mitigated by the widespread elimination of mandatory retirement policies since 2007. But with the oldest boomers turning 70 this year, a full reckoning is finally here. Firms that aren’t focused intently on transitioning client relationships by now—particularly firms that emphasize originations and billings over collaboration—are at greatest risk.
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Firms are also facing increased obligations or costs associated with retired partners. A minority with unfunded pension obligations like Milbank’s face increased costs as fewer current partners support successively more retired partners [see "The Pension Squeeze," page 45]. Firms with tax-qualified defined benefit plans—61 percent of The Am Law 200, according to retirement plan analytics firm Judy Diamond Associates Inc., a sibling ALM company—carry the risk of topping-up costs if a retirement investment portfolio underperforms. And with partnership head count flat, most firms are returning more in capital to retiring partners than they’re taking in from new junior partners.
At a time when firms are feeling increased market pressures, successfully navigating client succession, as well as controlling runaway retirement obligations, will help determine the next winners in the race for talent and market share.
The Boomer Grip on Business
At management forums these days, say several managing partners, the talk is increasingly about how to hold on to client relationships as partners retire. “It’s a big worry,” says Jeffrey Gray, managing partner of Davis Wright Tremaine, a firm that has recently been ramping up efforts to mitigate that risk.
While most retiring partners don’t have as much business as Milbank’s Benedict, client relationships at a majority of firms are still overwhelmingly concentrated in the hands of partners in their 50s and 60s. A survey by Altman Weil last year, for instance, found that nearly two-thirds of firm respondents—63 percent—attributed a quarter or more of revenues to partners age 60 or older. Roughly 42 percent counted on the over-60s for at least 35 percent of revenues. Getting senior partners to release their stranglehold on the business is tricky, particularly at firms where compensation is closely tied to a partner’s “book.” But even at firms where compensation is evaluated more holistically, the client handoff doesn’t come easily to many lawyers.
Baby boomers generally want to work longer than their predecessors, and they can, because they’re healthier and more active than the previous generation. “It’s been a high-octane performance-based generation,” Olson says. More are practicing past the traditional retirement age of 65 or 70, with a growing numbers holding on to equity into their late 70s. According to our spot survey of 68 Am Law 200 firms, the oldest equity partners are 80 years old.
(In the UK, however, the retirement age is typically 55. Click here to learn more.)
Lawyers of his generation “are very concerned about being praised and how they’re regarded,” notes Milbank’s Benedict. “It’s very hard on the ego, emotionally, when suddenly that seems to wither away.”
A partner’s “entire persona may be wrapped up in his or her persona as a lawyer,” says Allen Fagin, who served as Proskauer chair until 2011 and retired two years later. For those partners, “there is a lot of fear surrounding retirement, sometimes financial anxiety, sometimes, ‘What am I going to do?’”
This generation’s approach to retirement has been informed by their experience of cataclysmic changes in the legal industry. As young lawyers, they assumed—wrongly, for all but a tiny minority of firms—that they would follow in the footsteps of senior partners, who were expected to gradually hand off clients to younger partners while winding down their hours and being paid very handsomely. But 20 years ago, “all the rules changed,” says Jeffrey Lowe, global practice leader at Major, Lindsey & Africa. “Unlike the people who came before them, they’re being told that ‘you’re not originating much business anymore, so we’re going to pay you less.’ They’re finding that they really need to hold on to their relationships, because that’s the only thing giving them power.”
That emphasis on origination has been amplified by firms struggling to preserve or increase market share since the recent financial crisis. “Rather than easing off, the more senior you are, the more hours you are billing,” Lowe says.
As they entered the senior management ranks, boomers made decisions that have made the demographic crisis worse, say analysts. In leaner business cycles, “rather than hire, or hire as aggressively as in the past, many would tamp down and say, ‘We’re just going to work harder ourselves,’” Olson notes, leaving some gaps between generations at firms.
Since they began to enter firms in large numbers in the late 1970s, boomer lawyers have distorted firms’ age demographic. In 1960, for example, the median age of lawyers in the United States was 46. By 1980, the median age of lawyers had dropped to 39. As the boomer lawyers advanced through their careers, the median age increased in step, to 49 in 2005, the last year the American Bar Association released such statistics. Currently, at Am Law 100-200 firms, the median age of partners is 51, according to ALM RivalEdge data on graduation years. Just as they have left their imprint on the legal industry over the past 35 years, boomers are now upending traditional notions of how and when partners should retire.
These days, the age when partners step down is most often a guideline. Extensions are negotiable to varying degrees. Meanwhile, where there remains an official policy on retirement, the age has drifted up. “Rather than ‘you’re out at 70,’ I’ve seen more flexibility in the relationship, which frankly I think is highly appropriate,” says Olson.
Retirement policy information on 68 firms collected by The American Lawyer this summer, for example, shows that more than half—55.9 percent—have a stated retirement age; the rest don’t. But only 16 firms truly maintain a mandatory age cutoff; the others reported that they grant extensions to partners annually, usually subject to periodic review.
Nearly a third, or 21 firms, reported changing their retirement policies in recent years, most by dropping retirement ages altogether, and some by eliminating the “mandatory” part of the equation. (In 2005, Altman Weil reported that 57 percent of firms with more than 100 lawyers had a retirement age that was mandatory; that number had dropped to 50 percent by 2007, the last time Altman Weil examined the issue.) The shift was prompted by changes in the liability and competitive landscapes.
Firms began eliminating the mention of age from partnership contracts in large numbers in 2007, when Sidley Austin agreed to a landmark age discrimination class action consent decree with the Equal Employment Opportunity Commission; the firm paid $27.5 million to 32 former partners stripped of their equity under the firm’s partnership policy. That year, the New York State Bar Assocation and the ABA recommended that firms reconsider the mandatory policies, especially in light of the evolution toward larger firms with more centralized management. The nail in the coffin of such policies came in 2012, when Kelley Drye & Warren, settling a similar EEOC age bias suit, agreed not to fire lawyers once they reached the age of 70. (The American Lawyer spot survey this summer echoes this reality: Of those firms that reported no retirement age, nearly half, or 44 percent, eliminated the policies in recent years.)
There are increasing competitive reasons for lifting or eliminating mandatory retirement policies. Lawyers can’t be subject to noncompete requirements under U.S. law, so partners can easily take client relationships to a new firm after they age out of their previous one.
The growing lateral market in over-65s is evidence of those pressures. At firms with no mandatory age cap, several firm leaders highlighted their competitive advantage over firms where partners age out. “We’ve been very successful at bringing in laterally more senior partners who have brought over a lot of business and energy to the firm,” says Michael Beck, 61, chair of Loeb & Loeb, a firm that has historically had no retirement age policy. “For people over 60, at this firm we’re looking at another 10 or 15 incredibly productive years.” The firm’s oldest equity partner is 79, but about 10 percent of the partnership is around age 70, Beck says.
In February, for example, Beck lured over Steven Rosenthal, 67, and Marc Cohen, 66. The two friends, who had developed a busy public sector practice, decided to look for new opportunities a year before Rosenthal was about to hit the mandatory retirement age at Kaye Scholer.With a growing client business and still-abundant energy, the two felt no desire to give up their practices. “I want to be able to continue to practice without any age constraint on me,” says Rosenthal.
At the new firm, “there are no ‘gotchas’ or commitments, or ‘we’re going to review in five years’ or have you take a physical,” Cohen says. All their clients have followed the pair to Loeb & Loeb, which has already added lawyers to their team.
While most firms push older partners to pass on clients to younger partners in the interest of the firm, only a few offer financial incentives for doing so. “It’s a question that’s on everybody’s plate,” says law firm consultant Bradford Hildebrandt. As partners reach their upper 50s, firms “can tailor a compensation system that will incentivize him or her to work harder to transition the relationships to other partners. It hasn’t been popular, but it’s starting.”
At all but a few dozen mostly lockstep or modified lockstep firms that have seniority-based pension benefits, there’s also little incentive to stop working. In fact, there appears to be a stronger financial incentive to continue: Many partners may not feel that they have enough money saved for retirement—and they may be right.
Financial planning experts say that most partners need about 80 percent of their compensation to continue to live comfortably in retirement, and tax-qualified plans may be insufficient. That problem was exacerbated in 2008, when, practically overnight, the financial crisis erased a third or so of many partners’ retirement savings. Hundreds of partners at or near retirement age who saw their firms collapse in the years to follow—Heller Ehrman, Thelen, Howrey and Dewey & LeBoeuf—also saw their capital nest eggs evaporate, and in some cases were saddled with additional capital debts to pay off capital loans. “People clearly want to work longer,” says DLA Piper global co-chair Roger Meltzer. “Whether they want to work longer because they really love what they do,” he adds, “or because they have an impression that, as a result of losses they took to their own net worth during the financial crisis, they’re trying to make up, I don’t know.”There’s also a greater expectation among boomers that they should help out their children longer than previous generations did. “Most people are not in the financial position to say, I’m hanging up my cleats at 55,” notes Weil, Gotshal & Manges chair Barry Wolf. “More and more children and grandchildren are being supported by parents. There’s more of a burden—a desire—to help your kids out in terms of whether it’s their first apartment or first home. You’re not going to see people retire before they could start collecting the maximum benefits.”
Day of Reckoning
The widespread lifting of retirement caps after 2007 delayed a reckoning by encouraging productive partners to stay longer. But it proved a two-edged sword. It “can buy some time, but if it’s viewed as a hiatus where we don’t do anything, it’s likely going to create additional issues,” Altman Weil’s Olson says.
Without adequate attention to succession of client business, he says, firms risk alienating their younger talent. Altman Weil is seeing an increasing number of firms “where middle-aged and younger generations begin to get increasingly restless,” said Olson. “They perceive that seniors have a ‘pull-up-the-drawbridge’ mentality and are not invested in helping them in their careers.
Jonathan Hughes, an employment partner at Arnold & Porter, has seen this close at hand. There’s “a propensity of some lawyers who, if they were really thinking about what’s best for the firm, they would be thinking about giving their younger colleagues more client contact, and instead they continue to dominate the relationship to the point where they block opportunities for people.”
Sounding the alarm
In 2013, after reading a report about how clients react if firms don’t transition relationships, Deborah Read, the managing partner of Thompson Hine, took a look at how client management responsibility was distributed among partners at the firm by age band. “I looked at how many client relationships were managed by partners over 59—about a third at the time—and I said, ‘Whoa,’” she says.
Like many firms, Thompson Hine had raised the expected retirement age for equity partners from 65 to 68 in 2011 (though partners can retain their equity status till 72 with consent of the executive committee), but it hadn’t done much else to deal with the graying of its partnership. “I concluded that we had a passive approach to retirement and transitions. We’ve got a compensation structure that really doesn’t incentivize transitions, and we have some partners who lost a lot in the financial crisis and want to keep working.”
With Read’s help, the firm is now taking a more proactive and systematic approach. Beginning the year a partner turns 62, and periodically thereafter, Read meets with them to discuss long-term plans. When a partner is ready, he or she can discuss with the firm a multiyear phasedown in productivity and compensation, and a conversion to income partner status. A partner’s income declines, but often not as fast as the billable hour targets. The program, she says, has been well-received; over half of partners she’s had conversations with about their transition plans have agreed to the change. “We used to say to people, well, you should start transitioning your clients. But people would think, wait a minute, you’re just going to whack my compensation. As a partner, I will have subjected myself to a pretty vulnerable situation,” she says. By negotiating a multiyear arrangement, that uncertainty is erased while the interests of the clients are preserved. “I explain to them, ‘This is your legacy. If we don’t transition your very large client, I will have failed, and you will have failed.’”
Day Pitney managing partner Stanley Twardy was similarly alarmed because of the firm’s large number of lawyers aged 62 to 68. The looming retirements at the East Coast-based firm threatened hundreds, if not thousands, of clients.
Expanding a pilot program that began with the firm’s senior trusts and estate partners, Day Pitney now asks all partners in that age group to reduce their hours and the number of clients for whom they are responsible, under terms worked out individually. In exchange, they hold on to an outsize portion of their original compensation. “We may end up paying nearly double sometimes, because we’re compensating both the partner who’s giving up the work and the partner who’s picking up the work,” Twardy says. “They will work less but continue to get paid nearly as well, and it becomes part of the compensation model for them.”
As both firms’ efforts show, firms can manage partner retirements and client succession even without the leverage “carrot” of an outsize pension benefit. They’re both doing another thing right, experts say: starting individualized discussions at least five years ahead of a planned retirement. “I was at a meeting recently where one of the managing partners said, ‘You know, we need to have planning for succession, we need to have a talk with partners at age 63,’” Hildebrandt says. “And I said, ‘That’s way too late, you’ve already lost that client. You needed to start talking at like 55.’”
Davis Wright Tremaine dropped its mandatory retirement age of 70 after the EEOC decision on Sidley in favor of an informal system of annual “check ins.” Nowadays, six or seven years ahead of a partner’s expected retirement, practice group heads map out transition plans and identify successors as part of the compensation discussions with each partner. The successful passing on of client matters is also considered in the firm’s compensation system, though the system isn’t as formulaic as Day Pitney’s. “We want to make sure that we are recognizing the value of somebody passing on a client relationship, while accounting for the additional responsibilities of the attorney stepping in, too,” says Gray, Davis Wright’s managing partner. “There’s more art than science to that.”
Similarly, at Orrick, which doesn’t have a mandatory retirement age, discussions about transitions and client succession are also now rolled into the annual individual meetings where compensation is discussed. The individual ‘progress report’ meetings, which began two years ago, take advantage of the fact that compensation decisions at Orrick are based on many factors, not just billings or client origination. Those discussions, says Orrick chair Mitchell Zuklie, include concrete feedback on what the firm would like partners to do in the coming year.
With about 20 percent of the Orrick partnership over age 60, client succession is increasingly a part of those discussions. “At some point as a partner approaches retirement age, the guidance should not be to bill 1,800 hours and spend 2,600 total hours on business development, it could well be ‘Well, we want you to focus on transitions,’” says Zuklie.
Firms with mandatory retirement policies and pensions still have an edge in pushing partners to bring in younger colleagues. “Mandatory retirement does focus you,” notes Benedict, the retired Milbank partner. “It focuses you on transition and what you’re going to do thereafter.”
Benedict notes that his practice took 30 years to develop, so it’s not surprising that it takes many years to shift the relationship to a younger colleague or two. Finding a younger lawyer or team to hand off those relationships requires a certain shared vision and work ethic and compatible personalities. “I’m a 24-7 client service guy, no bones about it. I’m outgoing and likable,” he says; his successor, though a generation younger, is all those things, too.
But it’s not just about personal compatibility, he notes. “You need to have client buy-in to a transition,” says Benedict. Bringing a new younger partner into the relationship “may be the law firm’s vision, but what clients are buying is enhanced service. They’re concerned about duplication of roles and excess fees. I always say, if you have Sean [Murphy] and me both on the matter, someone’s always going to be on the matter. If there’s any duplication, we always wrote it off.” Together, Murphy and Benedict have doubled the practice over the last decade.
A ‘Pastoral’ Responsibility
Even with the best-laid plans, counseling senior partners on client succession is one of the hardest jobs that firm leaders say they face. So much depends on individual partners’ own readiness. “There are those who wanted to retire from the practice of law at the earliest moment that they could,” says one recently retired Am Law 100 head who struggled with such conversations, “whatever the cutoff was for not losing pension benefits, or for their general sense of retirement well-being. The other group is whenever they were carried out in a box—the last possible moment. And there isn’t a whole lot in between.”
“There’s a pastoral component to it,” says another leader of a global firm with no set retirement age, saying that discussions about retirement can be harder than asking someone to leave a firm. “When you’re asking someone to leave a firm, they already know that things haven’t been working out,” that leader says. “When you’re talking to somebody about retirement who’s basically been at the firm for 40 years and it’s basically their life, and informing them that the situation has changed, that’s hard to do.”
Thompson Hine’s Read says that she views conversations about succession and retirement as one of her most important roles as a leader. “I don’t think you can delegate this kind of conversation. I think it shows disrespect if you do,” she says.
Benedict’s example, however, shows that succession planning can leave positive feelings on both sides. An avid outdoorsman who admits that he had little time to indulge in his passions until he began scaling back the past two years, Benedict has no plans to practice law again. In mid-July, two weeks into his retirement, his day was full: fly-fishing, followed by a U.S. Ski Team board call, then tee time at a course behind his home. Though he left behind a practice that he loved, “I didn’t have this feeling of sadness,” Benedict says. “I have a huge sense of satisfaction that the practice is better today then when I came. All these great clients we have are going to be well taken care of.”
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