Lawyers are generally great at generating income. Lawyers generally suck at generating net worth. It feels like 80% of the folks I know who are partners at law firms are living paycheck to paycheck.
Why is that?
There are two easy and obvious answers:
(1) We’re status obsessed.
Why do large law firms compete to raise associate salaries? Is it because they really think that a 10k increase across the board will result in a higher quality set of employees – however “higher quality” is measured?
There are serious costs to raising associate salaries. First, and most obviously, those additional dollars come straight out of partner pockets. Salary increases – absent an increase in business – are a transfer of wealth from partners of associates.
Do increased salaries for associates lead to an increase in business? Signs point to no – Bank of America, for example, screamed after the last round of increases. Says the Wall Street Journal:
Bank of America Corp.’s top lawyer recently sent an email to a group of law firms calling the increases in associate lawyer pay unjustified, making it clear the bank wouldn’t help firms absorb the cost.
So, do higher salaries lead to better associates? I think probably not. Some firms – Williams & Connolly, for example – don’t pay annual bonuses. They’re lawyers are as credentialed as they come. So, maybe, there’d be some marginal effect on associate hiring. Perhaps a firm would have to hire Georgetown grads instead of Yale grads. But it’s hard to see that change being a huge reduction.
It’s also hard to see lawyers at law firms making this decision based on any data. Have they actually studied whether a $10k delta with another firm would matter to recruiting? I seriously doubt it.
No, the reason law firms match salaries is because law firm partners can’t stomach the thought that their firm isn’t winning. They can’t live with the idea that some guy at another firm down the road is seen as “top of the market” and they aren’t.
It’s the law firm equivalent of upgrading to a BMW 7 series because your buddy just bought a 5 series.
Or, put another way, lawyers are vain and insecure and are willing to piss away money to feed that vanity and insecurity.
It’s hard to both piss away money and build your net worth.
(2) We’re idiots about money.
As much as we know about the law, we tend to know little about money. Or, rather, we fail to apply whatever we know about money.
When we’re younger lawyers, we don’t save enough. When we’re older, we pay too much to financial planners to tell us how to buy stocks that underperform index funds.
As a lawyer, especially one who went to a fancy law school and is willing to work hard, it’s relatively easy to make a lot of money. But we seem temperamentally unfit to save a lot of money.
And that’s why lawyers aren’t rich.