03 Feb 2020
Lending to law firm partners: A Q&A with Emily Bernstein and Chris Duck
Making partner is a huge step up for any lawyer and it’s one that can have a major impact on their earning profile. We spoke to Emily and Chris, two of Investec’s Private Bankers working in this space, about the unique challenges they help clients overcome.
What are the biggest concerns lawyers have once they make partner?
Emily: When we’re speaking with lawyers who are making the move from salaried employee to partner, it’s a big change. Not only is it a potentially lucrative career move, they’ll have a much stronger stake in the success of their firm.
Chris: But conversely, it can make life harder for newly qualified partners to secure a mortgage. Changing income patterns can also create new issues; if partners are receiving some or all of their remuneration in another currency, suddenly foreign exchange becomes an issue they haven’t had before.
And how do you find law firms differ in their remuneration?
Chris: Every single law firm we speak to is different. For example, many will follow a ‘lockstep’ model, with all lawyers who become partners in the same year typically earning equal compensation.
But others may offer a ‘merit-based’ pay system that links remuneration to performance metrics, such as the number of hours billed or the amount of new business brought in.
Emily: However the partnership is structured, it usually results in equity partners drawing a relatively low monthly income in comparison to their often lumpy profit distributions. In the case of salaried partners, typically their guaranteed annual income is subsidised by performance-related bonuses, which can be complex for the high street to accommodate.
Chris: Many high-street lenders will also want to see two or three years of accounts and take an average of them. For clients who have just made partner, their earnings over the last three years won’t reflect their earning potential over the next three.
It’s not a ground-breaking approach, but it’s something I don’t see a lot of other lenders considering when they’re working with partners working for global law firms.
How do you overcome these challenges when working with legal partners?
Emily: Well, we start with a holistic view of our client’s income across profit distributions, drawings, deferred income and bonuses. We try and understand a partner’s entire financial life, so we can find a solution to match.
For clients who have just made partner, we might also look at their forecast earnings, so we aren’t as bound by that three-year historic average as some lenders are.
Chris: To give a concrete example, if we know a client is receiving profit distributions every August, we can then tailor the mortgage so there are mandatory payments at the same time of year.
We also see a lot of interest in revolver mortgages, which clients can take out on an interest-only basis and can also draw money out of if they need to – if they have an unexpected expense or need to pay for school fees, for example.
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Emily: We also take this approach across our lending, not just mortgages. We do a lot of work with Buy-to-Let (BTL) mortgages, including lending to Special Purpose Vehicles which many clients are using for their BTL portfolios at the moment.
Long-term, we also work very closely with our Wealth and Investment colleagues as partners diversify their assets. There is a real value to having all of our services under one roof.
Beyond understanding income, what are your biggest priorities when working with lawyers?
Emily: Time is always key. We’re working with a lot of partners who bill down to every six minutes of their day. It sounds clichéd, but every second really is precious.
Chris: The next issue is that becoming a partner usually entails a significant capital commitment, so recent partners can find their cash resources are stretched when they look to secure a mortgage.
New partners will often need a high loan-to-value (LTV) mortgage, which may not be on offer from many of the lenders that can underwrite self-employed mortgages based on just two- or three-years’ accounts. We've recently helped a number of partners with LTVs of up to 95 per cent.
Partners taking their annual dividends in a foreign currency can sometimes struggle to get a mortgage through the high street.
And foreign earnings, how does that complicate the picture?
Chris: Partners taking their annual dividends in a foreign currency can sometimes struggle to get a mortgage through the high street. This would again exclude a number of lenders as many lenders withdrew from foreign currency mortgages following the introduction of the EU’s Mortgage Credit Directive, which imposed more stringent controls and processes.
We also have to consider our client’s personal situation, they might live abroad or have substantial assets overseas, as well as receiving a portion of their income in another currency.
Emily: What we’ll do differently is take a client’s foreign earnings and assets into consideration when we’re looking at affordability.
It’s not a ground-breaking approach, but it’s something I don’t see a lot of other lenders considering when they’re working with partners at global law firms.
Apparently the two of you are known as the Laurel and Hardy of private banking for legal professionals, can you confirm?
Chris: Let’s just say if that’s true, I know who I am.
Emily: No comment.