04 Aug 2022
Banking for law firm partners: A Q&A with Emily Bernstein and Chris Duck
Private banking that reflects your unique financial situation can help you reach your goals. Here, Private Bankers Emily Bernstein and Chris Duck explain how they can support legal professionals with lending and wealth management.
How are you supporting lawyers in the current economic environment?
Emily: At Investec, we have a private banking team dedicated to working with senior legal professionals including partners. Against a backdrop of rising inflation and interest rate changes, it’s even more important to be able to understand the financial situation that our clients are in and to be able to tailor bespoke solutions for them. This could include structuring mortgage repayments around liquidity events such as large profit distributions, or helping time-poor lawyers by referring them to our colleagues at Investec Wealth & Investment for help with financial planning and investment management in a volatile market.
What are the biggest concerns lawyers share 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 have a much stronger stake in the success of their firm.
But conversely, it can make life harder for newly qualified partners to secure a mortgage. Changing income patterns can also create new needs; if partners are receiving some or all of their remuneration in another currency, suddenly foreign exchange becomes a consideration they haven’t had before.
How do law firms differ in their remuneration?
Emily: 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. 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.
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.
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.
Can you help me get a mortgage?
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 evidence of their forecasted earnings, to better understand their financial trajectory.
In terms of a repayment schedule, 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 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.
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.
Does this approach apply to lending other than mortgages?
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 & 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.
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 other lenders that can only underwrite self-employed mortgages on a limited basis. We've previously helped partners reach affordable 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 currency 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. 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 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. We are not able to help every client with international considerations, but we can often take a client’s foreign currency earnings and assets into account when we’re looking at affordability. It’s not a ground-breaking approach, but it’s something that other lenders may not consider when they’re working with partners at global law firms.
We can also introduce clients to the Foreign Exchange Dealers in our team who act on client instructions to monitor the market movements and aim to execute trades that support long and short-term goals. This could include exchanging foreign currency to raise a house deposit in Sterling.
Speak to a private banker about your lending needs
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