There are plenty of good jokes about lawyers. Have you heard the one about the terrorist who hijacked a 747 full of lawyers? He threatened to release one every hour until his demands were met.
Or have you heard why lawyers are replacing rats as laboratory research animals? First, they are plentiful. Second, the lab assistants don’t get so attached to them. And third, they will do things that you just can’t get rats to do.
I think Charles Dickens had it right when he wrote of “the sequestered nooks of the legal profession, where writs are issued, judgments signed, declarations filed and numerous other ingenious machines put in motion for the torture and torment of His Majesty’s liege subjects, and the comfort and emolument of the practitioners of the law”.
Well the story is that, next year, these leeches upon decent society are going to reinvent themselves – as an investment opportunity.
The Legal Services Act has decreed that people other than lawyers should be able to own British legal firms. As many as 60 firms are said to be thinking of floating on the stock exchange, according to newspaper reports.
The fanfares will soon be heard. Brokers, bankers and PR men have smelled the scent of fat fees. Investors will soon be rounded up, convinced that this is a great investment opportunity, cautioned that no serious diversified portfolio is complete without it, and marched to the payment counter.
But you should beware.
This has got all the makings of an investment opportunity that should be avoided at all costs. I will explain why.
How ‘Tesco Law’ will affect the legal profession – and its new investors
The forthcoming changes to the legal profession are the result of ten years of debate culminating in the Clementi Report. This recommended that the law should no longer be the exclusive province of lawyers. While all legal documents need to be just that – legal – Clementi judged that there was no reason why legal services should not be provided and marketed by others.
It was as a result of this judgment that the term ‘Tesco Law’ was coined. And, indeed, from next year we can look forward to certain basic legal services being offered by the likes of Tesco, the Co-Op and the AA.
The way it will work is that simple forms will be offered either in-store or, more likely, online. Customers will fill in the details as best they can. Then a qualified lawyer will simply rubber-stamp the final document, thereby making a considerable saving on the cost of these things today.
Faced with this prospect, high-street law firms that have made a cosy living from births, deaths and marriages will have to shape up or ship out.
Consolidation of this area of the legal profession is likely to be one of the investment themes of the next few years. Some of these firms will join together, close unwanted branches, share back-office functions and present a united brand.
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That is all very well, and probably long overdue. But cost-cutting alone does not make a good investment case. And the precedents for this type of operation are not auspicious.
Buy-and-build chains of estate agents and accountants have had mixed success at best on the stock market. And these were not faced with a challenge from the almighty supermarkets.
For the big legal firms the investment proposition will be rather different. There is a talk of some of the biggest firms raising capital on the stock market, but it is hard to understand why they should need it.
The fact is that legal firms, over time, are hardly short of money. Again various rationales will be put forward. Quoted legal firms will be able to offer share options to their junior staff. Capital will help them finance investment in IT and the establishment of overseas offices.
But the main issue is that, as partnerships, the profits are divvied up at the end of the year. They fund new yachts for the partners rather than re-investment into the business.
Why law firms will disappoint their shareholders
Comparisons are being made with the ‘Big Bang’ of 1985. That was when all of those stock broking and merchant banking firms abandoned their partnership models. Again, the precedents are discouraging.
Shares in City firms tend to move up and down with the stock market, and smart investors can make money from these gyrations. But as long-term investments they just don’t stack up. In a good year, the fat bonuses paid to staff reduce the rewards that could otherwise go to shareholders. In bad years, there is nothing for anyone.
The bottom line is this: this type of ‘people business’ does not need capital. It does not need millions to fund development costs or build a factory. So it need not care what shareholders think or how to reward them.
These legal newcomers will not be getting my investment.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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