I don't like writing about lawyers -- especially negatively. No one should. As a good rule of thumb, you should tiptoe around anyone who sues for a living.
Still, I couldn't ignore this piece from last week's Wall Street Journal:
"Jacoby & Meyers Law Offices LLP, a pioneer of television legal advertising, filed lawsuits Wednesday challenging state laws in New York, New Jersey and Connecticut that prohibit nonattorneys from owning stakes in law firms. ...
"The ownership restrictions aim to prevent investors from influencing lawyers' professional judgment, such as by pressuring attorneys to put profits before the needs of their clients. ...
"'There is no legitimate rationale that exists to prevent nonlawyers from owning equity in law firms,' said Andrew Finkelstein, the managing partner of Jacoby & Meyers. 'The rule unconstitutionally restricts interstate commerce by limiting attorneys' ability to act like any other business in the United States.'"
Actually, as the Journal notes, there is a legitimate rationale for the ban: conflict of interest.
But there's more to this matter than that. It may not necessarily call for a legal ban, but there's a good reason most law firms aren't searching for outside capital. They don't need it. Law firms are the epitome of low-capital businesses, able to self-fund operations without the need for deep-pocketed backers.
Think about it. Besides an office and standard business upkeep, there's very little physical equipment a law firm needs to operate. Nearly all of its capital is human capital, locked in the brains of the lawyers themselves.
What could a law firm do with money from outside investors? It could invest in more lawyers, but additional client billings generated by new lawyers should cover their salaries fairly quickly -- the up-front investment is minimal.
What else? Nicer digs? Holiday parties? Vegas benders? You got me. The overwhelming majority of a law firm's revenue is paid out as compensation. There aren't many other costs, or potential investments. Coca-Cola
Why, then, would a law firm like Jacoby want outside capital? The same reason a company like Blackstone
This isn't always a sinister move. Law firm partners need liquidity, and may wish to sell their shares even at a discount. But that's typically not the case. History shows, with Blackstone as the most recent example, that when companies that don't need additional capital sell shares to the public, it's usually to exploit unsuspecting investors by cashing out at the top of a business cycle. Naturally, they often make terrible investments.
In what's destined to become another good example, commodities trading firm Glencore recently went public. Glencore has survived, and thrived, for decades as a private company. Why does it suddenly need to go public? It doesn't. The business works great as it is. And life as a public company is miserable: shortsighted investors, meddlesome regulators, nosy reporters. Yet public investors are enamored with commodities like never before, eager to invest in companies like Glencore at terms that are seriously lucrative to its partners. Much of Glencore's business model is based on exploiting those on the other side of the trade -- something investors may want to keep in mind.
Law firms do, of course, make buckets of money. But, like Blackstone and Glencore, the money is for the employees. As former Goldman Sachs partner Leon Cooperman once said, "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."
And if you want to make money from lawyers, become one; don't invest in one.
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Fool contributor Morgan Housel owns shares of Altria. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Google, Coca-Cola, and Altria Group. Motley Fool newsletter services have recommended Google and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.