By Ryan Bradley
Let’s face it, we live in a litigious world. Each day, the news is filled with headlines detailing a massive lawsuit leveled against a large company, or the latest battle over a state law seeking to impair access to voter rights, healthcare or even restrooms. Lost in the mix are truly relevant legal developments that can have real-life applicability to business owners and founders and deserve some attention.
You May Be Paying Your Lawyer Too Much
The billable hour has been a fixture of the legal world for as long as the industry has been alive. During the era of irrational exuberance before the 2008 financial crisis, this cost-based model of legal services produced sky-high legal costs.
Law firms still operating on the antiquated hourly model are now facing intense competition from a new breed of legal services companies. These provide turn-key guides to performing legal tasks that were formerly insurmountable for entrepreneurs. In my own practice, I have been moving toward contingency fees or flat fees in order to better position my firm in the competitive landscape. Lean startups and established organizations alike are now understanding that they can perform certain legal tasks internally with their pre-existing talent and avoid the dreaded “thousand-dollar phone call.”
Sensing the changing tide, many established law firms and lawyers are embracing alternative fee arrangements, known as AFAs. They seek to base fees on the value delivered rather than on the cost of the attorney’s time. AFAs are not a new idea and have been used by plaintiff’s lawyers in the form of contingency fees for decades. While the established legal community has been slow to adopt AFAs, increased competition from technology-driven startups and nimble small- to medium-sized firms have resulted in even larger operations implementing them. Expect new and innovative forms of legal services arrangements to further mature in 2017 and ask yourself if your business is paying too much for legal services.
You Cannot Ignore Data Breaches
In the wake of highly-publicized breaches at Home Depot, Target and others, entrepreneurs should be aware that data breaches are a very real and costly threat to businesses of any size. Slate has produced a very disturbing infographic outlining the largest data breaches in history, from AOL to Evernote. Mishandled and hacked data is an epidemic that will only grow in 2017.
While most companies take at least basic measures to protect client data, the potential legal risks associated with data breaches are so significant that they cannot be ignored. Civil litigation associated with data breaches appears to have dipped slightly since 2014-2015 according to some reports. But litigation risk for business is real and expensive.
This does not mean that entrepreneurs and SMBs are out of the woods. The insurance industry, for example, has taken measure to address the problem with an array of products and recommended measures to minimize risk. Most of these measures involve establishing specific policies and procedures to prevent and address data breaches, as well as provide credit monitoring in some situations. While data breach policies and credit monitoring services will likely continue to grow and expand in 2017, entrepreneurs should be aware that the problem is widespread. No business that stores client information or transacts online is totally insulated.
Don't Fear Fiduciary Responsibilities
The term "fiduciary" is one that most entrepreneurs have heard, but few understand. Essentially, a fiduciary relationship is one wherein the professional, such as an attorney, investment advisor or trustee, known as a fiduciary, is required to act in the best interest of the other party or parties in the relationship. For example, an investment professional treated as a fiduciary will be required to recommend investments that would best serve the client, regardless of which products yield the highest fee or commission for the advisor — even if the two choices are essentially similar.
A regulation by the Department of Labor slated to go into effect in April 2017 would impose the fiduciary relationship on any person or entity that provides investment advice. That includes insurance agents, financial advisors, and most important to businesses, sponsors and participants in 401(k)s and similar retirement plans. Businesses could be held to a high standard of care previously reserved for only a narrow subset. Violations of the new law will be enforced civilly rather than administratively. While most experts believe the under the U.S.'s new administration, the rule will be delayed, it has been upheld in the courts as legal by a Dallas federal judge, so it could go into effect as planned.
Accordingly, plan sponsors (founders and entrepreneurs) may need to revise contracts and compensation agreements with their advisory firms and review plan documents. Businesses should be mindful of the costs and fees associated with various mutual funds and asset managers, since the prior “suitability” standard may be heightened. If you don’t find the best deal for your participants as a plan sponsor, have you fulfilled your duties?
Ryan Bradley is a partner at Koester & Bradley, LLP, Smith & Bradley, LLC, and White River Consulting.