Even at the best of times, it is hard to accurately predict economic conditions in the future. There is always the possibility of unforeseen events, both positive and negative, that will shift the economy one way or the other.
That said, while it’s not easy to predict exact economic output in the long term, we are able to forecast general trends and make predictions, as well as compare the current economic conditions against the backdrop of history as an indicator of where we might be headed.
With that in mind, what is obvious to us all is that the last few years have seen interest rates up at the higher end of the scale. In fact, as I write this the official bank rate sits at 5.25%, which is the highest it’s been since the 2008 crash.
Why is the interest rate at a 16 year high?
To put it simply, the bank interest rate is one of the key levers that the Bank of England has available to use as it attempts to keep our economy in a stable, growing position.
When inflation is high, the bank will raise the interest rate to encourage saving and discourage lending. This reduces the aggregate demand in the economy and helps to bring inflation down (albeit at a cost of economic growth). The reverse is also true of course: when inflation is too low you can reduce interest rates, encourage spending and borrowing, and hence help to stimulate the economy.
So, the current rate of 5.25% is high by today’s standards.. But this is not likely to last.
With the economy in recession and inflation on a gradual decline, the next move for the Bank of England will likely be a reduction of the bank rate. Indeed, the Bank of England currently predicts that the bank interest rate will fall below 4% by the end of the year.
So, what does this mean for law firms and client monies?
What we’re seeing now is both opportunity and threat for law firms.
The recent economic conditions have seen the UK experience both high inflation and low growth, which is a particularly challenging combination for policymakers to deal with.
For law firms, this has meant that the cost of doing business has risen and that it’s become more difficult to recruit fee earners to help generate income.
When you consider this, it’s clear to see why insolvencies are up year on year.
Law firms need to maximise all opportunities available to them to protect profit levels.
While the current economic situation presents challenges, it does also provide one very straightforward way for law firms to boost their revenue… Optimise the interest return made on client money.
High street banks are taking advantage of the 5.25% interest rate while they can, earning big profits on the back of increased interest margin spreads. The opportunity is there for law firms to do the same, but the high street banks are appearing predictably reluctant to pass on the favourable saving rates to deposit holders.
To maximise return from holding client money, Law firms need to ensure that they are both receiving optimal interest rates from the banks whilst passing on a fair level of interest to their clients.
Thus, law firms need to get proactive with their banking arrangements and ensure that their spread on client money interest is also optimised. At current interest levels, law firms should be able to generate a substantial amount of essentially ‘free money’ for very little effort.
This is not a new idea, of course, and interest earned on client monies should never be the primary focus for a law firm either. That said, you can’t ignore the simple fact that many law firms aren’t properly optimising their client monies strategy, and are leaving easy money on the table as a result.
With interest rates predicted to fall to below 4% by the end of the year, this really is a ‘make hay while the sun shines’ situation for law firms. Yes, the opportunity to profit from client monies interest isn’t going away, but as the interest falls, the revenue that law firms can generate from their client monies falls too.
How do you maximise the return on your client money?
At Gemstone Legal, we’re experts in law firm banking. It’s what our business is built around.
We’ve created a free online tool, the ‘Client Money Interest Scorecard’, that you can use to identify key areas where your law firm could be generating additional income.
It only takes a couple of minutes to complete, and you won’t be asked to provide any sensitive financial information.
Once you’ve answered all twelve questions you’ll receive immediate results and an opportunity to discuss how much extra return you could be making on your client money.
The idea here is to give law firms a quick, easy way to spot the areas where they are able to earn more revenue, and then provide you with the tools and guidance needed to actually achieve that revenue.
Complete the scorecard today and take the first step to increasing your law firm’s revenue earned on client monies.