Alternative Fee Arrangements: Retainer Fees
In How Many Alternative Fee Arrangements Are There?, we identified five core types of AFAs and a sixth: a hybrid of any of the five. We’ll examine each in a little more depth. Here’s a closer look at Retainer Fees.
Mentioning the words “retainer fees” around a potential new client can sometimes be a nerve-racking task. It may conjure up thoughts of being locked down or being trapped in an agreement where they can no longer make changes or escape from. But, retainer fees – a down payment for work to be done and agains which that work will be billed – when considered as part of a complete custom fee package, can actually help enable both your client and your firm. If positioned properly, your client should now feel comfortable that the firm’s work will begin as promised and continue without interruption. A retainer fee also shows that the client is as committed to the matter as the firms is – building trust and enhancing a potential long-term relationship.
There are basically three types of retainer fees your firm can employ: a classic retainer, a security retainer, and an advance payment retainer.
The classic retainer is one that is earned in it’s entirety by the firm upon receipt. An example of a classic retainer might be an upfront fee to ensure a lawyer’s availability during a specific time period. This type of retainer fee is usually designed to kickstart the relationship, but may, in some cases, encompass the entire engagement.
A security retainer is one in which a client retains interest in those monies until such time as services are rendered. In this case, the firm is basically holding the funds in escrow for a client. As such, the fees should reside in the firm’s trust account, as directed by states’ ethics rules, which gets reduced gradually as the fees are earned.
In the case of the advance payment retainer, as in that of the classic retainer, the lawyer retains ownership immediately, with one important difference. If the engagement ends before the depletion of the funds, the balance is subject to a refund due the client. Like classic retainers, the initial deposit typically goes into the firm’s own account.
The firm can also employ an evergreen retainer, which is a special situation that requires automatic replenishment when it reaches a certain balance. The minimum replenishment level is agreed to by the firm and the client and typically, work will cease when the balance dips below the agreed-upon minimum until it is replenished. An evergreen retainer ensures that there are always funds available throughout the case, no matter the stage.
Retainer fees can apply across the board (especially in evergreen format), or they can be part of a mixed-fee arrangement that utilizes an initial retainer and then converts to hourly or flat fee work when initial funds are depleted. Combining fee arrangements in such fashion can help anchor the relationship and get the case off to the right start, while allowing for some billing flexibility on the back end.
Retainer fees can also help facilitate a more professional relationship with special clients, who want to be able to pick up the phone and talk to someone at your firm when a need arises. In addition, because they’re collecting the funds up front, many firms are able to offer a discount off standard billing rates. Of course, attorneys need to do their due diligence and make sure they check with applicable state guidelines, but leveraging retainer fees can be an important part of establishing better short and long term client relationships.