Would you like a financial plan with that?

A lawyer who has an estate planning practice frequently advises his clients to get financial planning advice. Over the years, he has become very familiar with financial planning practices and he realizes that he could establish his own financial planning service that could provide such services to his clients and to the general public. Can the lawyer become a certified financial planner and sell financial planning services to his clients?

Clearly, a lawyer who operates a law-related business is faced with a conflict of interest every time he/she contemplates offering the services of the law-related business to a client. See, ABA Model Rules 5.7 Responsibilities Regarding Law Related Services, 1.7 Conflict of Interest: Current Clients and 1.8 Conflict of Interest: Current Clients: Specific Rules (in particular subpart (a) of the Rule that details business transactions with clients) of the ABA Model Rules. Depending on the circumstances, advertising and solicitation issues may also be implicated under Rules 7.2 and 7.3.

(b) The term "law-related services" denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

Paragraph 9 of the Comment to Rule 5.7 gives additional guidance as to the types of services that could be considered to be a law related service:

[9] A broad range of economic and other interests of clients may be served by lawyers' engaging in the delivery of law-related services. Examples of law-related services include providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and patent, medical or environmental consulting.

The third sentence of Paragraph 1 of the Comment to Rule 1.8 states:

The Rule applies to lawyers engaged in the sale of goods or services related to the practice of law, for example, the sale of title insurance or investment services to existing clients of the lawyer's legal practice. See Rule 5.7.

Under the ABA Model Rules, it is likely that an investment service would be considered to be a law related service. Rule 5.7 makes a distinction between services that are "offered under circumstances that are not distinct from the lawyer's provision of legal services to clients," or "in other circumstances by an entity controlled by the lawyer individually or with others." In the former circumstance, the Rules of Professional Conduct apply to the lawyer's conduct, while in the latter, they do not "if the lawyer takes reasonable measures to assure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the lawyer-client relationship do not exist."

1) Can a lawyer refer non clients to the investment advisory service?

2) Can a lawyer refer current clients to the service?

Applying the Arizona Rules 5.7 to the facts before it, the Arizona State Bar Ethics Committee came to the following conclusions with regard to the types of disclosures the lawyer must make to the non-lawyer customer:

...The steps necessary to assure an appropriate understanding by non-client customers will depend on the circumstances. "The burden is upon the lawyer to show that the lawyer has taken reasonable measures under the circumstances to communicate the desired understanding. For instance, a sophisticated user of law-related services, such as a publicly held corporation, may require a lesser explanation than someone unaccustomed to making distinctions between legal services and law-related services, such as an individual seeking tax advice from a lawyer-accountant or investment services in connection with a lawsuit." ER 5.7, cmt. ¶ 7.

In this context, the lawyer should explain, "in a manner sufficient to assure that the person understands the significance of the fact, that the relationship of the person to the business entity will not be a client-lawyer relationship." Id., cmt. ¶ 6. "This communication should be made before entering into an agreement for provision of law-related services, and preferably should be in writing." Id.

Thus, the inquiring attorney would be acting prudently in providing written disclosure to customers that the investment services are not legal services and the protections of a client-lawyer relationship do not apply. Written disclosure may not, however, be sufficient in all circumstances, as the attorney must explain these facts in a manner sufficient to assure that the particular customer involved understands their significance.

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Under circumstances where the services are provided to existing clients, the comment to ABA Model Rule 5.7 provides a useful discussion of the applicability of and interrelationship between other Model Rules (particularly Rules 1.7 and 1.8) when lawyers refer their clients to their law-related service. Paragraph 10 of the Comment to Rule 5.7 states:

[10] When a lawyer is obliged to accord the recipients of such services the protections of those Rules that apply to the client-lawyer relationship, the lawyer must take special care to heed the proscriptions of the Rules addressing conflict of interest (Rules 1.7 through 1.11, especially Rules 1.7(a)(2) and 1.8(a), (b) and (f)), and to scrupulously adhere to the requirements of Rule 1.6 relating to disclosure of confidential information. The promotion of the law-related services must also in all respects comply with Rules 7.1 through 7.3, dealing with advertising and solicitation. In that regard, lawyers should take special care to identify the obligations that may be imposed as a result of a jurisdiction's decisional law.

Applying Arizona Rules 5.7, 1.7 and 1.8 when the customer of the law related service is also a current client, the Arizona State Bar opinion stated:

"When a client-lawyer relationship exists with a person who is referred by a lawyer to a separate law-related services entity controlled by the lawyer, individually or with others, the lawyer must comply with ER 1.8(a)." ER 5.7, cmt. ¶ 6. Similarly, the comment to ER 1.8 notes that this rule applies to the lawyers engaged in the sale of law-related goods or services, such as investment services, to existing clients of the lawyer's legal practice. ER 1.8, cmt. ¶ 1.

Also relevant is ER 1.7, the general conflict of interest rule, which recognizes that "[l]oyalty and independent judgment are essential elements in the lawyer's relationship to a client." ER 1.7, cmt. ¶ 1. Under ER 1.7(a), a lawyer generally may not represent a client if there is a significant risk that the representation will be materially limited by the lawyer's personal interest. Such a "personal interest" conflict may not be waived by a client's informed consent unless, despite the conflict, the lawyer "reasonably believes" the lawyer will be able to provide competent and diligent representation. ER 1.7(b).

Where existing clients are involved, the facts posed by the inquiring attorney describe a proposed business transaction with a client. As such, the transaction must satisfy both ER 1.7 and ER 1.8 to comply with the ethical rules.

Examples of other state bar ethics Committees that have considered lawyers' involvement with law related services include the following: Florida Opinion 02-8 (2004) (nonlegal business is subject to the ethics rules with respect to that business unless the activities are distinct from legal services); Maine Opinion 179 (2002) (because title insurance is a law-related service, ethics rules apply unless sufficient measures are undertaken to distinguish the title services from the law practice; furthermore, title insurance services are naturally quite entwined with legal services so that it would be a rare circumstance when they could be so distinct as to be in compliance with the rules); Maine Opinion 182 (2003) (lawyer in a real estate transaction may refer client to a title company that the lawyer or the lawyer's law firm owns or has an ownership interest in; ethics rules, including the IOLTA provisions, would apply to the law-related services provided by the lawyer-owned title company); District of Columbia Opinion 306 (2001) (lawyer/ insurance broker may sell insurance products to the general public provided the lawyer complies with the ethics rules); Florida Opinion 94-6 (1994) (where mediation business is conducted through the law firm and is closely associated with the practice of law, the mediation practice must be conducted in conformity with the Rules of Professional Conduct.); Indiana Opinion 1 of 2002 (undated) (lawyer may provide legal services through his law firm and offer financial planning services through a separate entity, but the lawyer must comply with the legal ethics rules); Tenn. Sup. Ct. Bd. of Professional Responsibility, Ethics Comm., Op. 94-F-135 (1994) (trust accounts of law-related ventures operated by lawyers subject to trust account provisions of DR 9-102); Utah Opinion 04-05 (2004) (lawyer may form an entity offering law-related services, such as trust administration and investment management so long as he complies with Rules 1.7 and 1.8.); Utah Opinion 01-05 (2001) (real estate brokerage is a law-related profession, lawyer working there must comply with the lawyer ethics rules if he holds himself out as an active or inactive lawyer); Vermont Ethics Opinion 2001-02 [PDF] (undated) (lawyer may form a title and escrow company; as these are law-related services the legal ethics rules apply to lawyers employed there).

The New York state and local bar associations have issued several opinions on this topic. These opinions state that where the law related service is related to a legal matter that the lawyer is handling for the client, the lawyer may not provide the service. See, New York State Opinion 752 (2002) (DR 1-106 (the New York Code of Professional Responsibility version of ABA Model Rule 5.7) relieves a lawyer, in some circumstances, from the application of the disciplinary rules to nonlegal services. However, the disciplinary rules continue to apply to the lawyer's provision of legal services, and DR 5-101(A) bars the provision of nonlegal services that conflict with the representation of a client); Nassau County (NY) Bar Association Opinion 92-12 (1992) (Under the New York Code of Professional Responsibility, a lawyer who is also an insurance broker may not act as insurance broker and as a lawyer in the same transaction; however, the lawyer may receive legal fees from insurance clients if the employment is related to different matters.). See also New York State Bar Opinion 619 (1991), which states:

Where a lawyer advises a client on trust and estate matters, a central object of the representation is how best to satisfy the financial needs of the client and of those for whom the client wishes or is obliged to provide. A frequent topic in trust and estate planning is whether and to what extent life insurance products should be used to satisfy some of the client's financial objectives and, if so which ones. Where a lawyer has a financial interest or affiliation with a particular life insurance agency or company, the lawyer's independent professional judgment would unavoidably be affected in considering the appropriateness of or recommending, life insurance products for a particular client....

We recognize that both DR 5-101(A) and DR 5-104(A) permit a client to remit such disqualification of the lawyer if the client consents to the conflict after full disclosure of the circumstances.... however, we do not believe that there could be meaningful consent by the client to the lawyer having a separate business interest of this kind....the opportunity for overreaching by the lawyer is too great to be tolerated. We do not believe that a lawyer can, consistent with the duty of competent representation under Canon 6, solicit or accept a client's consent to a direct and substantial conflict between the client's and the lawyer's interests.

Advertising/solicitation

The last two sentences of Paragraph 10 of the Comment to Rule 5.7 state:

The promotion of the law-related services must also in all respects comply with Rules 7.1 through 7.3, dealing with advertising and solicitation. In that regard, lawyers should take special care to identify the obligations that may be imposed as a result of a jurisdiction's decisional law.

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Several state bar opinions discuss whether a lawyer can solicit legal work from a customer of his law-related service, and/or whether a lawyer can solicit *26 his legal clients to patronize his law-related service. See, e.g., Florida Opinion 02-8 (2004) which raises the traditional concern that the non-legal business will be a "feeder" to the law practice; Indiana Opinion 1 of 2001 (undated) (lawyer may not enter into a referral agreement with a financial planning company that the lawyer co-owns with nonlawyers; use of company as a feeder for estate planning clients violates the rule against solicitation and is inherently conducive to violations of the rules on referrals and on dividing fees with nonlawyers); Indiana Opinion 1 of 2002 (undated) (lawyer's financial services entity may not be used as a "feeder" to the law practice; use of telemarketing to solicit attendance at an educational program is permissible provided that these solicitations were solely for the purpose of obtaining clients for the financial planning business and not for the law practice; lawyer may not offer participants in the program a certificate for a free one-hour consultation with specific attorneys pre-selected by the lawyer: this would have the effect of obtaining clients for those attorneys, in violation of Rule 7.3.). See Also South Carolina Opinion 02-06 (undated) that stated:

In the Committee's opinion, an attorney's practice of forming relationships with customers through a mortgage broker business and then making direct solicitations to such customers for provision of legal services would violate Rule 7.3. We note in this regard that should the attorney engage in the mortgage broker business without the intention of soliciting work for his legal practice, acceptance of an unsolicited request for legal representation by a borrower probably would not violate Rule 7.3. If the attorney were to obtain professional employment in such manner on more than an infrequent basis, however, it would be difficult to establish that such employment was not based on solicitation in violation of Rule 7.3.

(lawyer with an ownership interest in a mortgage brokerage may not use the brokerage business to generate legal business, or to engage in solicitation); See, e.g., Michigan State Bar Opinion RI-135 (1992) and Utah State Bar opinion 146(A) (1995):

Neither the original version of Rule 7.3 nor the earlier Model Code provisions on DR 2-103 and DR 2-104 suggested an exception to in person solicitation based on the existence of a prior non-legal business relationship ....

The context of Rule 7.3 deals with lawyer-client relationship and does not easily lend itself to interpreting "professional relationship" to mean any type of business relationship. The Committee has not found any state that has so interpreted or defined the term "professional relationship"....

Therefore, a lawyer may not solicit legal employment from insurance or investment customers developed through advertising and solicitation relating only to insurance and investment products.

As to whether a lawyer could solicit insurance business from the clients of his law practice, the Utah Ethics Committee stated:

Nothing in the rules prohibits a lawyer from soliciting insurance business from clients who respond to his marketing efforts for his law practice, so long as he complies with Rule 1.8....

Further information on law related services is available here.

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