MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2010-04
Ethical Obligations/Prohibitions on Establishing a Referral Relationship with Licensed Financial Advisors
You have inquired whether the Maryland Rules of Professional Conduct allow you, as an attorney, to enter into a “referral arrangement” with a financial services firm where you would receive a fee from the financial advisor’s broker for working with them to establish financial plans for your estate planning clients. Your stated goal is to ensure that your clients receive proper financial advice and to allow you to monitor the success of their financial plan, in exchange for which you would receive an annual fee on a percentage basis. You state that “the broker/advisors would set up and implement an investment plan with [your] guidance as an attorney and as a licensed advisor.” The referral arrangement would be an “exclusive relationship” with that firm for financial services and would be disclosed to the client in writing. You also propose to obtain the relevant licenses you need to provide financial advice to your clients. The Committee has reviewed your request and feels that, even though such an arrangement may be motivated by a desire to assist your clients, the referral arrangement you propose is prohibited by Maryland Rules of Professional Conduct.
Your proposed referral arrangement and proposal to provide financial services to your clients raises issues with several of the Maryland Rules, including Rule 1.7 (conflict of interest), Rule 1.8(a) (Conflict of Interest: business transaction), Rule 1.8(f) (Conflict of Interest: compensation for representation) and Rule 5.4 (Professional Independence of a Lawyer).
Rules 5.4(b) and 5.4(c) appear to be the most germane rules to the facts you put forth, and both prohibit your proposed referral arrangement. Rule 5.4(b) states: “A lawyer shall not form a partnership with a non‐lawyer if any of the activities of the partnership consist of the practice of law.” Your proposal to the Committee indicated that “the broker/advisors would set up and implement an investment plan with [your] guidance as an attorney and as a licensed advisor.” (emphasis added). Such an agreement is an informal partnership with non‐lawyers (broker/advisors) where you are explicitly practicing law. It is thus prohibited under Rule 5.4(b).
Even if you were to revise your proposal and propose only to offer your client purely financial advice, not legal advice, your proposal would still fail to meet the relevant ethics rules given the guidance of relevant Maryland case law. While the Maryland Court of Appeals has made clear an attorney may conduct a business separate from his legal profession, any second vocation or business must be sufficiently divorced from the attorney’s legal services to prevent the attorney attempting to conduct a non‐legal based business from being treated as an attorney and to prevent the Rules of Professional Conduct from applying to the services. See Attorney Grievance Com’n of Maryland v. Martin, 308 Md. 272 (1986). In Martin, the Defendant was both a licensed attorney and a licensed life insurance broker. He recommended an investment to the plaintiffs, which turned out to be a Ponzi scheme. The Attorney Grievance Commission alleged neglect under the Rules of Professional Conduct for the attorney’s failing to research the investment he recommended. The attorney claimed he was acting in his capacity as a life insurance broker and not an attorney, but the Court rejected his claim. The Court made clear that where an attorney concurrently engaged in two separate pursuits, any attempts to serve an individual in a non‐legal area must be kept entirely divorced separately and distinctly from the practice of law. Id. at 282. Without such separation, “the public cannot be expected to tell when the lawyer is acting as such and when he is acting in the capacity of a layman.” Id. (citation omitted). The Court suggested that adequate separation is achieved when business is “conducted from a separate office, preferably from a separate building, with no common use of stationery, cards, announcements, names on doors, windows or shingles, telephone numbers, etc.” Id. The Court noted that where the clients’ reasonable “perception [is] that they were consulting a lawyer before entering into an important investment[,] . . . [i]t is . . . entirely appropriate to hold [the attorney] accountable to the ethical and performance standards of his profession” for those actions. Id. at 284. Given the Court’s language in Martin, the Committee does not believe under the facts of your proposal that an attorney could successfully separate himself from his status as the client’s attorney and attempt to act merely as a financial planner where the attorney has already served the client on a legal matter and where the client would believe he or she is consulting a lawyer, and in fact is consulting his or her lawyer on financial issues, before entering into an important investment. Where an attorney continues to serve a client by offering financial services, the legal activity and the proposed financial services cannot be adequately divorced under Martin’s logic, and you therefore cannot mingle those continuing legal services and services of the non‐lawyer financial planners without violating Rule 5.4(b).
Rule 5.4 (c) likewise prohibits your proposed referral arrangement. Rule 5.4(c) states: “A lawyer shall not permit a person who . . . pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Based upon your statement that “the broker/advisors would set up and implement an investment plan with [your] guidance as an attorney and as a licensed advisor,” as well as the fact that your legal services continue under analysis of Martin, supra, you may not enter into this arrangement because it is exclusive. The agreement would bind you to recommend these financial services providers even if in your judgment there was a better recommendation for your clients. The Maryland Rules prohibit any such limitation of an attorney’s judgment as it runs against the client’s interests.
Similarly, Maryland Rule 1.8(f) prohibits the proposed referral arrangement. It states, inpertinent part: “A lawyer shall not accept compensation for representing a client from one other than the client unless:
. . .
(2) there is no interference with the lawyer’s independence of professional judgment or with the client‐lawyer relationship.”
The Committee, for the same reasons cited above, believes that that the proposed exclusive fee agreement would interfere with the lawyer’s independence of professional judgment in determining from whom the client should seek financial services. Such a transaction entered into based upon an exclusive agreement, as opposed to the attorney’s independent judgment, cannot survive scrutiny under Rule 1.8(f)(2).
Lastly, and in the same vein of reasoning cited above, your proposal carries “a significant risk that the representation of [the referred client] will be materially limited by the . . . personal interest of the lawyer,” and it is thus prohibited under Rule 1.7. Here, the “personal interest of the lawyer,” at odds with the client is the financial motivation to steer the client to the attorney’s compensated services. The Committee is of the opinion this propos al cannot survive this most basic conflict of interest challenge.
The above opinion is in harmony with the Committee’s previous opinions dealing with this issue where it has handled similar inquiries. See, for example, Ethics Opinions 01‐17 (Dual Practice of Law and Investment Advice), 94‐22 (Lawyer’s uncompensated referrals for Financial Planning), and 92‐14 (Sale of insurance by attorneys to clients).
For the reasons laid out above, the Committee is of the opinion that the proposed referral agreement is prohibited by the Maryland Rules.
REFERENCES:
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Md. Rules of Prof. Conduct 1.7; 1.8(f); 5.4(b), (c)
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Attorney Grievance Commission of Md. v. Martin, 308 Md. 272 (1986)
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Ethics Opinions 1992-14; 1994-22 and 2001-17
REASSIGNED TO: Elliott Petty
DATE ASSIGNED: March 15, 2010
DATE DISTRIBUTED: November 3, 2010