Law Firms Should Offer Financial Planning Services
Reprinted with permission of Michigan Lawyers Weekly
As traditional practice areas and business sources diminish or dry up altogether, attorneys are seeking new roles and new niches. The impact of the 1995 tort reforms, the increasing tendency of many businesses to take their legal work in-house, and other factors are making it more difficult to obtain and keep good clients.
With all these changes, it’s not surprising that attorneys are starting to think “out of the box” in terms of the services they provide their clients. One appealing source of income: offering financial planning, such as investment counseling and life insurance sales, as a part of a “full service” approach to clients’ needs.
This trend is already taking place with the “Big Six” accounting firms, which have formed their own financial planning departments. For its part, the investment industry is also eager to form alliances with CPAs in order to take advantage of the CPAs’ client base. American Express, for example, acquired 70 accounting practices in the last three years, and Merrill Lynch and other investment brokers are following suit.
Not wanting to be left out, many lawyers are scrambling to become financial wizards overnight. For years, lawyers and CPAs have been referring clients to financial planners, often with no more to show for it than a thank you note or an occasional lunch. Now, with an eye to capturing that income stream, these professionals are trying to wear the financial planner’s hat themselves. Why refer that work away, they reason, when they could have it for themselves?
Unfortunately it’s not that simple while financial services can be profitable, lawyers must be wary of potential ethical and professional pitfalls. But there is a way to offer clients the financial planning services they need — and to tap into that valuable income stream — while avoiding the downside: form an alliance with a licensed professional financial planner.
There are a number of reasons why attorneys should avoid wearing the financial planner’s hat themselves. It is like a brain surgeon setting up as a golf pro. When you are already expert in one field, why change directions?
Moreover, attorneys put their client relationships at risk when they assume the financial planner’s role. Suddenly the attorney is not just the trusted detached advisor any more; he is selling a product, be it life insurance or another investment by which he will profit. And when a lawyer becomes a salesperson, the client doesn’t look at him with the same trust. The relationship has been compromised.
Now, an attorney could hire a financial planner to work for him in-house. But does he want the expense — and the possible liability — that comes with such an arrangement? Does he want the firm to get into the business of selling life insurance or other investments? For most attorneys, the answer is a resounding “No!”
There is an alternative way: attorneys need to form relationships with experienced — and licensed — financial planners. The right approach is to become the independent “team leader” who pulls together all the necessary components to advise the client.
Many attorneys resist the idea of providing financial services through a financial planning “partner.” The “traditional” view is that lawyers should stick to providing legal services only and that they should not receive any compensation for referring a client to a financial planner. To people with the more traditional viewpoint, the professional is somehow sullied by receiving a fee for making that connection possible for the client.
The opposing view, which could be described as the “progressive” one, is that the relationship of trust attorneys have with their clients actually requires attorneys to look for financial planning and other services for their clients Attorneys are in a position to know who the best planners are; their clients usually are not, and are looking to their attorneys for guidance and leadership. To justify that trust attorneys have to go out and find the best people to serve the clients’ needs.
Moreover, clients today are increasingly savvy about the world of financial planning services. They are well aware that the attorney will receive a fee for providing this service. In the majority of cases, they prefer to have the attorney’s fee come out off the sale of the product, rather than their own pocket.
Disclosure Is Key
While offering financial services by “partnering” with a licensed financial planner makes sense for many practitioners, a few common-sense cautions are in order.
In all professional relationships, there is the requirement of disclosure to the client whenever the professional could or will realize a personal benefit in connection with the professional relationship. So the client has to understand, up front, that the professional is going to be paid by providing this product or service.
Take the example of an attorney who is working on a client’s estate plan. The attorney realizes, while working on the estate plan, that it would be a good idea for the client to purchase life insurance. In response to the attorney’s suggestion, the client asks, “Can you recommend someone who could tell me what to do?” And at that point, the attorney obtains the client’s permission to set up a meeting with the financial planner.
By way of example, our firm often enters into these relationships with both CPAs and attorneys who bring us into meetings with their clients who are interested in learning about financial planning and tax strategies. In these relationships, the attorney or CPA receives a commission on the life insurance or other product that the client buys. Of course, the client is fully advised of this arrangement and has the option to pay the attorney directly for his help in providing this service. For the most part, however, the client is happy to have the attorney or CPA paid via commission. And the attorney receives the benefit of the income without compromising ethics or the quality of advice to the client.
When participating in such meetings, be careful to explain that a commission will be paid to the attorney if the client accepts the services. Of course, it should also be explained that the client has the option of paying the attorney directly if that is what he or she prefers. Again, most of the time, the client is happy to know that he or she will not have to pay a fee to the lawyer.
Clearly, in recommending a financial planning advisor to clients, attorneys have to be absolutely convinced of the financial planner’s credentials and ethics. Such due diligence is necessary because attorneys can be subject to suit for negligent referral if things go wrong.
Of course, any attorney is well advised to review the ethics rules pertaining to providing ancillary or non-legal services to clients. While I am not an attorney, my research has turned up several ethics opinions in this area.
For example, RI-135 provides that a lawyer/insurance agent may sell insurance to law clients provided that ethics rules regarding business transactions with clients, confidentiality, and conflicts of interest are observed. The opinion states that a lawyer may sell insurance policies to his or her current clients — so long as the attorney complies with the provisions on MRPC 1.8(a). In other words, the lawyer may enter into the transaction only if 1) the terms of the transaction are fair, 2) the terms are fully disclosed to the client in writing and in language the client can reasonably understand, 3) the client has a reasonable opportunity to seek the advice of independent counsel, and 4) the client consents to the transaction in writing.
In addition, MRPC 1.7(b) mandates that the lawyer must be careful not to let the legal representation be “materially limited” by the lawyer’s non-legal business interests, such as if a dispute arose between the insurance company and the client.
A material limitation would also occur if the demands of the insurance business prevented the lawyer from devoting the requisite time and attention to the legal matters undertaken by the lawyer. As a side note, this is another excellent reason why most attorneys will be better off forming a relationship with a financial advisor, rather than trying to wear both hats themselves.
More specifically, RI-190 provides that a lawyer may refer clients to a business which provides non-legal services and in which the lawyer has a financial interest. Again, disclosure to the client is all-important. RI-190 requires that the lawyer must 1) disclose the lawyer’s interest in the non-legal business, 2) advise that the client is entitled to seek services from any other independent non-legal service company, and 3) advise the client of the opportunity to obtain independent counsel before deciding whether to seek services from the lawyer’s non-legal company Of course, the attorney may not represent the client in a dispute involving the non-legal services.
In a world that increasingly demands “one-stop shopping,” forming an alliance with a certified financial planner can be a way to meet client demands while increasing income. All involved can benefit provided that there is full disclosure to the client as to the arrangement between the attorney and the financial planner and that the client has everything he or she needs to make a well informed decision. If those principles are adhered to, providing financial services is not only a profitable, but is also an honorable way to serve one’s clients.
John E. Mayer, CFP is president
of BFA® Family Wealth Planners, a registered investment advisor firm
with offices in