Law
Firms Should Offer Financial Planning Services
Reprinted with permission of Michigan Lawyers Weekly
By
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.
Preserving
Trust
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.
Conclusion
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.