Can a lawyer take a referral fee from an investment advisor for sending the lawyer's clients to that advisor?

Plain-English summary

A lawyer who holds a securities license wants to contract as an Investment Advisor Representative with an SEC-registered investment advisor and refer clients to the advisor in exchange for a percentage of the advisor's quarterly assets-under-management fee. The committee assumes the arrangement is permissible under securities law and addresses only the ethics question.

The committee finds two problems. First, the arrangement is a concurrent conflict under Rule 1.7(a)(2): the lawyer's personal interest in earning the referral fee creates a significant risk that the representation will be materially limited and threatens the lawyer's independent professional judgment (Comment 10; Rule 2.1). Whether the conflict is consentable must be decided case by case (Comment 14): the lawyer must determine, under the objective Rule 1.7(b)(1) standard, whether a reasonable lawyer would conclude competent and diligent representation is not compromised. If so, the lawyer may proceed with the client's informed consent, which requires disclosing the relationship with the advisor, the financial terms and expected amounts, the client's options, and the consequences of consent, including that the lawyer cannot advise the client in any dispute with the advisor and may have to withdraw from other matters if such a dispute arises.

Second, the arrangement is a business transaction with a client under Rule 1.8(a), so the lawyer must also satisfy its requirements: terms fair and reasonable to the client and fully disclosed in writing, written advice that the client may seek independent counsel with a reasonable opportunity to do so, and the client's informed written consent to the essential terms and the lawyer's role. The committee cites prior ISBA Opinions 97-04 and 99-06 reaching the same dual-rule conclusion and notes the Illinois presumption of undue influence when a lawyer benefits from a client business transaction, rebuttable only by clear and convincing evidence. It surveys other states (some prohibit such arrangements; others, like Illinois, permit them with full compliance) and adds that the lawyer should conduct due diligence on the advisor and may want to check malpractice coverage.

In practice

Under this opinion, an Illinois lawyer may take an investment-advisor referral fee only after treating the arrangement as both a Rule 1.7 conflict and a Rule 1.8(a) client business transaction. The opinion requires the lawyer to make the case-by-case consentability judgment under the objective standard, obtain informed consent that spells out the financial terms and the limits on the lawyer's ability to handle advisor disputes, and complete the Rule 1.8(a) written disclosures, independent-counsel advice, and signed consent.

Common questions

Q: Is taking a referral fee from an investment advisor prohibited?

A: Not per se. The committee says the arrangement is not per se prohibited but creates a Rule 1.7 conflict and is a Rule 1.8(a) business transaction with a client, so the lawyer must comply with both before proceeding.

Q: What conflict does it create?

A: A Rule 1.7(a)(2) personal-interest conflict. The committee says the lawyer's financial interest in the referral creates a significant risk of materially limiting the representation and threatens independent professional judgment.

Q: What does Rule 1.8(a) require here?

A: Terms fair and reasonable to the client and fully disclosed in writing, written notice that the client may seek independent counsel with a reasonable opportunity to do so, and the client's informed written consent to the terms and the lawyer's role.

Q: What else must the lawyer disclose?

A: Among other things, that the lawyer cannot advise the client in any dispute with the advisor and may have to withdraw from other matters if such a dispute arises, plus the full terms and the formula for the lawyer's fee.

Background and rules framework

The opinion interprets Illinois Rule of Professional Conduct 1.7 (concurrent conflicts; 1.7(a)(2) personal-interest conflict and 1.7(b) consent) together with Rule 1.8(a) (business transactions with a client) and Rule 2.1 (independent professional judgment). These track the corresponding Model Rules. The committee relies on prior ISBA Opinions 97-04 and 99-06, Illinois case law on the undue-influence presumption (In re Schuyler; Franciscan Sisters Health Care v. Dean), and out-of-state opinions from Arizona, Connecticut, Maine, Michigan, and Utah.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / IL RPC 1.7 (concurrent and personal-interest conflicts)
• MR 1.8(a) / IL RPC 1.8(a) (business transactions with a client)
• MR 2.1 / IL RPC 2.1 (independent professional judgment)

Cases:

• In re Schuyler, 91 Ill. 2d 6, 424 N.E.2d 1137 (1982), undue-influence presumption
• Franciscan Sisters Health Care v. Dean, 95 Ill. 2d 452, 448 N.E.2d 872 (1982)

Other opinions cited:

• ISBA Opinions 97-04 and 99-06 (referral arrangements as client business transactions)
• Arizona 98-09; Connecticut 97-16; Maine 184; Michigan RI-317; Utah 99-07

See also

• NY State Bar Op. 1086: Referral Fee From an Investment Advisor
• NY State Bar Op. 1043: Referral Fee From a Real Estate Broker's Commission
• ISBA Ethics Op. 16-04: Fee Division and Conflict Rules for "Of Counsel"

Source

• Landing page: https://www.isba.org/ethics/opinions/2303