Can a lawyer take an ongoing cut of an investment advisor's fee for referring a client to that advisor?

Plain-English summary

The opinion addressed two lawyers who wanted to refer clients to investment advisors and collect an ongoing percentage of the advisor's management fee. It concluded that a lawyer may charge a "legal fee" only for legal work. Where the lawyer's service is the referral itself, the referring lawyer can share in the referred legal work's fee only by agreeing to assume the same legal responsibility for the services as a partner of the receiving lawyer would, under Illinois Rule 1.5(g). Because neither lawyer was referring a matter for legal services, neither could charge a legal fee for the referral.

The opinion held that taking a percentage of the advisor's fee is a business transaction with the client, governed by Illinois Rule 1.8(a). It explained that case law presumes undue influence when a lawyer enters a business transaction with a client, and the lawyer must rebut that presumption by clear and convincing evidence: full disclosure of all relevant information, a transaction that is fair and reasonable, and the client's having had (or having been urged to seek) the advice of independent counsel.

The committee distinguished a one-time referral fee from an ongoing share of the advisor's fee. With an ongoing share, the opinion reasoned, the client may continue to expect the lawyer to exercise professional judgment for the client's protection, which heightens the Rule 1.8(a)(2) concern. It added that, to the extent the lawyer continues to do legal work for the client, the lawyer may charge a reasonable fee for those legal services and should make clear the difference between the lawyer's role and the advisor's role under Rules 1.4(b) and 1.2(a) and (c).

Currency note

This opinion was issued in 1998, before Illinois adopted the 2010 Illinois Rules of Professional Conduct. The ISBA Board of Governors affirmed the opinion in January 2010 as generally consistent with the 2010 Rules, while noting that the specific standards referenced in it may differ from the 2010 Rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Common questions

Q: Can a lawyer call a referral fee from an investment advisor a "legal fee"?

A: No. The opinion concluded that a lawyer may charge a legal fee only for legal services, and a referral to an investment advisor is not legal work, so it cannot be billed as a legal fee.

Q: Is taking an ongoing percentage of the advisor's fee allowed at all?

A: The opinion treated it as a business transaction with the client under Rule 1.8(a). It is permitted only if the lawyer satisfies that rule, including rebutting the presumption of undue influence with clear and convincing evidence of fairness, full disclosure, and the client's opportunity for independent advice.

Q: Does a one-time referral fee differ from an ongoing share?

A: Per the opinion, a one-time fee (for example, referring a client to a car dealer) makes it easier to show the client did not reasonably expect the lawyer to keep exercising professional judgment for the client. An ongoing share of the advisor's fee makes that expectation, and the Rule 1.8(a)(2) concern, harder to overcome.

Q: What does "full disclosure" cover here?

A: The opinion stated that full disclosure would include informing the client about the risks of the transaction and that the lawyer would not be involved to protect the client's interest but would continue to receive a portion of the advisor's fee, and that putting the disclosure in writing would be prudent.

Background and rules framework

The opinion interpreted Illinois Rule 1.5(g) (division of fees among lawyers in different firms, corresponding to Model Rule 1.5(e)) and Illinois Rule 1.8(a) (business transactions with a client, corresponding to Model Rule 1.8(a)). It read Rule 1.8(a) against Illinois case law establishing a rebuttable presumption of undue influence in lawyer-client business dealings. It also referenced Rules 1.4(b) and 1.2(a) and (c) for the lawyer's duty to explain the respective roles of lawyer and advisor.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8(a) (business transactions with clients) / Illinois Rule 1.8(a)
• Model Rule 1.5(e) (division of fees between firms) / Illinois Rule 1.5(g)
• Model Rule 1.4 (communication) / Illinois Rule 1.4(b)
• Model Rule 1.2 (scope of representation) / Illinois Rule 1.2(a), (c)

Cases:

• In re Anderson, 52 Ill.2d 202, 287 N.E.2d 682 (1972), presumption of undue influence in lawyer-client business dealings
• Franciscan Sisters Health Care v. Dean, 95 Ill.2d 452, 448 N.E.2d 872 (1982), fiduciary transactions
• Lossman v. Lossman, 274 Ill.App.3d 1, 653 N.E.2d 1280 (Ill.App. 2d Dist. 1995), rebutting the presumption as to a fee bonus
• In re Pagano, 154 Ill.2d 174, 607 N.E.2d 1242 (1992), rebuttal possible without independent counsel
• Weisblatt v. Chicago Bar Assn., 684 N.E.2d 984 (Ill.App. 1st Dist. 1997), negligent-referral claim dismissed
• Elane v. St. Bernard Hospital, 284 Ill.App.3d 865, 672 N.E.2d 820 (Ill.App. 1st Dist. 1996), retaining legal responsibility for a referred case

Other opinions cited:

• ISBA Advisory Opinion No. 89-14: lawyer/insurance agent referral as a business transaction
• ISBA Advisory Opinion No. 799 (1982): legal fee for non-legal title work

See also

• ISBA Ethics Op. 97-05: For-Profit Lawyer Referral Service
• ISBA Ethics Op. 97-09: Non-Compete in a Partnership Agreement

Source

• Landing page: https://www.isba.org/ethics/opinions/9704