Can a Maine lawyer accept a referral fee from an investment advisor for sending clients to the advisor?

Plain-English summary

A lawyer asked whether the Maine Bar Rules permit receiving compensation from an independent investment advisory firm in exchange for referring clients to it. Under the proposed contract, the lawyer would be an independent contractor whose only service was the referral, and the advisor would pay the lawyer ongoing cash based on the value of the referred client's managed assets for as long as the assets stayed under management, with written disclosure to the client at the time of referral.

The Commission concluded the arrangement would violate the Code in at least two respects. First, it violates Maine Bar Rule 3.4(f)(2)(i), which bars a lawyer from acquiring a pecuniary interest adverse to a client unless the transaction and terms are fair and reasonable to the client. The Commission found the referral fee "inherently unfair and unreasonable to the client" because its singular design is to influence the lawyer to recommend the advisor for the advisor's benefit, in contrast to acting on the client's best interests, undermining the fiduciary foundation of the relationship. The Commission did not reach whether the client could give informed consent, stating that no amount of explanation or client sophistication could overcome the inherent unfairness.

Second, the arrangement violates Maine Bar Rule 3.3(a)'s bar on an excessive fee. Weighing the reasonableness factors, the Commission found the fee plainly excessive: it pays potentially significant sums for essentially no time, effort, skill, or judgment by the lawyer; such referral fees are not customarily received by Maine lawyers; and the lawyer assumes no responsibility for the quality of the advisory services. The opinion treats the referral fee as received in connection with the delivery of legal services and so subject to the excessive-fee rule even though the advisor, not the client, pays it. Surveying a split among other states' ethics bodies, the Commission found the conditions imposed by states that allow the practice "so unrealistic" as to fortify its own conclusion that the practice is per se unethical.

In practice

Under the Maine Bar Rules as the opinion read them (the pecuniary-interest bar corresponds to ABA Model Rule 1.8(a), the excessive-fee bar to Model Rule 1.5, and the loyalty concern to Model Rule 1.7), the opinion holds that a lawyer may not accept an ongoing referral fee from an investment advisor for steering the lawyer's clients to the advisor. The opinion makes the prohibition categorical: it rests not on the adequacy of disclosure but on the inherent unfairness to the client and the unearned, excessive character of the fee, and the Commission expressly declined to treat informed consent as a cure. The opinion also notes that a fee paid by a third party for the referral is still measured against the excessive-fee rule because it arises from the attorney-client relationship, while Rule 3.12(b) permits third parties to pay legal fees only where the third party does not direct the lawyer's professional judgment.

Common questions

Q: Can a Maine lawyer take a referral fee from an investment advisor?

A: No. The opinion concludes the arrangement violates the Code in at least two respects and is per se unethical, finding the referral fee inherently unfair to the client and an excessive fee.

Q: Does client disclosure or consent make the arrangement permissible?

A: No. The opinion states that no amount of explanation by the lawyer and no amount of client sophistication can overcome the inherent unfairness and unreasonableness of the arrangement, and the Commission declined to reach informed consent because it would not cure the violation.

Q: Why is the referral fee "excessive" when the advisor, not the client, pays it?

A: Because it is unearned and tied to legal services. The opinion holds the fee pays significant sums for essentially no time, skill, or responsibility by the lawyer, and treats it as received in connection with the delivery of legal services, so the excessive-fee rule applies even though the advisor pays it.

Q: Did Maine follow the states that allow this with safeguards?

A: No. The opinion surveys a split among other states and finds the conditions imposed by states that technically allow the practice so unrealistic that they reinforce Maine's conclusion that the practice is per se unethical.

Background and rules framework

The opinion interprets Maine Bar Rule 3.4(f)(2)(i) (a lawyer may not acquire a pecuniary interest adverse to a client unless the transaction and terms are fair, reasonable, and fully disclosed) and Rule 3.3(a) (no excessive fee), with supporting reference to Rule 3.4(b)(2) (client consent factors), Rule 3.6(a) (care, skill, and independent judgment), and Rule 3.12(b) (third-party payment of fees). These correspond to ABA Model Rule 1.8(a) (business transactions with and pecuniary interests adverse to a client), Model Rule 1.5(a) (reasonable fees), and Model Rule 1.7 (conflicts of interest). The opinion canvasses contrary and concurring opinions from New York, Rhode Island, Ohio, Michigan, Illinois, New Hampshire, Arizona, Connecticut, Pennsylvania, and Utah.

Citations and references

Rules of Professional Conduct:

• Model Rules 1.8(a), 1.5(a), 1.7
• Maine Bar Rules 3.4(f)(2)(i), 3.3(a), 3.4(b)(2), 3.6(a), 3.12(b)

Other opinions cited:

• N.Y. State Bar Op. 682 (1996); R.I. Ethics Advisory Panel Op. 99-08 (1999); Ohio Bd. of Comm'rs Op. 2000-1 (2000); Mich. Informal Op. RI-317 (2000) (and earlier RI-146 (1992)); Ill. State Bar Op. 97-04 (1998); N.H. Bar Ass'n Op. 1998-99/10 (2000); Ariz. Op. 98-09 (1998); Conn. Bar Ass'n Op. 97-16 (1997); Pa./Phila. Joint Formal Op. 2000-100 (2000); Utah State Bar Op. 99-07 (1999).

See also

• NY State Bar Op. 1086: Investment Referral Fees
• CA Op. 1999-154: Lawyer Dual-Practice and Referral Fees
• ABA Formal Op. 474: Referral Fees and Conflicts

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89457

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Issued by the Professional Ethics Commission

Date Issued: March 30, 2004

Question

The Commission has been asked whether it would be a violation of the Maine Bar Rules for a lawyer to receive compensation from an independent investment advisory firm ("investment advisor"), in which the lawyer has no other interest or involvement, in exchange for the lawyer's referring clients to the advisor for investment management services.

The inquiring lawyer has provided the Commission with a copy of the proposed contract by which the investment advisor proposes to enter into this arrangement with the lawyer. The contract provides that the lawyer would be an independent contractor of the advisor, with the only service provided by the lawyer to be the referral of the lawyers clients business to the advisor.

The proposed contract contemplates that the investment advisor would continue to make cash payments to the lawyer for as long as the clients assets remain under the management of the advisor. Initially, the fee paid to the lawyer, in exchange for referring a client for the advisors services, would be calculated based upon the value of the referred clients assets managed by the advisor. Future compensation would be adjusted for any contributions or withdrawals by the client of funds placed with the advisor as well as any appreciation or depreciation in the value of the clients assets under the advisors management. The client would not be paying larger management fees to the investment advisor than if the lawyer had not been involved in making the referral. In other words, the lawyer making the referral would receive a portion of the investment advisors usual management fees, based upon the value of the principal of the clients account as calculated over time. At the time of making the referral, using the investment advisors forms for this purpose, the lawyer would make written disclosure to the client concerning this arrangement.

Opinion

The Commission believes that this arrangement would violate the Code of Professional Responsibility in at least two respects. First, the arrangement would violate Maine Bar Rule 3.4(f)(2), which prohibits a lawyer from acquiring a pecuniary interest adverse to a client unless, among other requirements, the terms are fair and reasonable to the client. Second, the arrangement would violate Maine Bar Rule 3.3(a), which prohibits a lawyer from entering into an agreement for, charging or collecting an excessive fee.

Not Fair or Reasonable to the Client

Of most direct bearing on this question is Maine Bar Rule 3.4(f)(2)(i), which provides, in pertinent part, as follows:

A lawyer shall not knowingly acquire a property or pecuniary interest adverse to the client ..., unless:

(A) The transaction and terms in which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed to the client in manner and terms which should have reasonably been understood by the client.

The Commission finds that the referral fee at issue here is inherently unfair and unreasonable to the client.[1] The singular purpose and design of this arrangement is to influence the lawyer to make recommendations to the lawyers client for the benefit of an investment advisor who is paying the lawyer to do so, in stark contrast to the lawyers being motivated by the best interests of the client. This arrangement is so adverse to the fiduciary relationship that is the foundation of the lawyers responsibility to the client, that the Commission finds it to be fundamentally and objectively unfair and unreasonable to the client, and therefore in violation of the Bar Rule.[2]

Excessive fee

Maine Bar Rule 3.3(a) provides that a lawyer shall not enter into an agreement for, charge or collect an illegal or excessive fee. The Rule defines a fee as excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with the definite and firm conviction that the fee is in excess of a reasonable fee. Factors to be considered as guides in determining the reasonableness of a fee include, among others, the time and labor involved, the skill requisite to perform the service, the fee customarily charged in the locality for similar services, and the responsibility assumed by the attorney.

In weighing these factors, the Commission believes the referral fee[3] contemplated by the proposed arrangement is plainly excessive. First, the arrangement provides for potentially significant compensation to be paid for essentially no time or effort on the part of the lawyer. Second, there is little or no skill or judgment exercised by the lawyer. Third, in our experience, fees for referrals of this sort are not customarily received by Maine lawyers, many of whom would consider this practice unprofessional. Finally, the lawyer in this situation assumes no responsibility for the consequences of the referral and undertakes no responsibility for the quality of the investment advisory services rendered. In sum, it is fair to say that the fee, which may aggregate a large sum over time, is unearned by any service the lawyer has performed or will perform in the future, at least insofar as the clients interests are concerned.

In coming to this determination, the Commission is mindful of the conflict among bar ethics commissions and similar bodies in other states that have struggled with this and related questions.[4] However, having evaluated the views of these other states, the Commission believes and that its conclusion is most consistent with both the letter and the intent of the Maine Bar Rules in upholding the integrity of the fiduciary relationship between lawyer and client.[5]

For these reasons, the Commission views the transaction described in the question presented to be in violation of the Bar Rules.

Footnotes

[1] The Commission does not reach the issue of whether the client can make informed consent to the lawyers relationship with the investment advisor under the factors set forth in Bar Rule 3.4(b)(2). The Commission believes that no amount of explanation by the lawyer and no amount of sophistication of the client can overcome the inherent unfairness and unreasonableness of this arrangement to the clients interests and the consequent undermining of the fiduciary relationship between lawyer and client.

[2] Also potentially implicated here is the general principle of Bar Rule 3.6(a) that A lawyer must employ reasonable care and skill and apply the lawyers best judgment in the performance of professional services. The contemplated arrangement raises serious questions about whether a lawyer being paid by an investment manager to solicit the clients business for the advisor is in circumvention of this rule as well.

[3] We view the referral fee in this case as received in connection with the delivery of legal services, and therefore subject to the Bar Rule covering excessive fees, even though it is paid by the investment advisor instead of the client. The referral would occur in connection with, and arise from, the attorney-client relationship and could not be reasonably distinguished, in the clients mind, from the provision of legal advice. See Maine Bar Rule 3.2(h). Maine Bar Rule 3.12(b) recognizes that legal fees may be paid by third parties, but, the lawyer must not allow the third party to direct or regulate the lawyers professional judgment.

[4] Compare: Opinion 682 (1996) of the New York Committee on Professional Ethics of the New York State Bar Association, to the effect that a lawyer may not accept a fee from an investment advisor for referring clients to the advisor, because, among other reasons, clients reasonably expect their lawyers to act as fiduciaries in rendering such advice, and the amount of compensation involved is not objectively determined by the transaction; Opinion 99-08 (1999) of the Ethics Advisory Panel of the Rhode Island Supreme Court, to the effect that a lawyer may not provide both legal services and investment services to a client when the lawyer has a financial interest in the clients investment decisions, but a lawyer may conduct an investment advisory business with a law client provided the lawyer informs the client of the potential conflicts of interest, advises the client to obtain independent counsel and otherwise complies with the lawyers obligation to assure fairness, client consent and confidentiality; Opinion 2000-1 (2000) of the Ohio Supreme Court Board of Commissioners on Grievances and Discipline, to the effect that a lawyer may not receive referral fees from a financial advisor to steer clients to the advisor for investment advice, citing an irreconcilable conflict of interest that cannot be cured by full disclosure because the lawyers participation in such a scheme would impair the lawyers professional independence and fiduciary duty to the client and also would amount to a prohibited business transaction between lawyer and client; Informal Opinion RI-317 (2000) of the Michigan State Bar Commission on Professional and Judicial Ethics, apparently reversing an earlier opinion (RI- 146 (1992)), determining that it is not inherently unethical for lawyers to profit from referring clients to an investment advisor, so long as the client gives informed written consent, but recognizing that this arrangement precludes the lawyer from giving legal advice to the client in the event that there arises a dispute with the investment advisor; Opinion 97-04 of the Illinois State Bar Association Committee on Professional Ethics (1998), to the effect that a lawyer cannot collect referral fees for sending clients to investment advisors unless the lawyer can overcome a presumption of undue influence over the client, showing that the transaction was fair and that the client had the opportunity to seek independent counsel after full disclosure; Opinion 1998-99/10 of the New Hampshire Bar Association Ethics Commission (2000), in which that Commission deadlocked concerning the issue, with the advice being that a lawyer who wishes to engage in this practice should give serious thought to whether the lawyers independent judgment to the client would be compromised; Opinion 98-09 (1998) of the Committee on Rules of Professional Conduct of the State Bar of Arizona, to the effect that a lawyer may not engage in this practice since it may interfere with the clients ability to be candid with the lawyer, may affect the lawyers independent professional judgment, and, if the client becomes an adversary of the investment advisor, may place the lawyer in an impossible conflict; Opinion 97-16 (1997) of the Committee on Professional Ethics of the Connecticut Bar Association, to the effect that a lawyer may accept such an investment referral fee if the client gives informed, written consent; Joint Formal Opinion 2000-100 (2000) of the Pennsylvania Bar Association Commission on Legal Ethics Professional Responsibility and the Philadelphia Bar Association Professional Guidance Committee, to the effect that a lawyer may accept such an investment referral fee so long as the lawyer takes great care to obtain valid client consent and the fee will not influence the lawyers judgment or otherwise impair the attorney-client relationship, recognizing that the preferred practice would be for the lawyer to pass on the referral fee to the client; Opinion 99-07 (1999) of the Utah State Bar Ethics Advisory Commission, to the effect it is not per se unethical for a lawyer to accept such an investment referral fee but that the lawyer has a heavy and very difficult burden to assure that the lawyer can maintain independence while taking a cut of the advisors compensation.

[5] Many of the opinions of the states that find this practice to be potentially ethical set forth conditions that this Commission finds to be so unrealistic as to fortify the conclusion that the correct course is to consider the practice per se unethical, as other states deciding the question have found. For example, the Utah ethics panel, while technically allowing the practice, has said that it would be very difficult for a lawyer to engage in it and still maintain the required independence, with the lawyer obligated to consider whether the client may later have concerns that the lawyer has not provided unbiased advice or that the lawyers loyalty to the client has not been compromised. Likewise, the Pennsylvania ethics panel, while technically allowing the practice, states a number of challenging factors that the lawyer must weigh in determining that the relationship with the client remains that of trust, including the sufficiency of the disclosure, the sophistication of the client, the independence of the advice and the reasonableness of the referral fee. The New Hampshire ethics panel, while deadlocking on this question, was able to articulate that the lawyer must at least consider whether the client has received a benefit from the lawyers referral recommendation, and whether there may arise an inherent compromise of loyalty that would influence the lawyers judgment. In sum, all of the panels that technically allow the practice have at the same time admonished that the lawyer must remain independently loyal to the best interests of the client, a prospect that this Commission considers to be essentially impossible under the circumstances presented.