Can a lawyer take an ongoing referral fee from an investment advisor for steering a client's funds there?
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This page answers the general question as of 1987. Ezel answers yours: whether it's allowed on your facts, under the current rules of professional conduct in your state, with citations.
Plain-English summary
The Committee considered whether a lawyer may accept an ongoing referral fee from an investment advisor or broker, where the fee is disclosed in advance to an existing client and the lawyer monitors the account but the advisor has exclusive responsibility for managing it. The Committee concluded the inherent conflict is not waivable.
The Committee began with SCR 158.6 (now within the third-party-compensation rules), which bars a lawyer from taking compensation from someone other than the client where it interferes with the lawyer's independence of professional judgment. While ordinary business conflicts can sometimes be cured by disclosure and a valid waiver, the Committee did not believe a conflict could be cured where the differing interest actually pays the lawyer a fee on the same subject on which the lawyer is advising, citing the presumption of impropriety in lawyer-client business transactions recognized in In re Singer. It distinguished an insurer paying for an insured's defense, because here the investment advisor pays the lawyer a percentage of a management fee while expecting no real services for the client.
The Committee was especially troubled by the lawyer "monitoring" the account without authority to affect investment decisions, which it read against SCR 188 (professional independence). It questioned how a lawyer paid continuously by the investment company could independently warn the client that a strategy was unsound, concluding the lawyer has effectively taken off the lawyer's hat and put on the broker's. Relying on Louisiana State Bar Ass'n v. Drury (suspension for a referral-fee arrangement that could tempt a lawyer to overlook a provider's failings) and a law-review analysis of investment-company conflicts, the Committee held that a lawyer is not barred from acting as a broker, but only if the person served is clearly not a client; where the funds were obtained through the broker's law firm, that is prima facie a conflict requiring the client to obtain independent legal counsel before investing through the lawyer/broker.
Currency note
This opinion was issued in 1987, before Nevada's 2006 adoption of the current Nevada Rules of Professional Conduct (the renumbered Rules 1.0 et seq. that replaced the former Supreme Court Rules) and the related Ethics 2000-based revisions. The conflicts rule is now Rule 1.7, the business-transaction and third-party-compensation limits are now in Rule 1.8 (including 1.8(a) and 1.8(f)), and professional independence is now Rule 5.4. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.
Common questions
Q: Can a lawyer collect an ongoing fee from an investment advisor for sending a client's money there?
A: Not while remaining the client's lawyer on the matter. The opinion concluded the conflict is not waivable because the lawyer cannot keep acting as the client's lawyer once he takes on the broker's role and fee.
Q: Does disclosing the fee and getting the client's consent fix it?
A: No. The opinion found a written disclosure meaningless and potentially misleading here, because the lawyer is acting in his own and the advisor's interest rather than the client's, so the client is denied independent professional judgment.
Q: Is a lawyer ever allowed to act as a broker?
A: Yes, but only if the person served is clearly not a client of the firm. The opinion held that where the funds were obtained through the lawyer's firm, the client must first obtain independent legal counsel before investing through the lawyer/broker.
Background and rules framework
The opinion interprets former SCR 157 (conflicts of interest, now Rule 1.7), former SCR 158 (compensation from a third party and business dealings, now within Rule 1.8), and former SCR 188 (professional independence of the lawyer, now Rule 5.4), reading them against the presumption of impropriety in lawyer-client business transactions.
Citations and references
Rules of Professional Conduct:
- Model Rule 1.7 / former Nev. SCR 157 (conflicts of interest)
- Model Rule 1.8 / former Nev. SCR 158 (business transactions with, and third-party compensation regarding, a client)
- Model Rule 5.4 / former Nev. SCR 188 (professional independence of the lawyer)
Cases:
- In re Singer, 109 Nev. 1117, 865 P.2d 315 (1993) (presumption of impropriety in lawyer-client business transactions)
- Louisiana State Bar Ass'n v. Drury, 455 So. 2d 1387 (La. 1984), cert. denied, 470 U.S. 1004 (1985) (discipline for an undisclosed referral-fee arrangement)
Other opinions cited:
- New Hampshire Bar Ethics Committee Op. 1994/95-2 (divided on a nearly identical question); ABA Informal Op. 1482 (1982)
See also
- NV Ethics Op. 6: a lawyer operating a temporary-staffing business
- NV Ethics Op. 4: percentage-of-hourly-rate fee arrangement
- NV Ethics Op. 9: insurance defense counsel and third-party compensation
Source
- Landing page: https://nvbar.org/for-lawyers/ethics-discipline/ethics-opinions/
- Original PDF: https://nvbar.org/wp-content/uploads/opinion_24.pdf
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