Can a lawyer accept a fee from a financial services company for referring clients to it for investment or financial products?

Plain-English summary

Financial services groups were approaching Ohio lawyers to enter business relationships under which the lawyer refers clients needing financial services, reviews and approves the financial plan, advises the client on it, and receives a negotiated fee per referral. The Board concluded the arrangement is not permissible under several rules and withdrew Adv. Op. 2000-01. (The Board noted it did not address whether such a fee complies with other state or federal law, which is outside its authority.)

Under Prof.Cond.R. 2.1, a lawyer must exercise independent professional judgment and may recommend other professionals when appropriate, but any referral must be made in the client's best interest and free of financial incentives; a referral driven by a fee compromises that judgment. Under Prof.Cond.R. 1.8(a), the business relationship gives the lawyer a pecuniary interest adverse to the client, because the lawyer's interest in earning the fee competes with the client's interest in obtaining comparable services elsewhere on better terms, and the Board found the transaction can never be fair and reasonable to the client (citing Maine Prof. Ethics Op. 184). Under Prof.Cond.R. 1.8(f), the fee is impermissible compensation from someone other than the client for the lawyer's services. Under Prof.Cond.R. 1.7(a)(2), the arrangement creates a substantial risk that the lawyer's personal interest will materially limit consideration of alternatives for the client.

The Board also concluded that because the proposed activities include the practice of law (reviewing and approving the plan and advising the client), the ongoing business association is a prohibited partnership between a lawyer and nonlawyers under Prof.Cond.R. 5.4(b). Finally, the Board concluded client consent cannot cure the problem: although Prof.Cond.R. 1.7, 1.8(a), and 1.8(f) allow disclosure and consent, Prof.Cond.R. 2.1 and 5.4(b) do not, so the joint application of the rules forecloses a consent exception.

In practice

The opinion holds that, under the Ohio Rules of Professional Conduct as they stood at the time, a lawyer may not accept a referral fee from a financial services group for referring clients. Per the opinion, the arrangement creates a pecuniary interest adverse to the client that cannot be made fair and reasonable (Prof.Cond.R. 1.8(a)), constitutes impermissible third-party compensation (Prof.Cond.R. 1.8(f)), produces a material-limitation conflict (Prof.Cond.R. 1.7(a)(2)), and forms a prohibited lawyer-nonlawyer business association where the activities include the practice of law (Prof.Cond.R. 5.4(b)). The opinion states that because Prof.Cond.R. 2.1 and 5.4(b) provide no consent exception, client disclosure and consent cannot cure the conflict.

Common questions

Q: Can a lawyer take a fee for referring a client to a financial advisor or investment firm?

A: The opinion concludes no. It finds the fee gives the lawyer a pecuniary interest adverse to the client and compromises the lawyer's independent professional judgment (Prof.Cond.R. 1.8(a), 2.1).

Q: Can the client just consent to the lawyer keeping the referral fee?

A: The opinion concludes consent does not solve the problem, because Prof.Cond.R. 2.1 and 5.4(b) contain no disclosure-and-consent exception even though some of the other rules do.

Q: Why does Rule 5.4 apply to a referral arrangement?

A: The opinion concludes that because the proposed activities include the practice of law (reviewing and approving the plan and advising the client), the ongoing business association is a prohibited lawyer-nonlawyer partnership under Prof.Cond.R. 5.4(b).

Background and rules framework

The opinion interprets Ohio Prof.Cond.R. 2.1 (independent professional judgment and candid advice; Model Rule 2.1), Prof.Cond.R. 1.8(a) and 1.8(f) (business transactions adverse to a client and third-party compensation; Model Rule 1.8), Prof.Cond.R. 1.7(a)(2) (material-limitation conflicts; Model Rule 1.7), and Prof.Cond.R. 5.4(b) (prohibited partnerships with nonlawyers; Model Rule 5.4).

Citations and references

Rules of Professional Conduct:

• Ohio Prof.Cond.R. 2.1 and cmt. [4] (Model Rule 2.1)
• Ohio Prof.Cond.R. 1.8(a), (f) (Model Rule 1.8)
• Ohio Prof.Cond.R. 1.7(a)(2) and cmt. [1] (Model Rule 1.7)
• Ohio Prof.Cond.R. 5.4(b) (Model Rule 5.4)

Other opinions cited:

• Ohio BPC Adv. Op. 2000-01: referral fee from a financial services group (withdrawn by this opinion)
• Maine Prof. Ethics Op. 184 (2004): business relationship unfair to the client
• Vermont Bar Ass'n Op. 98-8 and New York State Bar Ass'n Op. 682 (1996): loyalty in referrals

See also

• Ohio BPC Op. 2000-001: Referral Fee From a Financial Services Group (withdrawn by this opinion)
• Ohio BPC Op. 2004-009: Attorney-Chiropractor Mutual Referrals
• Ohio BPC Op. 1999-006: Referral to a Litigation Funding Company
• Ohio BPC Op. 1995-006: Paying a Nonprofit Referral Organization a Percentage of the Fee

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2019/10/Adv.-Op.-2019-10-Final.pdf

Original opinion text

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

OPINION 2019-10
Issued October 4, 2019
Withdraws Adv. Op. 2000-1

      Lawyer Acceptance of Referral Fees from Financial Services Group

   SYLLABUS: A lawyer is prohibited from accepting a referral fee from a financial

services group for referring clients in need of financial services. A lawyer involved in a
business relationship and referral fee agreement with a financial services group acquires
a pecuniary interest adverse to the client. A material limitation conflict is present when
a lawyer enters into a business relationship and referral fee agreement with a financial
services group due to the personal interest of the lawyer in earning a referral fee. Full
disclosure and consent of the client does not resolve a conflict of interest arising from a
referral fee agreement between a lawyer and a financial services group.

This nonbinding advisory opinion is issued by the Ohio Board of Professional Conduct
in response to a prospective or hypothetical question regarding the application of
ethics rules applicable to Ohio judges and lawyers. The Ohio Board of Professional
Conduct is solely responsible for the content of this advisory opinion, and the advice
contained in this opinion does not reflect and should not be construed as reflecting the
opinion of the Supreme Court of Ohio. Questions regarding this advisory opinion
should be directed to the staff of the Ohio Board of Professional Conduct.
 65 SOUTH FRONT STREET, 5TH FLOOR, COLUMBUS, OH 43215-3431
Telephone: 614.387.9370 Fax: 614.387.9379
www.bpc.ohio.gov

HON. JOHN W. WISE RICHARD A. DOVE
CHAIR DIRECTOR
PATRICIA A. WISE D. ALLAN ASBURY
VICE- CHAIR SENIOR COUNSEL
KRISTI R. MCANAUL
COUNSEL

                                OPINION 2019-10
                              Issued October 4, 2019
                            Withdraws Adv. Op. 2000-1

       Lawyer Acceptance of Referral Fees from Financial Services Group

   SYLLABUS: A lawyer is prohibited from accepting a referral fee from a financial

services group for referring clients in need of financial services. A lawyer involved in a
business relationship and referral fee agreement with a financial services group acquires
a pecuniary interest adverse to the client. A material limitation conflict is present when
a lawyer enters into a business relationship and referral fee agreement with a financial
services group due to the personal interest of the lawyer in earning a referral fee. Full
disclosure and consent of the client does not resolve a conflict of interest arising from a
referral fee agreement between a lawyer and a financial services group.

QUESTION PRESENTED: May a lawyer accept a fee from a financial services group for
referring clients in need of financial services?

APPLICABLE RULES: Prof.Cond.R. 2.1, 1.7, 1.8, 5.4.

OPINION: Financial services groups are approaching Ohio lawyers and offering to
enter into business relationships based on the referral of clients in need of financial
services. The groups typically offer clients financial services through investment
planners, investment advisors, and money managers and may offer insurance services or
accounting services through affiliated specialists or firms. Upon referral, the financial
services group initiates a meeting with the client and lawyer. The lawyer reviews and
approves the plan or product before it is offered to the client. The lawyer offers the client
legal advice about the plan and product. The lawyer receives a fee for each client referred.
Op. 2019-10 2

The financial services group and the lawyer negotiate the fee in advance of the referral.
The fee may be a one-time fee per referral, a one-time fee based on how much of the
product the client buys, a percentage of the returns realized for the client, or a percentage
of the fees paid by the client to the financial services group throughout the period the
client’s funds are invested.

   This opinion addresses whether the proposed activity is ethical subject to the Ohio

Rules of Professional Conduct. The opinion does not address whether a referral fee from
a financial or investment advisor complies with any state or federal laws, because
questions of law are beyond the advisory authority of the Board of Professional Conduct.

Independent Professional Judgment

   In representing a client, a lawyer must exercise independent professional

judgment and render candid advice including economic considerations. Prof.Cond.R. 2.1.
When consultation with a professional in another field is itself something a competent
lawyer would recommend, the lawyer should make such a recommendation. Id. at cmt.
[4]. As part of their representation, clients expect lawyers to make appropriate referrals
to other individuals or groups when the need becomes apparent during the legal
representation. If, during the legal representation, a lawyer ascertains that a client needs
financial services, the lawyer has a fiduciary duty to counsel the client accordingly, and
may refer the client to appropriate resources. The lawyer’s duty of loyalty demands that
any referral be made in the client’s best interest, free of compromise and conflict, and not
based upon financial incentives that a particular company may offer the lawyer. To do
so undermines the fiduciary nature of the relationship between the lawyer and client.
See, e.g., Vermont Bar Ass’n, Op. 98-8 (undated) and New York State Bar Ass’n Op. 682
(1996). In addition, a lawyer’s independent professional judgment is compromised when
the lawyer is involved in a business relationship and referral fee agreement as described.

   Prof.Cond.R. 1.8 is also implicated by the factual scenario. Division (a) provides

that a lawyer shall not enter into a business transaction with a client or acquire a
pecuniary interest adverse to a client unless certain conditions are met. The Board finds
that the business relationship between the lawyer and financial services group involves
a lawyer’s pecuniary interest adverse to a client. The client has an interest in investing
and earning as much as possible, while at the same time reducing any fees associated
with the investment so as to maximize returns. However, the lawyer’s interest in the
transaction is to direct the client to a particular financial services group in order to obtain
Op. 2019-10 3

a referral fee. Because of the lawyer’s business relationship with the financial services
group, there is never any consideration of whether the client may be able to obtain
comparable financial services elsewhere for a more favorable fee or return.

   Even if one considers the interests of the client and lawyer to be aligned, the

transaction and terms on which the lawyer acquires the interest can never be fair and
reasonable to the client. Prof.Cond.R. 1.8(a)(1). Instead, the Board is of the view the
business relationship is inherently unfair and unreasonable to the lawyer’s client. Maine
Prof. Ethics Op. 184 (2004). The overriding purpose of the business relationship between
the lawyer and financial services group and referral fee arrangement is to influence the
lawyer to make recommendations for the benefit of an investment advisor and the
lawyer, not to address the best interest of the client.

   Furthermore, Prof.Cond.R. 1.8(f) prohibits a lawyer from accepting compensation

for representing a client from someone other than the client unless certain conditions are
met. A referral fee paid by a financial services group to a lawyer falls within the ambit
of this rule because the fee provides compensation to a lawyer for expected legal services
in connection with the client’s decision to use the particular financial services group. For
all the reasons discussed above, a lawyer’s independent professional judgment and the
lawyer-client relationship will be compromised when a lawyer enters into this type of
business relationship with a financial services group.

   Lastly, a lawyer’s representation of a client creates a conflict of interest if there is a

substantial risk that a lawyer’s ability to consider, recommend or carry out an appropriate
course of action for a client will be materially limited by the lawyer’s own personal
interests. Prof.Cond.R. 1.7(a)(2). The principles of loyalty and independent judgment are
fundamental to the attorney-client relationship and underlie the conflict of interest
provisions of these rules, and a lawyer’s own personal interest should not be permitted
to dilute the lawyer’s loyalty to the client. Prof.Cond.R. 1.7, cmt. [1]. The arrangement
with the financial services group creates a substantial risk of interference with the
lawyer’s independent professional judgment in considering alternatives for the client and
may foreclose courses of action that should be pursued on behalf of the client.

Prohibited Business Relationship

   The proposed business relationship involves activities that consist of the practice

of law, such as reviewing and approving the financial services plan prior to presentation
Op. 2019-10 4

to the client, as well as joint meetings with the client for the purpose of discussing and
offering legal advice about the plan. The financial services group, while not asking
lawyers to form a legal partnership as defined under state law, is asking for ongoing
business associations or relationships with lawyers or law firms. The formation of
partnerships between lawyers and nonlawyers, when any of the activities include the
practice of law, is prohibited. Prof.Cond.R. 5.4(b).

Client Consent

   The question then becomes whether a client may consent to the lawyer’s

representation and acceptance of a referral fee. The Board is of the opinion that full
disclosure and client consent are not permissible in this situation. Prof.Cond.R. 1.7, 1.8(a),
and 1.8(f) provide for a disclosure and client consent to otherwise impermissible conflicts,
but Prof.Cond.R. 2.1 and 5.4(b) do not. Because of the joint application of these rules to
the issues raised, the full disclosure and consent exceptions applicable to only some of
the above referenced rules do not apply.

   CONCLUSION: Lawyers will naturally desire to develop relationships with

professionals in other fields in order to have the ability to refer clients to competent
professionals able to assist in matters beyond strictly legal questions and to create
potential new pools of clients, however to do so in exchange for a referral fee is
problematic. The lawyer-client relationship and the lawyer’s ability to maintain
independent professional judgment is compromised when a lawyer is involved in a
business relationship and referral fee agreement with a financial services group. The
lawyer has a material limitation conflict when entering into this type of relationship. The
lawyer has acquired a pecuniary interest adverse to the client that cannot be cured
because the transaction and terms are simply not fair and reasonable to the client. A
lawyer’s own personal interest should not be permitted to dilute the lawyer’s loyalty to
the client. For a similar reason, a lawyer cannot accept compensation from a financial
services group for the legal advice provided to a client in connection with the group’s
investment services because of the lawyer’s lack of independent professional judgment.
Finally, a lawyer is unable to enter into a business relationship of this type with the
financial services group because at least one of the proposed activities of the relationship
consists of the practice of law. Because of the joint application of the Rules of Professional
Conduct to the issues raised, the full disclosure and consent exceptions applicable to only
some of the above referenced rules do not apply.