Can an estate-planning law firm set up a separate company to sell investment products to its own clients?

Plain-English summary

An estate-and-tax-planning firm asked whether it would violate the RPCs to set up a separate business entity offering investment-advisor services and products (annuities, mutual funds, and other securities), where clients of the new business would also be clients of the law practice and the lawyers would earn fees and commissions from the products sold.

The committee said RPC 1.5, 1.6, 1.7, 1.8, 1.14, 7.1, 7.2, and 7.3 would appear to apply most directly, with RPC 1.7 supplying the general conflict rule and RPC 1.8 the more specific rules on business transactions with a current client. It said the business transaction would likely be prohibited unless the lawyer fully complied with those rules, including RPC 1.8(a) through (f). The committee identified the core problem: the lawyer's interest in fees and commissions creates a financial incentive to sell more products to the client. It also described conditions that would have to be met, including that the separate business be genuinely separate physically and financially, that the lawyer not represent to the business's customers that they will receive the benefits of the lawyer's expertise or create false expectations, that the lawyer make clear there is no attorney-client privilege between those customers and the lawyer, and that neither business be used to refer clients to the other.

The committee concluded that the burden of full compliance was substantial and, on the facts presented, that the inquirer could not reasonably believe the representation would not be materially limited by the lawyer's own interests as an investment advisor or seller of products. It said the business appeared so inextricably intertwined as to be indistinguishable and therefore would be prohibited. The committee added that it could not give legal advice on the sufficiency of any disclosure or consent, or on whether a lawyer acting as a broker would still be held to a lawyer's standard of care.

Currency note

This opinion was issued in 2004, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. The 2006 revisions restructured several of the rules the committee cited, including RPC 1.7 (concurrent conflicts) and RPC 1.8 (specific conflict transactions). 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 mentioned here.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee did not treat a separate investment business as categorically barred, but it found this particular plan prohibited. It said such a business could proceed only with full compliance with the enumerated rules, and it set out conditions (genuine physical and financial separation, no claims that customers receive the lawyer's expertise, a clear statement that no attorney-client privilege exists for the business's customers, and no cross-referrals between the two operations). On the facts, the committee concluded the lawyer's financial incentive to sell products meant the lawyer could not reasonably believe the representation would not be materially limited, and that the two businesses were so intertwined as to be indistinguishable, so the arrangement would be prohibited.

Common questions

Q: Can a law firm sell investment products to its clients through a separate company?

A: The committee said that on these facts the arrangement would be prohibited, and that such a business could proceed only with full compliance with RPC 1.5, 1.6, 1.7, 1.8, 1.14, 7.1, 7.2, and 7.3.

Q: What is the core conflict the committee identified?

A: The committee said the lawyer's interest in fees and commissions creates a financial incentive to sell more products, so the lawyer could not reasonably believe the representation would not be materially limited by the lawyer's own interests (RPC 1.7).

Q: What separation did the committee say would be required?

A: It said the separate business must be genuinely separate physically and financially, must not claim customers receive the lawyer's expertise or create false expectations, must tell customers there is no attorney-client privilege, and must not be used for cross-referrals with the law office.

Q: Why was this specific plan prohibited rather than merely conditioned?

A: The committee said the business appeared so inextricably intertwined with the law practice as to be indistinguishable, so on these facts it would be prohibited.

Background and rules framework

The opinion interprets RPC 1.7 (Model Rule 1.7, conflicts of interest) and RPC 1.8 (Model Rule 1.8, specific conflict transactions, including business transactions with a client), read alongside the other rules the committee listed (RPC 1.5 fees, 1.6 confidentiality, 1.14 client property, and 7.1, 7.2, 7.3 advertising and solicitation). The committee applied the material-limitation standard of RPC 1.7 to a lawyer's financial interest in selling investment products to clients and concluded the arrangement could not satisfy it on the facts.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.7 / Washington RPC 1.7 (conflicts of interest; material limitation by the lawyer's own interests)
• Model Rule 1.8 / Washington RPC 1.8 (business transactions with a client; subsections (a) through (f))
• Washington RPC 1.5, 1.6, 1.14, 7.1, 7.2, 7.3 (additional rules the committee identified as applicable)

See also

• WA Ethics Op. 2053: Running an Escrow Business
• WA Ethics Op. 1017: Lawyer Who Is Also a Broker
• ABA Formal Op. 00-418: Taking Equity in a Client

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1308

Original opinion text

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

Advisory Opinion: 2055
Year Issued: 2004
RPC(s): RPC 1.5, 1.6, 1.7, 1.8, 1.14, 7.1, 7.2 , 7.3
Subject: law firm to establish separate business to provide investment services and charge fees or commissions

The inquiring lawyer wishes to know whether it is violation of the Rules of Professional Conduct for a law firm practicing primarily in the areas of estate and tax planning to establish a separate business entity for the purposes of offering investment advisor services and investment products such as annuities, mutual funds and other securities. It is anticipated that clients of the to-be-formed business would also be clients of the law practice. The lawyers of the law firm would realize income from the separate business in the form of fees and commissions from the investment products sold.

In Washington, RPC 1.5, 1.6, 1.7, 1.8, 1.14, 7.1, 7.2 and 7.3 would appear to apply most directly to the above situation. RPC 1.7 provides the general rule as to a conflict of interest between an attorney and her or his client. RPC 1.8 provides more specific rules as to conflicts of interest and prohibited transactions with a current client, especially business transactions. RPC 1.5 provides for reasonable attorney fees and fee disclosure requirements. RPC 1.6 provides for the preservation and use of a client’s secrets and confidences. RPC 1.14 provides for the preserving the identity of funds and the property of a client. RPC 7.1 provides that a lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. RPC 7.2 provides in part that a lawyer shall not give anything of value to a person for recommending the lawyer’s services, except the cost of advertising or communicating. RPC 7.3 provides that a lawyer must have direct contact with prospective clients and cannot for business purposes directly or through a third person solicit a prospective client with whom the lawyer has no family or prior professional relationship.

The above business transaction would likely be prohibited unless the lawyer fully complies with the procedures and requirements enumerated in RPC 1.5, 1.6, 1.7, 1.8(a), (b), (c), (d), (e), and (f), 1.14, 7.1, 7.2, and 7.3.

Generally speaking, the lawyer’s interests in obtaining fees or commissions from the sale of the products give the lawyer a financial incentive to sell more products to the client. Additionally, the separate business entity must in fact be separate both physically and financially. A lawyer cannot represent to the customers of the separate business that the customers will receive the benefits of the lawyer’s expertise or otherwise provide the customers with false expectations regarding the services provided by the separate business. A lawyer must make clear to the customers of the separate business that there is no attorney/client privilege between such customers and the lawyer. Lastly, the separate business cannot be used as a means of obtaining referrals for the law office and, likewise, the law office cannot be used to refer clients to the separate business.

The burden is on the lawyer to fully comply with the foregoing and it appears to the committee that under the facts presented that the burden here is substantial. It is the committee’s opinion that inquirer could not reasonably believe that the representation will not be materially limited by the lawyer’s own interests, as an investment advisor or seller of investment products. Further, under the facts of this case, the business appears so inextricably intertwined as to be indistinguishable and therefore would be prohibited.

The RPC Committee cannot offer legal advice as to sufficiency of the contents of any such disclosure or consent required in the rules above. Nor can the RPC Committee comment on whether an attorney, even while acting as a broker, would nevertheless be held to the standard of care of an attorney, as that would also constitute legal advice.