Can a West Virginia lawyer accept a referral fee from a financial services provider for sending clients to that firm?

Plain-English summary

The Lawyer Disciplinary Board reviewed a proposal (the "LPL Partners Program") under which lawyers would enter a "strategic relationship" with a financial investment advisor. For each client a lawyer referred who opened an investment advisory account, the lawyer would receive "an on-going percentage of the advisory fee as compensation." The Board treated the question broadly: whether a lawyer may accept a referral fee from a financial services provider or investment advisor for referring the lawyer's own clients. The Board noted that calling the lawyers "solicitors" rather than investment advisors did not change the analysis.

The opinion holds the arrangement improper on two independent grounds. First, a referral fee creates a financial interest that may affect a lawyer's professional independence under Rule 2.1: the more referrals to the provider, the more money the lawyer makes, so the lawyer would appear to be promoting his or her own self-interest. The same self-interest implicates Rule 1.7(b), and the Board concluded a lawyer cannot reasonably and objectively evaluate the representation when his or her own financial interest is involved, so even with consent the arrangement carries an appearance of impropriety.

Second, the Board found the arrangement runs afoul of Rule 1.8. Acquiring a pecuniary interest adverse to the client (Rule 1.8(a)) is "clearly adverse to the client's interest," and the Board concluded the conflict "cannot be cured by full disclosure to the client, or by the client's consent." The Board also treated the referral fee as compensation for representing a client from one other than the client under Rule 1.8(f), because clients view a lawyer's recommendations of other professionals as part of the representation and expect the lawyer to act as a fiduciary.

Quoting the Professional Ethics Commission of the Maine Board of Overseers of the Bar (Maine Ethics Opinion No. 184 (2004)), the Board agreed that such a referral fee "is inherently unfair and unreasonable to the client" because its singular purpose is to influence the lawyer's recommendations for the benefit of the paying advisor, in stark contrast to being motivated by the client's best interests.

In practice

Under this opinion, an arrangement in which a financial services provider pays a West Virginia lawyer a referral fee (or "solicitor" fee) for referring the lawyer's clients to that provider is, as the West Virginia rules stood at the time of the opinion, ethically improper. The Board concluded the conflict is one that disclosure and client consent do not cure, so the consent mechanism in Rule 1.7(b)(2) was not treated as a path to permissibility for this fact pattern.

The Board framed the holding as turning on the lawyer's financial stake in the referral and the fiduciary expectation clients bring to a lawyer's recommendation of other professionals. The opinion expressly noted it could offer general guidance to other situations where a lawyer has an ownership or pecuniary interest adverse to the client, while directing lawyers to also review any West Virginia Rule or prior opinion specific to their situation.

Common questions

Q: Can a West Virginia lawyer take an ongoing percentage of advisory fees for referring clients to an investment firm?

A: No. The Board concluded this is ethically improper because the referral fee creates a financial interest that affects the lawyer's professional independence under Rule 2.1 and acquires an interest adverse to the client under Rule 1.8.

Q: Does it help if the client consents in writing to the referral arrangement?

A: No. The Board found the conflict "cannot be cured by full disclosure to the client, or by the client's consent," concluding the lawyer cannot reasonably and objectively evaluate the representation when his or her own financial interest is involved.

Q: Does calling the lawyer a "solicitor" instead of an investment advisor change the result?

A: No. The Board said that distinction is irrelevant; whether the payment is labeled a referral fee or a "solicitor" fee, it is a payment to the lawyer for allowing a third party to profit from the lawyer's client.

Q: Why does Rule 1.8(f) apply to a fee paid by the financial provider rather than the client?

A: The Board reasoned that referring a client to other professionals is part of the legal service the client expects, so a fee from the provider is indirectly compensation for the lawyer's legal services from someone other than the client.

Background and rules framework

The opinion interprets several West Virginia Rules of Professional Conduct. Rule 2.1 (corresponding to Model Rule 2.1) requires a lawyer to exercise independent professional judgment and render candid advice. Rule 1.7(b) (Model Rule 1.7) bars representation that may be materially limited by the lawyer's own interests unless the lawyer reasonably believes the representation will not be adversely affected and the client consents after consultation. Rule 1.8(a) (Model Rule 1.8) governs acquiring a pecuniary interest adverse to a client, and Rule 1.8(f) bars accepting compensation for representing a client from one other than the client unless the client consents, there is no interference with independent judgment, and client information is protected under Rule 1.6.

The Board reinforced its analysis with out-of-state authority, including Kentucky Ethics Opinion E-390 (1996), New York State Ethics Opinion 682, and Maine Ethics Opinion No. 184 (2004), all of which it read as consistent with treating such referral fees as adverse to the client and uncurable by consent.

Citations and references

Rules of Professional Conduct:

• Model Rule 2.1 / WV Rule 2.1 (independent professional judgment; candid advice)
• Model Rule 1.7 / WV Rule 1.7(b) (representation materially limited by lawyer's own interests)
• Model Rule 1.8 / WV Rule 1.8(a) (business transaction or pecuniary interest adverse to client)
• Model Rule 1.8 / WV Rule 1.8(f) (compensation for representing a client from one other than the client)

Other opinions cited:

• Maine Ethics Opinion No. 184 (2004): referral fee from investment advisor inherently unfair and unreasonable to the client
• Kentucky Ethics Opinion E-390 (1996): lawyer's affiliation with investment advisor raises competence and disclosure problems
• New York State Ethics Opinion 682: referral fee as a payment allowing a third party to profit from the lawyer's client

See also

• WV Ethics Op. 2005-02: Legal Funding Plans
• ABA Formal Op. 474: Referral Fees and Conflicts
• ABA Formal Op. 00-418: Acquiring Ownership in a Client
• Alabama Ethics Op. 1995-08: Referral Service Percentage Fees

Source

• Landing page: https://wvodc.org/Legal-Ethics-Opinion
• Original PDF: https://storage.googleapis.com/msgsndr/Rgd68xOkcVdteTsBkf6O/media/66a7ea7f688d5e736216162e.pdf

Original opinion text

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

L.E.O. 2006-01[1]

IS IT PROPER FOR A LAWYER TO ACCEPT A REFERRAL FEE FROM A FINANCIAL SERVICES PROVIDER?

Introduction

The Lawyer Disciplinary Board has received a request to review a proposal from a financial investment advisor concerning a program entitled the LPL Partners Program. The proposal detailed in the literature submitted to the Lawyer Disciplinary Board suggests that lawyers could enter into a "strategic relationship" with the financial advisor "to offer fee-based investment solutions" to their clients. For each client referral that results in an investment advisory account with the financial services provider, the lawyer would then receive "an on-going percentage of the advisory fee as compensation."[2] The literature further cautions that the lawyer should refer clients to the financial investment advisor only after "obtaining appropriate state investment advisory representative licensing and providing written disclosure of their relationship with the . . . financial advisor." While the instant request is specific to the LPL Partners Program, the Board recognizes that there may be other financial services groups with programs such as this one which involve lawyers receiving a referral fee for referral of the lawyer's clients to the financial services group.[3] Thus, the Board issues this opinion to offer guidance to lawyers regarding the potential ethical problems associated with such programs and whether it is ethically proper for a lawyer to accept a referral fee from a financial services provider or investment advisor.

Discussion

The referral fee arrangement raises concerns under several of the West Virginia Rules of Professional Conduct, including Rule 2.1 (professional independence of attorney); Rule 1.7(b) (prohibition of representation that may be materially limited by the lawyer's own interests); and Rules 1.8(a) and (f) (prohibition of business transactions with the client and prohibition from accepting compensation for representing a client from one other than the client).

First, it is the opinion of the Board that a referral fee creates a financial interest that may affect a lawyer's professional independence in representing his or her client, i.e., the more referrals made to the specific financial services group, the more money the lawyer makes. As was recently stated in L.E.I. 2005-02 (Legal Funding Plans), "[i]f an attorney allows anything, including his or her self-interest, or the interest of a third party to interfere with his [or her] 'independent professional judgment', the lawyer is in violation of Rule 2.1." Rule 2.1 of the West Virginia Rules of Professional Conduct provides that "[i]n representing a client, a lawyer shall exercise independent professional judgment and render candid advice." In the instant situation, the lawyer would appear to be promoting his or her own self-interest by referring a client to a specific financial services provider so that the lawyer will receive the referral fee. This would be a violation of Rule 2.1.

In addition, this scenario also implicates Rule 1.7(b), which provides in pertinent part, that "[a] lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation . . . ." As was stated above, the lawyer's own interests are involved because he or she is receiving a fee to refer a client to a specific financial services provider. Furthermore, if the lawyer has entered into an agreement with the financial services provider, then the lawyer may feel that he or she is under an obligation to refer all such clients in need of financial services to that one financial services provider, regardless of the client's specific needs. The Board does not believe that a lawyer could be seen to objectively evaluate the situation when the lawyer's own financial interests are involved pursuant to his or her own agreement with a financial services provider for referrals in exchange for a fee. While the Board recognizes that Rule 1.7(b)(2) provides that the lawyer could continue with representation should the client consent after consultation, the lawyer should remember that both sections of 1.7(b) need to be met. This Board believes that in this situation, the lawyer cannot be seen to reasonably and objectively evaluate the situation when his or her own self-interest and/or financial interests are involved. Thus, even if all other conditions were met, the arrangement still has an appearance of impropriety.

Second, it is also the opinion of the Board that an agreement between a lawyer and a financial services provider for referrals in exchange for a referral fee paid to the lawyer implicates Rules 1.8(a) and 1.8(f). Rule 1.8 (Conflict of interest: Prohibited transactions.) of the West Virginia Rules of Professional Conduct provides, in pertinent part, as follows:

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto.

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) the client consents after consultation;
(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by Rule 1.6.

As a general principal, all transactions between client and lawyer should be fair and reasonable to the client. In transactions wherein the lawyer knowingly has an ownership or other pecuniary interest adverse to the client, at a minimum, the same should be disclosed to the client, review by independent counsel should be conducted and the client should consent to the same in writing. Receipt of a referral fee or acquisition of a financial interest in a transaction involving the client, based upon an agreement with a financial services provider by a lawyer, is clearly adverse to the client's interest because there is the potential that the lawyer might not provide the client with meaningful and appropriate advice due to the lawyer's own financial interest in the referral.[4] Furthermore, the conflict of interest is such that the Board believes it cannot be cured by full disclosure to the client, or by the client's consent to the arrangement.[5] Referral fees, whether they are called referral fees or "solicitor" fees, paid by a financial services provider to a lawyer can be regarded as payments to a lawyer for allowing that person or organization to make a profit from his or her client.[6]

The instant request contemplates that the lawyer and the financial services provider would enter into an agreement for the lawyer to provide a referral of his or her clients to a particular financial services provider in exchange for a referral fee. It is the opinion of the Board that this arrangement also runs afoul of Rule 1.8(f), as stated above. In referring clients to financial services providers, the Board considers the lawyer to be providing a legal service that may be expected by the client as part of the attorney-client relationship. Furthermore, the Board makes the assumption that clients view recommendations to other professionals by the lawyer as part of the representation being provided, and they expect that lawyers will act as fiduciaries in such matters.[7] Therefore, should the lawyer receive a referral fee from the financial services provider, then it is the opinion of this Board that the referral fee is indirectly providing compensation by one other than the client to the lawyer for his or her legal services.

Conclusion

The Board agrees with the Professional Ethics Commission of the Maine Board of Overseers of the Bar, which stated:

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

Maine Ethics Opinion No. 184 (2004).

Accordingly, the Board finds that it is ethically improper for a lawyer to accept a referral fee from a financial services provider. The referral fee creates a financial interest by the lawyer in the representation that affects a lawyer's professional independence in representing his or her client. Furthermore, the type of arrangement proposed in this request also requires an improper business relationship involving clients and non-lawyers that even full disclosure and consent from the client cannot cure.

APPROVED by the Lawyer Disciplinary Board on the 17th day of November, 2006 and ENTERED this 27th day of December, 2006.

David A. Jividen, Chairperson
Lawyer Disciplinary Board

[1] At its December 9, 2005 meeting, the West Virginia Lawyer Disciplinary Board voted to change the title of its Formal Opinions from Legal Ethics Inquiries (L.E.I.) to Legal Ethics Opinions (L.E.O.).
[2] In the cover letter attached to the literature, the financial investment advisor stated that "[a]ttorneys involved would be paid as 'solicitors' and not Investment Advisors." For the reasons stated below, the Board is of the opinion that this distinction is irrelevant.
[3] The Board believes that this L.E.O. can also offer general guidance to lawyers with regard to other instances in which a lawyer may have an ownership or other pecuniary interest adverse to his or her client, including but not limited to ownership interest in a real estate company or other business. However, lawyers are cautioned to also review any West Virginia Rules of Professional Conduct or other L.E.I. that may more specifically relate to his or her particular situation.
[4] See, New York State Ethics Opinion 682.
[5] "Moreover, in many instances the lawyer's affiliation with the investment advisor and the resultant client referrals could involve the lawyer in matters beyond his [or her] professional competence, and, indeed raises difficult questions regarding state and federal investment advisor registration and examination requirements . . . . Consequently, it would be difficult, if not impossible, for the lawyer to fully and fairly disclose to the client the consequences of pursuing the recommended course instead of other alternatives that the lawyer is unlikely to have evaluated or considered." Kentucky Ethics Opinion E-390 (1996).
[6] Id.
[7] See, New York State Ethics Opinion 682.