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Ethics Opinion

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RI-317

February 14, 2000

SYLLABUS

    A lawyer may accept a referral fee from an investment advisory firm, provided the client consents in writing following the lawyer's full disclosure of the lawyer's interest to the client, and the lawyer advises the client that the client is entitled to seek services from other investment advisory firms and to obtain independent counsel before deciding whether to seek services from that investment advisory firm.

    References: MRPC 1.5(b), 1.7(b), 1.8(a); RI-146, RI-190.

TEXT

A lawyer who is a licensed investment advisor representative asks whether lawyers may accept referral fees from investment advisory firms when the lawyers refer their clients to investment advisory firms for investment services.

The inquirer provided the Committee with a sample agreement between the lawyer and investment advisor and a form acknowledgment of disclosure that is given to the client. Under the sample agreement, the lawyer's "sole responsibility is to introduce clients and collect data to be utilized by Advisor to give investment advice." The lawyer also agrees to give the client the advisory firm's disclosure brochure. The fees paid by the client to the advisory firm are the same regardless of whether the client hires the firm directly or through a lawyer. The referral fee is typically a percentage of the fees payable by the client on a continuing basis. The lawyer agrees to act as a sales representative for the advisory firm.

The lawyer/inquirer points out that regulations under the Investment Advisor's Act of 1940 permit paying referral fees to lawyers. The application of these regulations is a question of law beyond the authority of this Committee.

In RI-146, the Committee opined that a lawyer may not accept a percentage of a broker's commission as a referral fee because it would be a conflict of interest under MRPC 1.7(b). However, in RI-190, the Committee opined that a lawyer may refer clients to a financial planning business in which the lawyer is the sole shareholder, provided certain disclosures and advice were given to the client.

There is no substantive difference between receiving a fee for referring a client to a third party non-lawyer and receiving the financial benefits from being the sole shareholder of a company that provides non-law services to the client on the lawyer's recommendation. Under either scenario, the lawyer has a financial interest in the relationship between the third party and the client.

Under MRPC 1.7(b), "a lawyer shall not represent a client if the representation of that client may be materially limited . . . by the lawyer's own interests unless the lawyer reasonably believes that representation will not be adversely affected and the client consents after consultation."

It is apparent that the lawyer's representation may be limited by the lawyer's financial interest. The question then becomes whether the client may consent. In RI-146, the Committee opined that the lawyer "could not 'reasonably believe the representation will not be adversely affected' because the Committee concluded, the lawyer's financial interest is 'direct' and the client's interest is 'secondary, indirect, or . . . nonexistent.'"

This conclusory analysis does not consider that clients often look to lawyers for recommendations and are at a loss without these recommendations. Many considerations impact a lawyer's referral – money is only one. For, example, the beneficiary of the referral may be a friend or relative of the lawyer or may refer clients to the lawyer. In most referral situations, the lawyer has some interest in making the referral. These interests should not result in per se rule against referrals where there is some benefit to the lawyer. More often than not, and even if money is involved, the lawyer wants the client to be happy with the referral as it will enhance the lawyer's credibility.

In RI-190, the Committee focused on MRPC 1.8(a) (business transactions with clients) and concluded that disclosures and requirements of the rule would be sufficient to permit the referral.

The transaction in question is not a typical business transaction with a client, but may be viewed as one because the lawyer is an agent of the advisory firm. Accordingly, the lawyer must comply with MRPC 1.8(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 that can be reasonably understood by the client;

      "(2) the client is given a reasonable opportunity to seek the advice of independent counsel in he transaction; and

      "(3) the client consents in writing thereto."

Provided full written disclosure is made to the client regarding the nature and extent of the relationship with the advisory firm, including the referral fee, and the client is advised of the right to seek services from other investment advisors and to obtain independent counsel before deciding whether to choose this advisor, the client may make an informed decision and consent to that payment of the fee. Because of the lawyer's ongoing financial interest in the fees paid to the advisory firm and that the lawyer is an agent of the advisory firm, full written disclosure should include (among other things) that the lawyer can not render legal advice to the client if disputes or differences arise between the advisory firm and the client.

 
     

 

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