Ethical Issues For Attorneys Who Sell Insurance And Financial Products

The increasing sophistication and complexity of estate and individual tax planning, and concurrent sophistication and complexity of financial and insurance products that integrate into such planning, creates a desire by Clients for “one-stop shopping”, i.e., a firm that both takes care of all these estate and tax planning issues as well as sells these financial and insurance products. Of course, there is a substantial incentive for Attorneys to offer financial and insurance products, since the commissions paid and/or “trails” often will substantially outweigh the ordinary fees earned for the legal planning.

But where the monetary interests converge, so do the conflicts-of-interest: Is the Attorney implementing a particular type of estate plan to benefit the client or to drive commissions? What if the Attorney could use an estate planning strategy that generates no more fees, but doesn’t require any financial or insurance products to implement? There are the myriad questions that arise from so-called “practice groups” of Attorneys and financial planners, some groups being formally organized while others are simply cross-referral networks, and fee sharing or discounts between the participants in those groups.

The bottom line is that an attorney probably can sell financial and insurance products and services, and probably can participate in certain “practice groups” arrangements. However, this landscape is chock-full of ethical mines known and unknown that threaten to blow up the Attorney’s career.

The ethical rules of some jurisdictions make it easier for attorneys to participate in these activities; the ethical rules of other jurisdictions make it hard. At the end of the day, each attorney who confronts this situation will have to very carefully review and understand the ethical rules of not only the jurisdictions where they are admitted to practice law, but also the jurisdiction where they may engage, directly or indirectly, in offering insurance or financial services.

With a few exceptions, the Attorney’s most useful tool in avoiding these mines will be the ethical trifecta of (1) written disclosure of potential conflicts, (2) advice to seek independent counsel, and (3) written waiver by the Client. In the vast majority of cases, the ethical trifecta will provide a very effective shield for attorneys from both ethical sanctions and civil liability.

Easily said; but some Attorneys may find it difficult or otherwise unpalatable to disclose their side-commissions, or even their close relationships to life insurance agents and financial planners, to their clientele. Moreover, the other advisors with whom the attorney works may not want this information disclosed. Whereas attorneys are subject to very elaborate and strict rules for disclosing their compensation for legal services to clients, life insurance agents and some financial services representatives are not, and it is often not routine for them to disclose to their clients what they are getting paid on certain sales.

ANALYSIS OF THE SCANT CASE LAW

Far from being a hotbed of judicial activity, there are very few court opinions that shed much meaningful light on these issues. Doubtless, that is because the area of mixed legal-financial planning is relatively new, and almost no cases involving these issues have either trickled past settlement (and thus no adverse judgment to appeal), or have resulted in bar complaints. But there are a couple of salient cases, and these deserve very close examination.

In Stark County Bar Assn. v. Buttacavoli, 2002 Ohio 4743, 96 Ohio St. 3d 424, 775 N.E.2d 818 (2002), Ohio Attorney Buttacavoli (“Attorney”) held himself out to the general public as being both an attorney and a financial planner, and he was both a member of the Ohio Bar and a registered securities representative of Allmerica Financial Group. Eventually, these dual roles lead to a Bar Complaint.

In Count One, an ailing 65-year old Client Bissell came to Attorney for both legal and financial advice. For a couple of hundred bucks, Attorney prepared a will to leave Client Bissell’s inheritance to charity, which named Attorney as the Executor of Client’s Estate.

Attorney also advised Client Bissell to cash in a $86,000 Certificate of Deposit, and instead invest those funds into a Variable Annuity of like value, but with a $4,300 surrender charge. Attorney told Client Bissell that the annuity company would decide if he (Attorney) was entitled to a surrender charge (yeah, right!), which of course the annuity company did pay, and which ultimately worked out to $3,492 received by Attorney. The Court held that Attorney did not fully disclose his financial interest to Client Bissell.

In Count Two, Attorney was approached by Client Mother, age 101, and her Daughter, requesting that a living will and power of attorney be prepared. Attorney did this work for a mere $100.

Attorney then talked the two into taking $90,000 out of a deposit account that was being used to pay nursing home expenses, and instead place it into a Mutual Fund. Here, the testimony of the witnesses diverge: Attorney says that he warned Mother and Daughter that the fund risked the loss of principal, while they testified that there were never so warned. To paint a picture of the circumstances, this occurred shortly before the April, 2000, “dot.com” stock market crash, to soon be followed by the 9/11 stock market crash and its much longer-lasting effects.

Although the investment risk was disclosed in the prospective given to Mother and Daughter, they were not told by attorney that he would make a $3,000 commission on the sale. In the end, the $80,000 investment became $66,000.

For these transactions, the Bar Panel concluded that

“the legal and financial advice was part of an integrated transaction requiring full disclosure of respondent’s financial interest in the investment transactions and informed consent by the clients based upon such full disclosure. Moreover, the panel found that in respondent’s role as attorney, his legal advice could reasonably be affected by his financial interest in the investment advice he offered. The panel also believed that respondent’s interest in selling the investment vehicles offered to his clients differed from their interests in securing the most financially favorable use of their funds, and his clients clearly expected the respondent to exercise his professional judgment for their protection.”

In affirming the Bar Panel’s finding, the Court similarly held:

“Although our Disciplinary Rules do not prohibit an attorney from engaging in the dual professions of law and financial planning, the rules do require that an attorney providing both legal and financial advice must carefully separate these services and provide full disclosure as to his financial interest in the investment advice he provides. Informed consent by the clients must be obtained after full disclosure. Clearly, respondent failed to provide full disclosure to his clients concerning his financial interest in the investment recommendations.

“Here, both clients readily admitted that they had sought respondent’s services as both an attorney and financial planner. The problem arose, however, because while respondent clearly billed these clients for his legal services, his additional compensation for selling the investments was not clearly explained to them. In fact, Riffle testified that respondent led her to believe that because her mother had attended the same church as respondent, respondent would not charge additional fees for the investment. Respondent admitted that he made a representation that he would not charge additional fees because of the church association. However, respondent testified that he meant that he would not charge for any general questions she may have had regarding the legal work performed or the investment made. Regarding Bissell, we find that the communication concerning respondent’s commission on the annuity sold was misleading at best. When Bissell asked about respondent’s fee, Bissell received a vague answer that compensation would come from the annuity issuer. Therefore, we find that ample evidence was submitted to find violations of DR 5–101(A)(1) and 5–104(A).”

To reach its conclusion, the Court drew upon other opinions where attorneys had not fully disclosed the fact or degree of their own investments in investment deals they pitched to their clients. These opinions could be summarized as a group as involving cases where the attorneys’ clients had gone to them for legal advice on some matter, and then were talked into an investment in ventures in which the attorneys held interests. But the court was careful to distinguish those cases as being worse, since the attorneys had actively deceived their clients, whereas here both Clients approached Attorney for legal and financial planning.

Notably, the Attorney had a clean record, and had done the right thing and fully compensated bother Client Bissell and Client Mother for their losses. Doubtless, in the end this accounted for Attorney only being suspended for only 6 months ― which is still very serious.

In Florida Bar v. Doherty, No. SC-332 (March 29, 2012), the Florida Supreme Court disbarred an attorney who sold annuities to an elderly couple while concurrently acting as their estate planning attorney, but who failed to disclose the conflict to his clients, advise them to seek independent counsel, or obtain a written waiver.

The facts of the case involved Florida Attorney Doherty (“Attorney”), who was also a licensed annuity salesman in Florida, and who provided financial planning services to his clients.

Husband and Wife came to Doherty first for financial planning, and then to provide estate planning services due to their advanced ages and declining health. Doherty assisted the elderly couple with their estate planning. Very soon thereafter, Husband passed and Wife decided to consolidate her annuity holdings from six annuities to three annuities. Attorney thus submitted applications for three annuities to Conseco Insurance Company.

Coincidentally, Attorney was in a dispute with Conseco about chargebacks in the amount of $86,370 that were owed by Attorney to Conseco. Attorney entered into a settlement with Conseco whereby Attorney was to pay Conseco $10,000 up front, and then 50% of any commissions that he received on the sale of Conseco products until the chargebacks were returned. If no commissionable sales were made within 6 months of the agreement, the entire chargeback would become due and payable.

Apparently to avoid losing his 50% commissions on the sale of annuities to Client, Attorney cancelled the Conseco applications and instead submitted applications for annuities with Washington National that would have paid him commissions not subject to offset.

Simultaneously, Attorney was working with Wife to revise her own estate planning documents now that she was a widow. Attorney did so, and created two new trusts in the process.

One new trust was to hold title to Wife’s condo, but had the peculiar instruction that when she passed the proceeds were to be used to purchase more annuities. Interestingly, the trust document limited the purchase of such annuities to either Conseco or Washington National annuities. Oh, and Attorney was named the Trustee of that new trust.

The second new trust was an educational trust for the couple’s grandchildren, and Doherty named himself the Trustee of this new trust too.

Attorney was also named Wife’s personal representative and the successor Trustee of an existing trust, and “was given final and uncontestable authority to determine whether certain estate planning methods the client effectuated were successful.”

Wife herself passed only two months after her Husband, before any annuity sales were completed. The wife’s survivors successfully challenged Attorney’s appointments as personal representative and trustee and had him removed.

A Referee was appointed to gauge Attorney’s ethical conduct, and found that Attorney had assumed “multiple, concurrent yet discrete, professional roles in behalf of [the client], i.e., estate planner, trustee and successor trustee of a number of trusts, financial products salesperson, personal representative, and attorney.”

But the Referee did not find Attorney had ever attempted to advise Husband or Wife of his “multiple and conflicting positions.”

Although there did not appear to be any evidence that Attorney’s financial planning for his clients had caused them any losses, or that they had been disadvantaged by his commissions, the Referee nonetheless recommended that Attorney be disbarred, and asserted two grounds:

Attorney did not challenge the Referee’s first ground, which was that Florida Bar Rule 4-1.7(a)(2) provided to the effect that a lawyer shall not represent a client if there is a substantial risk that the representation of the client will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person, or the lawyer’s personal interests.

Attorney did vigorously challenge the Referee’s second ground, which was that Florida Bar Rule 4–1.8(a) provided to the effect that that 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 the transaction is fair and reasonable to the client, the client is advised in writing of the desirability of seeking independent legal counsel, and the client gives informed, written consent to the essential terms of the transaction.

In sustaining the Referee’s finding on this latter point, the Florida Supreme Court noted that an attorney is simply not allowed to enter into a business transaction with a client unless the transaction is fair to the client and three elements (the ethical trifecta) are met:

(1) The terms of the transaction and fully disclosed and transmitted to the client;

(2) The client was advised in writing to seek independent counsel; and

(3) The client gives informed and written consent to the attorney’s role in the transaction, including whether attorney is representing the client in the transaction.

Here, Attorney failed to meet any of these elements. Instead, Attorney complained that selling annuities and financial services was not a “business transaction” with a client at all, and certainly not one that implicated the Bar Rule ― since Attorney acquired no interest in the annuities purchased.

This argument fell on deaf ears. The Court holding that “rule 4-1.8(a) is not so limited in its scope and application.” The Court pointed to the official comment to Model Rule 1.8(a) (followed by Florida) which indicated that the rule “applies to lawyers engaged in the sale of goods or services related to the practice of law, for example, the sale of * * * investment services to existing clients of the lawyer’s legal practice.”

The Florida Supreme Court also noted that the Supreme Court of Ohio had similarly disciplined an attorney who both prepared a will and advised the client to invest funds into an annuity. Stark County Bar Ass’n v. Buttacavoli, 96 Ohio St.3d 424, 775 N.E.2d 818 (2002) (which we discussed, supra.).

Thus, the Florida Court concluded:

Like the respondent in [the Ohio case, Attorney] held himself out as a lawyer and a Certified Financial Planner. His professional relationship with the client involved both legal work, including amending her will and executing two trusts on her behalf, and financial services, namely brokering the sale of Conseco and Washington National annuities. It is clear that [Attorney] stood to earn a commission from the sale of the annuities had those transactions been completed. It is also clear that he did not disclose his financial interest in the transactions to the client in writing as required by rule 4–1.8(a). Accordingly, we approve the referee’s recommendation that [Attorney] be found guilty of violating rule 4–1.8(a).

As his final (literally) argument, Attorney argued that disbarment was too harsh of a sanction. It didn’t help that the Referee had identified four aggravating factors:

(1) Attorney had previously served a two-year suspension from the practice of law;

(2) Attorney acted with a selfish motive;

(3) Attorney refused to acknowledge the wrongful nature of his conduct; and

(4) Attorney had substantial experience in the practice of law.

But, even with these aggravating factors, did the mere sale of annuities to his clients rise to the level of serious misconduct? Yes, explained the Court:

“The evidence demonstrates that [Attorney’s] conduct created a clear conflict of interest in that there was a substantial risk that his representation of the client would be limited by his own interests. [Attorney] acted purposefully to make his personal, pecuniary interests at least as important as those of his client and her estate. He advised his client to select various means of estate planning and wealth management that would earn him a personal financial benefit. Additionally, [Attorney] participated in a business transaction with his client and failed to disclose his substantial interest in the transaction. We believe his actions amount to egregious misconduct.”

And with that, Attorney’s ticket was pulled.

SOME MUSINGS ON THESE TWO CASES

For the last decade, the sale of life insurance, annuities, and financial services by attorneys have proliferated. Some attorneys argue that this is a win-win for themselves and clients — the first finally getting to make the substantial commissions that otherwise went to some insurance agent or planner who did little or nothing and bore little of the risk, and the latter possibly getting a more tightly-integrated estate and financial plan that meets their goals.

If the sales commissions are the same as the client would otherwise pay to an independent insurance agent, these attorneys suggest, where is the harm?

As yet, some Courts aren’t buying it. Instead, as in this Opinion, some Courts see the sale of insurance products and financial services to Clients as a “business transaction” that is not per se impermissible, but requires not only that the transaction be fair to the client, but also each and every of the elements of the ethical trifecta: (1) written disclosure to clients, (2) advice to seek independent counsel, and (3) written waivers by clients.

But who out in the field is really making such written disclosures to clients, telling them to seek independent counsel, or obtaining written waivers? Which is another way of saying, what insurance or annuities salesperson wants to tell their clients how much commission they are getting, and to go ask somebody else about it?

Further, there are many unanswered questions as to how far disclosure must go. The intent of Rule 1.8 is to provide the fullest and fairest disclosure to the client, since obviously the attorney is acting as a fiduciary in relation to the client. Does this include the lavish golf junkets and vacations that insurance companies rain on their high producers? Does an attorney have to disclosure to his client the number or percentage of clients that are also sold insurance products or financial services? The answers to these questions are probably yes.

Of course, such conflicts have been seen in other transactions where the attorney ends up with stock, earns a commission as a mortgage broker, etc., but all these instances have required the trifecta of disclosure, advice to seek independent counsel, and written waiver. Bottom line: there is no special waiver for attorneys who sell insurance products and financial services on the side.

Notably, an attorney who is licensed to sell insurance and financial products can perform estate planning for a client so long as that same client is not also the attorney’s customer for those products, and vice versa. The problem comes when the attorney wears both hats at the same time. An Attorney can be either an estate planner or financial planner, has entered the ethical minefield when trying to play dual roles with the same client.

This is especially worrisome given the comment by the Referee in Doherty that the attorney assuming “multiple, concurrent yet discreet [sic] professional roles in behalf of [the client], i.e. estate planner, trustee and successor trustee, financial products salesperson, personal representative, and attorney” is problematic. If the roles of estate planner, trustee and personal representative for a client by themselves are deemed to be conflicting positions, as suggested by the court’s opinion, then punctilious adherence to the conflict rules regarding sales of financial products or insurance is even more important.

Notice the case doesn’t even mention whether the client might have suffered financial harm from the proposed annuities suggested by her attorney (there couldn’t have been any actual harm since the client died before any of the sales were completed). This implies that the objective fairness of the terms of the insurance or financial product is irrelevant and provides no help to an attorney who failed to make the required disclosures.

Here, it didn’t help that Attorney had previously served a two-year suspension in another state, since the Florida Bar is well known for dropping the axe on repeat offenders, especially those who move to Florida after having been disciplined elsewhere. It also didn’t help that Attorney had been accused of making false statements on his errors and omissions insurance application, which the Court touched on only briefly in passing.

One might even get the impression that the Attorney in Doherty was simply a “bad actor” with a history of problems and the Court was just taking out the professional trash. But that overlooks that Attorney utterly failed to satisfy the trifecta of disclosure, advice to seek independent counsel, and written waiver.

If you are an attorney who has gotten into the insurance, annuities or financial services game, you’d better document your compliance with this Trifecta in each and every case, or you might find that your ticket has been pulled too.