October 6, 1999
Sherwin P. Simmons, Esquire
Commission on Multidisciplinary Practice
c/o Arthur Garwin
Center for Professional Responsibility
American Bar Association
541 North Fairbanks Court
Chicago, IL 60611-3314
Re: Comments on Commission's Report on MDPs
As a solo practitioner engaged in an estate and tax planning practice I have followed closely the MDP debate. I desire to comment from that perspective. Before proceeding, I applaud the work of the Commission to bring to the forefront this very important discussion of what the practice of law truly means - to the practicing attorney and to the client. I would hope that your efforts foster a renewed look at our profession and the principles under which we practice.
1. HOLISTIC ESTATE PLANNING OFTEN INVOLVES TAX AND FINANCIAL PLANNING. Initially I was privately supportive of the Commission's Report, since many of my clients have expressed a desire for coordinated and comprehensive estate, tax and financial planning advice. The design of a comprehensive estate plan for a client often involves discussions of such matters as: IRA contribution and distribution planning; Roth IRA conversion planning; asset protection planning; tax consequences of investments in annuities and other tax deferred vehicles (both presently and as they may affect heirs); long-term care insurance; stepped-up basis at time of death and the related potential benefits of "tax efficient" equity investing through unrealized capital gains or securing long-term capital gain treatment; liquidity to pay estate taxes and the potential use of life insurance to provide such liquidity (including a discussion of how much insurance may be needed, if at all, and what type of insurance may be most suitable, and how life insurance may best be owned); and elections for payment of pensions (including survivorship options, and term certain options). Other clients desire advice on how to reduce current and future income tax liability exposure. Discussions of gifting assets to others or to irrevocable trusts necessarily involve a discussion of the client's potential future need for funds or property which might be transferred away.
I find myself, using a holistic approach to the design and implementation of an estate plan, advising clients on matters which may be considered primarily "financial" in nature. Far too often I meet with clients who have received poor advice in the areas indicated above from their non-lawyer advisors. In addition some clients become "frozen" when receiving conflicting advice from several advisors. There is no question that a skilled estate planning lawyer, offering independent advice to a client, can provide significant benefits in addressing many financial and tax planning issues.
2. THERE IS DEMAND FOR INTEGRATED PLANNING FROM MANY CLIENTS. I have personally encountered several requests from clients, without prompting, for the integrated delivery of estate planning, asset protection planning, tax planning, and financial planning services. Many clients desire "one-stop shopping" with a view of receiving better, more integrated (and better) advice and/or paying less fees. While "tax simplification" was the buzz word of the mid-1980's, we all know that tax legislation over the last two decades has complicated many planning issues for the individual client. Clients often desire to travel down a single path when seeking to identify and address the many tax and non-tax issues presented by an increasingly complicated world.
At the same time, there is sometimes expressed by other of my clients their desire to seek independent viewpoints on an issue from several different advisors before making a decision on the matter at hand. Very often clients desire my endorsement of opinions given by other advisors before proceeding.
3. THE CURRENT ETHICS RULES (IN MY STATE) APPEAR TO PROHIBIT A LAWYER FROM OFFERING INTEGRATED TAX, FINANCIAL PLANNING, AND ESTATE PLANNING SERVICES. Earlier this year I inquired of my state bar's ethics staff for guidance as to whether I could engage in an integrated practice, offering services including financial planning and asset management (with all fees disclosed to the client, and paid directly by the client, with no outside fees or commissions accepted). Applying current ethics rules it was responded that an attorney recommending to a current law firm client (for example, one undertaking an "estate plan") that the client also seek financial advisory and/or asset management services, and then having the lawyer offer to provide those services, would be an impermissible conflict of interest. I agree that a conflict of interest would exist in recommending to a "law firm client" that the client needs "non-legal services" from the client.
(However, it could be argued that a conflict of interest also exists if the attorney identifies for a client desiring a simple estate plan other "legal" services that a client may need, such as suggesting a more expensive estate planning technique, or suggesting that the attorney serve as an executor or trustee in a situation where other alternatives are not readily available. The sometimes hard to digest distinction appears to be that an attorney may certainly identify legal needs, and perhaps has a duty to do so, and then offer legal services to fulfill those legal needs. But the attorney may not identify non-legal needs and then offer to fulfill those needs for the client.)
Current ethics rules permit the lawyer to provide financial services as an ancillary business to clients who are not already clients of the law firm. An attorney could open a business as a securities broker, or insurance agent, and market those services in a wholly independent way.
But there is a lot of "gray area" in between. For example, what if an existing "trust" client requested the lawyer to provide financial advisory services, with no prompting by the attorney? That would seem to be permitted, according to my state bar's ethics committee staff. But what if the client's inquiry came about as a result of a firm brochure in the lawyer's reception area, discussing why financial planning or investment advisory services may be needed and then disclosing that the lawyer provides such services? What if the lawyer invited all of his current "will" and "trust clients" to a seminar on financial planning and asset management, presented by the lawyer? And, of course, clients receiving non-legal services should not be subjected to "solicitation" for legal services. There are many shades of gray here, and since I have always tried to avoid gray areas in the ethics arena I have decided not to pursue an ancillary practice. It also seems that an "ancillary practice" does not provide the all-inclusive, integrated services some clients desire, which was my initial motivation for looking into this area.
4. DOES THE CURRENT SYSTEM OF CROSS-REFERRALS BETWEEN PROFESSIONALS DE FACTO IMPINGE UPON THE INDEPENDENT PROFESSIONAL JUDGMENT OF THE ATTORNEY? In the estate planning arena there has been a proliferation of attorney associations and programs for attorneys designed to teach attorneys how to market themselves and their practices. Many of these programs are quite beneficial, teaching important practice management and counseling techniques and providing a collegial atmosphere to learn and exchange ideas.
However, I am disturbed by the emphasis of many of the marketing materials put out by these organizations and programs which emphasize the need to develop and maintain relationships with other professionals - such as securities brokers, life insurance agents, trust officers, etc. It has been my experience that many (but not all) financial services professionals desire the "I scratch your back, you scratch mine" approach to referral arrangements. I believe the development of such close ties between financial services professionals and estate planning attorneys to be a development which can, and sometimes does, impinge upon the delivery of independent advice to the client, for economic reasons.
For example, if the financial professional recently sold a retiree couple (who possessed a large estate) several joint and survivor tax-deferred variable annuities, with no discussion by the advisor on how this may negatively affect their estate plan, what is the attorney to do when the clients then come in to undertake or revise their estate plan? Does the attorney point out the purchase of that product may not enable the estate tax savings feature of the plan to be fully realized? What about recommendations made by other advisors to purchase additional life insurance (or other forms of insurance), or establish CRTs (even when the client does not appear to be charitably inclined), etc.? What about the trust officer who insists to a client that they must name the bank or trust company, and that under no circumstances should the client name a family member. What happens when the trust officer refers that client to the attorney for "implementation" services? In all of these circumstances, will the attorney risk the loss of future referrals (and substantial adverse economic impact to the attorney's own practice) by providing conflicting advice to that given by the referral source? Moreover, will the attorney only refer to other professionals whom he believes will provide the best service to the client? Will the attorney only seek referrals from other professionals with the understanding that the attorney will give independent advice to the client?
This current "marketing" emphasis in the estate planning legal community begs the question - Does the current emphasis on maintaining cross-referral or marketing relationships between attorneys and other financial services professionals impinge, de facto, upon the attorney's delivery of independent advice? I believe too many attorneys have not given enough thought to this issue when seeking to establish close marketing-oriented arrangements with financial services professionals.
5. THE IMPACT MDP'S WOULD HAVE UPON THE SOLO ESTATE PLANNING ATTORNEY. Initially I believed the permitted use of Multi-Disciplinary Practices would permit me, as an attorney, to engage in business relationships with other professionals who also respect the principle that the client's interests always come first, and to provide a more integrated approach to meeting client needs. However, as perceived from my observations of the cross-referral arrangement abuses, I possess no confidence that the client's interests would remain paramount in most MDP's, at least where they were controlled by non-lawyers.
If non-lawyer controlled MDP's are permitted, then not only the Big 5 accounting firms, but a host of other brokerage, insurance, and other firms (including banks and trust companies) would seek to provide estate planning legal services (wills, trusts, and other documents) as part of their other services. Of greatest impact would be the "bundling" of legal services, including "if we manage your assets, your will and trust and other estate planning documents will be done for free." I have been informed by a colleague that this very practice of bundling services already occurs in some trust companies in at least one state (in that state a long tradition exists of trust companies providing in-house generated legal documents).
From an economic perspective, as a solo practitioner I do not possess the time and capital needed to individually develop and offer integrated financial, tax and estate planning services. Nor would I possess the funds to compete against the marketing budgets of banks, brokerage firms, etc. who would seek to provide estate planning documents for clients. Nor could I compete with large firms heavily marketing "free" legal documents to their asset management clients.
If MDPs are to be permitted, then the solo estate planning practitioner would likely largely become a dinosaur within several years. Many estate planning attorneys would probably end up under contract with (or an employee of) large CPA firms, brokerage firms, banks, or other financial services firms. An entrepreneurial few would probably thrive by forming small MDPs of their own. A very few attorneys might survive in traditional solo practices, serving those clients who would desire strictly independent advice.
Speaking for myself, I do not want to be the salaried employee of a large firm, especially if the MDP would encourage me to give advice which may favor the MDP's firm's other businesses (but which advice might not be in the best interests of the client).
6. "INDEPENDENT ADVICE" SHOULD BE VALUED. The need for attorney's clients to receive independent, impartial advice should not be underestimated. Estate planning attorneys often do not (and should not) simply prepare legal documents. Rather, estate planning attorneys should offer guidance to a client in many areas, if the attorney possesses adequate knowledge and skill in those areas. Every effort should be made by the estate planning attorney to not engage in any activities which might impair (or influence) the attorney's duty to independently advise the client. The role of the attorney as an "independent advisor" should be re-emphasized in our ethics seminars and articles, not subjected to further impingement by MDPs.
I do not foresee that an attorney employed by an MDP would remain "independent" at all in the delivery of legal advice, or in the delivery of advice which is not strictly "legal" in nature but rather might be "tax" of "financial" advice.
There are benefits in providing the integrated delivery of tax, financial planning, investment advisory and estate planning services. There is current client demand for such integrated services. However, when these benefits are weighed against the substantial potential harm clients could suffer from the failure to receive truly objective advice, I believe the scale does not even come close to tipping in favor of the MDP structure - the potential harm to the client from the loss of independent, objective advice would be too much.
I accept the restrictions placed upon my practice as an attorney. These restrictions are necessary for the privilege of practicing in a profession in which the client's best interests are kept primary. Rather than the pursuit of MDPs, I believe the organized bar should make every effort to: (1) train attorneys in recognizing and avoiding situations in which their independent advice to a client could be compromised; and (2) announce to the world that attorneys remain a source of confidential, independent advice for their clients.
Again, thank you to the members of the commission for seeking to address this complicated issue in this complex and fast-changing world. While I may disagree with the commission's conclusions, I appreciate their efforts and their perspective with regard to this very important issue.
Ron A. Rhoades
Attorney and Counselor At Law
2420 N. Essex Avenue
Hernando, Florida 34442