Note: I'd like to thank John Dietz, a co-founder of the Asset Protection Society (APS) for forwarding this case to me. It's a court case that should send mild to high voltage shock waves through parts of our industry.
The unauthorized practice of law
What is it? It's when a non-licensed attorney gives legal advice.
As an attorney, I'm often asked if financial planners who charge fees for estate-planning advice (versus making money on commissions), are in danger of practicing law without a license. My opinion is that if you are not charging fees, the chances are remote that you'll get busted for practicing law without a license. However, for those who are charging fees to help clients with estate planning, the waters become muddier.
The IN Supreme Court finds that an insurance agency is practicing law without a license
What happened? In 1995, the firm United Financial Systems Corporation (UFSC) started to market and sell "estate-planning services," including wills and trusts (this is a business model of many in our industry). From 2006-2009, the firm sold 1,306 plans, and grossed over $2.7 million. Interestingly, less than 1 perent of the firm's income came from fee income.
UFSC targeted clients (mainly seniors) through direct mail about how to avoid probate. When someone responded to the mailing, an "estate-planning assistant" would meet with the potential client and gain access to their financial information. The court noted that this information was used later by UFSC to sell the client "insurance products."
The estate planning presentations made by the assistants touted that UFSC had a team of tax strategists, financial consultants, independent attorneys, Medicaid and estate-planning assistants. In realty, UFSC had no tax strategists.
The court noted that the estate-planning assistant received a commission on the sale of wills and trusts, and the assistants pushed the most expensive estate plans. For an estate plan costing $2,695, the assistant would earn between $750 and $900.
Once the client agreed to have their estate plan done, the information gathered was routed to the UFSC's in-house attorney, who then provided that information to an outside counsel who performed the actual legal work. Once the outside counsel completed the estate planning documents, they were sent back to UFSC, and a "financial-planning assistant" was then paid $75 to deliver the documents and assist the client in implementing them. This assistant made most of his/her money selling insurance products based on the financial information provided by the client so his/her estate plan could be completed.
It should be noted that UFSC lost money when it paid to generate and cultivate these leads unless an insurance product was sold.
Unauthorized practice of law
The court did not like that the legal plan was sold by a non-licensed attorney; that the outside counsel made less than the assistant who sold the plan; and that the outside counsel had minimal contact with the client
The court also seemed disgusted with one example it noted where a client was sold a plan that was not financially sound and where the emphasis by UFSC was geared towards selling the client three deferred annuities (noting that the financial-planning assistant earned a commission of $40,000).
The court determined that UFSC had engaged in the unauthorized practice of law and ordered the firm not to engage in similar activities going forward. What's also interesting is that the court ordered the firm to notify clients who hired them after 2006 and tell them that they are entitled to a refund of the fees paid.
Moral of this court case
Do not charge fees for financial/estate planning services that involve the drafting of documents. Do not charge fees to help clients form LLCs or other corporate documents. If you want to charge fees for helping clients with anything that involves drafting legal documents, you'd better make sure that the lawyer that does the work actually talks with and interacts with your clients.
This court, while seemingly disgusted at the UFSC business model, did not opine on the use of estate planning as a tool for financial planners or insurance advisors to gather information about and, ultimately, sell products or gather assets under management.