Are You Taking Legal Advice From Your Financial Advisor?

Today, I want to talk about a serious issue that has developed in the legal profession over the last several years. It is the practice of law by unlicensed individuals, companies, and other professionals. This is referred to as the unauthorized practice of law, and it can have very serious consequences.

Most frequently this tends to happen in the estate planning world. However, it has also happens in the areas of family law and immigration law. Let’s look at a common example.

John and Jane have their annual meeting with their financial advisor who is providing them advice on how to properly invest their portfolio and how to meet their retirement goals. The financial advisor then says, I want you to go speak with an estate planning lawyer to have your will and powers of attorney drawn up. At your age, it is very important that you have your estate planning taken care of so that your children are provided for in the event of your death or incapacity.

John and Jane, having worked with their financial advisor for many years, trust his opinion. When they get home, they begin the process of finding a lawyer to go see and put their estate plan together as was discussed.

John and Jane meet with the lawyer who reviews their family information, information about their children, asks them very detailed questions about who should be in charge, and when children should receive the assets. The lawyer then asks John and Jane questions about their assets and their types of assets.

John and Jane discuss that they own two homes (one in Tennessee and one in South Carolina), they mention they both have rollover IRA accounts from work before they retired which are being managed by their financial advisor, and they also mention they have a number of financial accounts totaling approximately $750,00 with their financial advisor.

The lawyer discuses that what would benefit the family the most is a Revocable Living Trust with Lifetime Asset Protection for their surviving children, commonly referred to as a Clayton election. The lawyer explains that due to owning property in two separate states (Tennessee and South Carolina) that without a living trust in place, their children would be forced to complete a probate administration in two different states, hiring two different lawyers, and taking twice as long. The attorney mentioned that this court proceeding takes anywhere from several months to two years or longer before all the assets are distributed to the children from the estate.

The second reason that the lawyer mentioned that a Revocable Living Trust would be the most beneficial for John and Jane were the concerns about Julie. The lawyer explained that without a living trust, Julie’s share of her inheritance would be immediately payable to her, and she could do whatever she wanted with her inheritance. However, in this circumstance, they would be subject to loss by divorcing spouses, creditors, lawsuits, bankruptcy, other predators, and frivolous spending. The lawyer advised John and Jane that by structuring their estate in a Revocable Living Trust with Lifetime Asset Protection for their children, that they can be assured that their estate settlement will be simple, easy, and protected for their children, that being their ultimate concern.

At the conclusion of this meeting, the lawyer quoted a $5,000 fee for the legal work. John and Jane felt that was a little high, but not out of the realm of what they were expecting and given the experience of the attorney they were speaking with, they felt it was right for them. Therefore, John and Jane signed the legal representation agreement, paid the fee, and the attorney started working on their legal matter.

A few weeks later, John and Jane received a call from their financial advisor who asked them if they took care of their wills and estate planning. John and Jane said that they had done so and hired an attorney to establish their Wills, Powers of Attorney, and Revocable Living Trust. John and Jane’s financial advisor became incensed and said, “why did you do that! You have a simple situation. You do not need a revocable living trust. Trusts are only appropriate if you have millions of dollars. It is just not appropriate in your situation. I want you to go back to that lawyer, ask for your money back, and then we will discuss the best strategy for you. I will then refer you to an attorney who will draft the necessary documents to put our plan in place.”


Question: Did the Financial Advisor Cross The Line?


First, ignoring the issues involved with professional courtesy, the answer is an astounding yes! Furthermore, the financial advisor has broken the law, and depending upon how a prosecutor decides to interpret the actions of the financial advisor, it may even be a Class E Felony!

Under Tennessee law, the unauthorized practice of law is defined as “no person shall engage in the practice of law or do law business …  unless the person has been duly licensed and while the person’s licenses is in full force and effect … any person who violates the prohibition in subsection (a) commits a Class A misdemeanor.” In addition, the term “law business” is defined under law as “the advising or counseling for valuable consideration of any person as to any secular law, the drawing or the procuring of or assisting in the drawing for valuable consideration of any paper, document or instrument affecting or relating to secular rights, the doing of any act for valuable consideration in a representative capacity, obtaining or tending to secure for any person any property or property rights whatsoever, or the  soliciting of clients directly or indirectly to provide such services.”

However, it could also be considered a felony in some cases! Tennessee law also states that “it is unlawful for any person, either directly or indirectly, falsely to advertise the person as, or hold the person out as, a lawyer … a violation of this section is a Class E felony.”

Many state bar opinions have stated in the past that it is not what you understand the relationship to be, but what the client understands the relationship to be. If the client understands from their financial advisor that the financial advisor is providing legal advice, the advisor could be violating this criminal statute.

In the example above, the financial advisor said, you do not need a revocable living trust.” The financial advisor also went on to say that “it is not appropriate in your situation.” Under Tennessee law this is the unauthorized practice of law and could be subject to prosecution.

However, it just doesn’t end there.

There are several other consequences that can occur.

In addition to the penalties under Tennessee law, the financial advisor could be subject to action by the Tennessee Bar Association for the unauthorized practice of law, could be fined by the Attorney General, and could even be subject to issues with their own regulatory agencies including FINRA (Financial Industry Regulatory Authority) and the SEC (Securities and Exchange Commission).

However, the consequences could also be with the bad advice that was given to the client, the same advice that the financial advisor was not qualified nor licensed to provide.

Let’s say John and Jane took their financial advisor’s advice and ended up going to another attorney who did not draft a trust but just drafted a last will and testament and powers of attorney. Well, this was advice that John and Jane relied upon from their financial advisor. However, what if, years later, John and Jane’s children end up in a probate proceeding, in two states, that last a year and a half and costs the family $75,000? Is the financial advisor liable? The financial advisor very well could be held liable for providing the improper legal advice that the family relied upon.

In addition, the financial advisor could also be subject to legal action by the attorney. Remember, when John and Jane were told by their financial advisor to ask for their money and go to another attorney? Don’t forget that John and Jane already had a signed contract with the attorney. This attorney may consider the financial advisor to be engaging in an effort to influence the clients to break their contract (referred to as tortious interference with contract), and the financial advisor could find himself at the receiving end of a lawsuit by the attorney.

Unfortunately, I see issues with this every single day in my law practice when families engage in inappropriate estate planning, or sometimes no estate planning at all, under the advice of their financial advisor. If you want to engage in estate planning, or have a legal question, it is best to seek the advice of an attorney.

If you feel it is time to complete, or update, your existing estate planning make sure you speak with a qualified, competent, knowledgeable, and experienced estate planning attorney. When seeking out an attorney, your legal questions are most appropriately answered by your attorney.

As the Florida Bar Association once said, “the amateur at law is just as dangerous as the amateur surgeon.”

If you have questions about estate planning, please give us a call at (615) 472-2482 to schedule an initial estate planning and legacy planning session with your Nashville, Tennessee Estate Planning Attorney.

Daniel A. Perry
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Focused on helping seniors, individuals with disabilities and small business owners make informed decisions.
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