IS IT A CONFLICT FOR ATTORNEYS TO PITCH INVESTMENTS? CALIFORNIA SEEKS END OF LAWYER-ADVISER ROLE

Even as the nation’s financial services sectors are working to break down legal barriers, California is trying to erect a big one: a law that would force attorneys out of the financial advice business.

A bill likely to pass the state Assembly would make it illegal for lawyers to sell financial products or services to anyone with whom they have ever had an attorney-client relationship. Lawyers violating the rule would be subject to discipline by the state bar, and injured parties could sue for civil damages. Elderly clients could recover additional awards.

The bill is intended to reduce “conflicts of interest” surrounding the sale of commission-based products such as annuities, says its sponsor, Assembly Member Kevin Murray (D-Los Angeles). At this time, no other state is known to be considering similar legislation, but California frequently is seen as a leader in policy issues.

If passed, the bill could devastate the livelihoods of lawyers who have been financial planners for decades. Indeed, opponents charge that the bill was introduced despite little evidence of abuse. What’s more, it comes when other professions such as certified public accountants are taking steps to make it easier for their members to sell financial products (InvestmentNews, Feb. 16).

Mr. Murray introduced the bill at the request of California Advocates for Nursing Home Reform in San Francisco. Prescott Cole, staff attorney with that group, acknowledges his organization was only able to find a couple of examples of abuse by attorneys selling financial services.

advisers opposed

In one instance, the state attorney general and the state bar association are suing attorney Herbert Rhodes of Santa Ana, Calif., and two insurance companies for, among other things, using unfair sales tactics in peddling living trusts and annuities mainly to elderly customers.

Mr. Rhodes, who is charged with aiding the others in the unauthorized practice of law, denies the charges. He says the issue of unauthorized practice of law is “as gray as you can get.” He cites legal advice routinely given out by real estate agents, accountants and self-help books as examples of areas where non-lawyers issue legal advice.

The Alliance for Mature Americans of Lake Forest, Calif., which sold some of the products last year, agreed to make $1 million in restitution payments to customers and pay $100,000 in civil penalties, without admitting or denying guilt.

“We think it’s an inherent conflict of interest” for attorneys to sell their clients financial products, Mr. Cole says. He cites as evidence of an increasing push a letter sent to California attorneys by a Florida attorney and insurance broker promising to double or triple their income if they were to sell annuities to Medicaid recipients who are in nursing homes.

The International Association for Financial Planning in Atlanta and the Securities Industry Association in New York oppose the bill, but the State Bar of California initially supported it. It later backed away for fear the bill would jeopardize negotiations with Gov. Pete Wilson over an unrelated bill to fund the bar association.

The group supports the proposal “in concept,” says Larry Doyle, chief legislative counsel for the state bar in Sacramento, but objects to the lifetime ban on the sale of financial products. The bar also wants to examine the issue of whether some people should be allowed to sign waivers to use attorneys who sell financial products “for purposes of convenience and. . . economy or because they have significant faith in their attorney.”

Mr. Murray says waivers would be insufficient to protect the elderly.

While it isn’t known how many attorneys sell such investment products as annuities, very few belong to financial planning associations. That gives IAFP, with only 60 California attorney members, less clout in fighting the bill. Just over 500 of the IAFP’s 17,000 members are attorneys.

If the bill were amended to focus only on current attorney-client relationships, not former relationships — which is being discussed by proponents of the bill — the SIA probably would drop its opposition, says James Bruner Jr. of the Sacramento office of Orrick Herrington & Sutcliffe LLP, who represents the SIA in California.

substantial losses

For attorneys currently acting as financial advisers, the legislation would be devastating. Harry Barth, who owns Harry M. Barth PC and H.M. Barth & Co. Financial Planners LLC of Santa Ana, has been a financial planner for 30 years and an attorney since 1992. He would lose “three-quarters of my income, at least,” he says, declining to reveal assets under management or revenues.

It would keep consumers from exercising their own choice of financial professionals, he adds. “My clients want to deal with someone who’s both a financial adviser and an attorney.”

The bill is expected to receive greater scrutiny in the state senate, and so far Gov. Wilson has not yet taken a stand on it. But if the bill becomes law, Mr. Barth threatens a court challenge.

Norah Morrison, who supervises close to $10 million in assets at her firm in Fountain Valley, Calif., estimates she would lose about $200,000, or 60% of her total annual income, if she had to give up her financial planning practice.

“A lot of my clients came to me because of a prior relationship, whe-ther it was 25 years ago when we did a divorce or a drunk driving (case) or a contract, or whether it was a year ago when I did estate planning for them,” she says. “They tell me the reason they want to come to me is because they already trust me.”