In the midst of COVID-19, financial advisors have been forced to grapple with a changing world when it comes to fiduciary standards, an increasingly remote client base and the fee pressure of robo-advisors and custodians. However, one trend that’s flown under the radar is the integration of estate planning and wealth management practices. While some advisors have recognized these trends, few have considered the question of whether they create a need to change external marketing, service offerings or strategic plans.
Let’s review the two models that have resulted from these estate-planning trends—the strategist model and the captive attorney model—while giving guidance to financial advisors who may wish to consider formalizing a team approach to estate planning.
The Strategist Model
A number of broker-dealers, wirehouses and life insurance companies have built teams of dedicated professionals who provide tax and estate-planning advice. While the titles given to members of these teams vary, the most common title is “strategist.” I’ll use the word “strategist” to refer to members of such teams, along with individuals who duplicate the service offerings of such teams independently.
Strategists recognize that a traditional function of attorneys involves the education of clients on common estate-planning strategies, as well as the client’s own estate plan. However, to relieve some of the fee pressure on clients who may otherwise be billed for this type of education, strategists use their practical experience and knowledge in estate planning to educate clients in advance of meeting with an estate-planning attorney.
The biggest drawback to this model is that strategists must avoid the unauthorized practice of law. A strategist need not be a licensed attorney so long as legal advice isn’t given, but there are a number of compliance measures that come into play. These restrictions may limit the tailoring of advice for clients. The client still needs to engage an estate-planning attorney to implement estate-planning strategies, which may reduce the convenience and team approach the client desires. Even with the right limitations and disclaimers, clients may still end up with a mistaken impression that a strategist is providing legal or tax advice, and this can increase the financial, regulatory and reputation risk of the advisor and the institution employing the strategist.
Currently, strategist teams function primarily within financial institutions, and these services are typically only available to wirehouse advisors and not to independent RIA firms. Few have sought to privatize strategist-type service offerings for independent RIA firms, but this could be the next wave of innovation in estate planning. A number of independent advisors already fill the functions of strategist by, for example, reviewing and summarizing clients’ estate-planning documents.
However, independent advisors are beginning to recognize their own shortcomings, as well as the shortcomings of outside referrals, when compared to client demands for the services of a team under the same roof. In response, while the model isn’t new, a number of independent RIA firms have created formal affiliations with estate-planning
attorneys.
The Captive Attorney Model
While the degree of affiliations with estate planners vary, for purposes of this article the term “captive attorney” will refer to an estate-planning attorney who closely affiliates with a financial advisor. Traditionally, estate-planning attorneys have retained separate and independent practices from financial advisors. The captive attorney model seeks to remove this silo effect, with the expectation of exclusivity and availability. The captive attorney is available to meet with clients on the advisor’s schedule, with the hope that clients will engage the attorney out of convenience. The advisor gains the benefit of pitching the availability of the attorney to clients, but this benefit may be driven more by optics than function.
The captive attorney model should reduce reliance on referrals, but the scale of the practices of both the advisor and captive attorney may frustrate this goal. Without a steady flow of existing clients and prospects from the advisor to the captive attorney, the economic stability of the relationship may quickly erode if the attorney doesn’t have a sufficient book of existing clients. The advisor may hope for referrals of the captive attorney’s existing clients, and this reciprocal referral base may not meet projections. In addition, the client’s choice controls, meaning that the attorney ethics rules require that a client be given their choice of counsel. Given that there’s no obligation or guarantee that the advisor’s clients will even engage the captive attorney, this arrangement could have a limited shelf life depending on the scale of both affiliated practices.
The attorney ethics rules can also reduce the convenience, and utility, of this arrangement. As noted above, clients must independently be allowed to choose their own counsel, and both attorney and advisor could suffer adverse consequences if a client feels forced to use the captive attorney. Even when a client willingly engages the captive attorney, the attorney has enhanced duties to disclose conflicts of interest, protect client confidentiality with respect to the advisor and make it clear whether and when an attorney-client relationship is formed. A breach of these duties can lead to attorney discipline, and the effects of this discipline can spill over to the advisor and mutual clients.
The advisor must take care not to practice law, by speaking for the captive attorney. Likewise, the captive attorney must be careful to avoid giving securities or insurance advice without the proper licenses. For this reason, it’s often recommended that a captive attorney (as well as a strategist) obtain the proper securities and insurance licenses, such as Series 65. For attorneys with an established book of business who obtain a securities license, an added benefit to this arrangement is the ability to annuitize their book of business by sharing in fees for the investment and management of their own clients’ assets.
Overall, the captive attorney arrangement seems like a winning proposition for the advisor, attorney and mutual clients. However, the number of mutual clients required to make this arrangement work long term is often underestimated. Limitations on the captive attorney’s own experience, skills and state licensure may also require that clients be referred to outside estate-planning counsel. In addition, an attorney’s book of business is often reliant on referrals from other financial advisors, and these referrals may be cut off due to the affiliation with one financial advisor or RIA firm. Similarly, while referrals from estate-planning attorneys to advisors are often not as frequent, the advisor also runs the risk of cutting off these outside referrals. The loss of these outside relationships can hinder the ability of both the attorney and advisor to recover if the captive attorney relationship is terminated.
This risk of early termination of the relationship can be even more damaging to mutual clients. Noncompetes often aren’t available due to the attorney ethics rules cited above regarding clients’ choice, so a severing of the affiliation can cause a loss of mutual clients by the attorney and/or advisor. A replacement of the captive attorney isn’t easy, and this risk is exacerbated when considering the saturation of the advisor’s existing client base with estate plans prepared by the prior attorney.
Choosing a Model
Wirehouse advisors are often limited in their choice of strategist. However, it can be helpful to cultivate these relationships within their financial institutions, and their compensation structure may even reward them for using an in-house strategist team. At the very least, the leveraging of these available resources can increase the rate at which advisors close new business while also increasing retention of existing clients.
On the other hand, independent RIA firms that lack the resources of a strategist must consider whether these services can be replicated. Advisors themselves could do so, or a junior advisor could use estate-planning education and review as a strategy to build a book of business. Before proceeding, however, the RIA should be aware of the risks of the unauthorized practice of law and implement appropriate processes, procedures and deliverables to avoid these risks.
Advisors who would prefer to farm out this work can consider using attorneys in their networks as strategists as a way to explore a future affiliation with the attorney. The challenge is finding an attorney who has the capacity to perform these services (such as estate plan summaries) for free, according to the advisor’s meeting schedule, as a cost to prospecting for their own clients. This opportunity to serve as a strategist or captive attorney may attract an estate-planning attorney who lacks experience, a book of business and/or soft skills with clients, so the advisor should be aware that this free work comes at a cost.
Ultimately, if an independent RIA wishes to explore the captive attorney relationship, the objectives and expectations of this role should be thoroughly considered in advance. While often understated, sometimes the desired benefit is simply pitching the presence of the attorney. This can help get business in the door, even if clients don’t use the captive attorney, but this arrangement can be one-sided to the detriment of the captive attorney. Optics should be balanced with form and function, and these considerations should form the basis of the economic relationship.
There are a number of economic arrangements for a captive attorney, ranging from a simple office-sharing arrangement to a full-time, salaried position. Co-ownership, however, isn’t an option for the advisor, as state laws regulating the practice of law prohibit the sharing of fees with a non-attorney. Likewise, without the appropriate securities and insurance licenses, the captive attorney can’t take an ownership stake in an RIA. Whether or not co-ownership is considered, the nature of this relationship can expose both the attorney and advisor to the errors and omissions of the other. Such risks may not be covered by their respective professional liability insurance policies, so the economic arrangement should hedge against such exposure. Finally, the loss of referrals from outside parties should be considered in the economic arrangement as well.
For those independent RIA firms that desire both the optics of a captive attorney and the flexibility to maintain relationships with outside estate-planning attorneys, the true value of an affiliated attorney may be an arrangement in which the attorney acts as a strategist. Such an arrangement may require paying an attorney on a project-by-project basis, for example, to prepare estate plan summaries and participate in client meetings. This payment would have to be in a non-legal capacity, especially in states that prohibit availability retainers for attorneys, but this arrangement may be a strategy to use until such time (if any) that it makes economic sense to bring on a full-time captive attorney.
Expanded Options
While the strategist model and the captive attorney model seem separate and distinct, there are elements common to each that can add value for any advisor, client or prospect. For wirehouse advisors, the use of internal strategists may simply be a question of trust, expertise and willingness to change the planning process. On the other hand, while independent RIA firms have more room for creativity in designing an estate-planning knowledge and service center, the options and risks can be difficult to balance. The good news is that the shifting desires of clients are simple to categorize—more services, provided by a team, under one roof. This desire will increase in a post-COVID-19 world but with the benefit of expanded options for the creation of a team that isn’t constrained by physical location.