When financial professionals help people deal with complex rules and regulations, they are usually drawing on an in-depth knowledge of finance many people don’t have. But sometimes that desire to help means they could cross the line into giving legal advice. And that’s something they shouldn’t do unless they are licensed attorneys.
It’s important to remember that crossing this very thin line can land you in legal trouble for unauthorized law practice. Individual states have various definitions of what that means, so you must familiarize yourself with the local statutes and case law where you practice.
It may sound easy enough, but the term “practice of law” is often ambiguously defined in some states while others attempt to give a thorough explanation. (The American Bar Association compiled this list of definitions by state, which clearly demonstrates the inconsistencies.)
Generally speaking, though, the practice of law includes the following activities:
1) Preparing legal documents, including deeds, mortgages, leases, trust instruments, wills, etc.;
2) Interpreting or expressing legal advice and opinions;
3) Preparing or trying cases in front of a court or judge;
4) Rendering a service that requires the use of legal knowledge or skill; or
5) Using the titles of “lawyer,” “attorney,” “Esq.,” etc.
Given the multifaceted work financial advisors do with clients every day, it could be easy to unintentionally (or knowingly) cross into areas outside the bounds of their profession.
For example, an advisor who is retained to assist with financial planning during a divorce may have to contend with areas such as insurance policies, retirement planning, taxes and other things that might arise. Despite their responsibility to give clients options, however, advisors must be careful not to deviate into legal advice and opinion, even if they are familiar with the topics. Only a licensed attorney can prepare legal documents and offer specific advice on the application of legal principles to the facts at hand or opinions on the various alternatives.
CPAs have to be even more careful, since they are afforded a special exception when it comes to their practice. Treasury Circular 230 gives CPAs the authority to represent clients before the IRS, allowing them to analyze and interpret how tax laws apply to clients and consult with their clients about their interpretations of the law.
CPAs need to be wary because their authority to advise on legal matters extends only as far as tax law. It is not uncommon for tax-related matters to become entangled with other areas, such as estate planning or business valuation, which would require the CPA to consult with an attorney before moving forward and advising a client.
The actual enforcement of statutes against unauthorized law practice varies by state, but practitioners could face both civil and criminal charges. The consequences range from cease-and-desist orders to stiff financial penalties or restitution to people who were charged for services. Practitioners could also face jail time, depending on whether the court finds that the unauthorized practice was intentional. (It also depends on the potential harm arising from continued practice.)
To avoid crossing the line into legal territory, financial advisors must pay close attention to how they interact with their clients and ensure they stay within the bounds of their authority. It may be permissible for advisors to discuss general legal principles with clients, but they must be careful not to apply the principles to specific facts of a case.
When they think they might drift outside that realm, they would benefit from an attorney to either use themselves or refer clients to.
Discussing law will likely be necessary for you as a financial professional -- just make sure you do not take it a step too far.
Joseph E. Cordell is the principal partner of Cordell & Cordell, a domestic litigation firm focused on representing men in divorce.