Financial Advisor ReferralWe all know the importance of networking to land a career in finance. But what about afterwards? Networking shouldn’t stop once you get your job. Getting involved in a professional organization is important. Your organization often has valuable resources like job lines, career planning and continuing education.

Many of today’s financial professionals go onto receive further designations (CFA, CFP, CPA, etc.) each overseen by an organization.

These resources are valuable, but how about networking outside of your organization? It is important to network with professionals outside of your specific field. This can be especially important for financial planners whose clients require a multitude of services throughout their lives. In addition to financial planning, these typically include tax, legal and financial and insurance needs.

Consequently, an increasing number of financial planners are developing relationships with associated professionals such as accountants, attorneys, insurance or real estate agents.

The specific services of all these professionals overlap at some point while overseeing a client’s comprehensive financial plan. This includes estate planning needs or possibly a divorce. The client might need life insurance or insurance related products. There is sure to be real estate needs and the tax-related issues that go along with it. And more complicated tax issues, such as for a small business are often beyond the scope of a financial planner.

A great place to meet professionals in different fields is by pursuing an advanced degree, like an MBA. MBA programs are full of professionals that go on to be involved in many different aspects of business.

Some candidates pursue finance while others go into real estate, banking or insurance. An increasing number of aspiring accountants pursue the Masters in Accountancy degree before going onto get their CPAs. Once you’ve met these other professionals, what’s the best way to create a mutually beneficial relationship? The answer may be entering into referral agreements.

What are Referral Agreements?

A referral agreement is a business development arrangement between two professionals where each refers the other prospects in exchange for some type of payment or referral fee.

Many financial advisors are seeking qualified clients (clients with a minimum amount of assets in their current portfolio) and find it more time effective to outsource at least a portion of this task.  A referral arrangement can be very lucrative for finance professionals, especially advisors.

A CEG Worldwide survey showed that an advisor’s five best new clients in the previous year came from referrals from other professionals.1 This speaks to the importance of ongoing, professional networking with professionals in different fields like insurance, law and accounting.

Many financial advisors are seeking qualified clients (clients with a minimum amount of assets in their current portfolio) and find it more time effective to outsource at least a portion of this task.  A referral arrangement can be very lucrative for finance professionals, especially advisors.

What are Referral Fees?

Financial Advisor Referral FeesReferral fees (also called finder’s fees or referral income) are compensation charged by one professional to another for leads on prospects or new clients.

There are different referral fee structures-they can be a one-time flat-fee or can be a percentage of the advisory fees ultimately received from the client.

A referral fee is also allowable based off an ongoing advisory fee, provided this type of fee structure is disclosed to the client with a written agreement. This type of arrangement may provide more of an incentive to initiate the referrals and is allowed as long as there is written disclosure. This type of referral relationship may require licensing by the solicitor, depending on the state’s regulations.2

Types of Referral Alliances

There are several different types of professional referral partnerships (or ‘alliances’) that make sense. According to John Bowen, founder of CEG Worldwide, more than half of people with investable assets over $1 million found their financial advisors by their accountant, attorney or other professional.3

Advisor-CPA Alliances

An agreement between financial advisors and accountants is one of the most common referral agreements. Accountants, CPAs especially, have substantial influence with the affluent investing public. This type of alliance might involve referral services leading to joint business development and revenue sharing. Some accountants and advisors announce the ‘alliance’ or partnership with existing clients in a marketing campaign or maybe throw a private event for clients.

Tom Giachetti is a security attorney for the law firm, Stark & Stark in Lawrenceville, New Jersey. In an interview with Financial Advisor Magazine he was in favor of CPAs referring clients to advisors and commented “CPAs should be leveraging client relationships to get compensation they wouldn’t otherwise receive.” He reports seeing the typical ongoing fee in these arrangements is 25 to 35 basis points.4 Referring a $500,000 client with a 30 basis point (3/10 of one percent) referral fee generates a $1500 referral fee.

He reports seeing the typical ongoing fee in these arrangements is 25 to 35 basis points.4 Referring a $500,000 client with a 30 basis point (3/10 of one percent) referral fee generates a $1500 referral fee.

But the disciplines of financial planning and tax issues, while seemingly similar, have marked differences. The personalities of the two professionals may also be quite different. Many financial advisors are natural ‘networkers’-not always the same traits shared by accounting professionals.

To alleviate the disconnect, some advisors have had success building a CPA referral relationships by having the accountants actually sit in on a planning session. This way, both sides can fully understand what each brings to the table.

Many advisors and accountants typically find it simpler to refer their clients to each other instead of expanding their current business by actually offering both services. While there are instances where financial advisors also become accountants or CPAs, just 1% of CPAs get into financial advisory services, according to Financial Advisor Magazine.5 CPAs typically pursue their PFS (Personal Financial Specialist) designation which is the AICPA’s version of the CFP designation.

Other Advisor Alliances

Advisors are also entering into referral agreements with insurance professionals, typically life insurance or property and casualty agents. Estate planning or asset protection attorneys may provide complementary services to financial advisors.

Real estate transactions are another field where referrals are popular. A real estate survey showed that 1 in 3 agents would pay a 35% referral fee.6 Fintech has even gotten into the real estate game with online referral exchanges.7

Referral Fee Rules

A financial advisor is allowed to pay referral fees to third parties for soliciting clients but the Securities and Exchange Commission (SEC) has rules (specifically Rule 206(4) of the Investment Advisers Act of 1940) governing the practice.

There must be a written agreement between the financial advisor and the third party solicitor. The agreement must cover the nature of the referral agreement, the scope of the solicitor’s activities and the fee structure.8 This information needs to also be disclosed to clients or prospects.

Often, designating bodies (such as the CFA Institutes and CFP Best Practices) place even more stringent rules to be in compliance with their Code of Ethics. For example, under the CFA Institutes Code of Ethics, Standard VI-C, a referral ‘fee’ extends to any beneficial consideration (not just a monetary payment) between two parties.9 This can include soft dollar arrangements, access to software programs, proprietary research, office space, etc.

Other laws and regulatory bodies govern different referral agreements. In real estate, the Real Estate Settlement Procedures Act (RESPA) makes it legal to receive a referral fee if the solicitor is licensed. Informal referral arrangements with an unlicensed solicitor may be allowed under REPSA, assuming there’s no referral fee paid.10

Since referral fee rules can be a gray area and this article does not constitute legal advice it’s always recommended that you run any prospective partnership by a compliance professional or attorney at your firm.

Agreements Can Be Difficult at First

It’s not always easy to make referral agreements work. If you are still having difficulty try targeting a specific niche and becoming an “expert” in the specific needs and values of those clients in that area.11 Examples of niche clients may include teachers, veterans or small business owners. Your value could come from providing specific services to each of these groups such as selling or transferring business ownership or how to best handle receipt of an upfront settlement or understanding veteran’s financial benefits.

Some advisory firms such as Commonwealth Financial and Ameriprise have established Professional Alliance Programs designed to help grow your business and better serve your customers.12,13 There are often different tiers of participation from informal arrangements between an advisor and a non-licensed professional to more formal agreements.

Remember, once you become a finance professional, networking shouldn’t stop. Engaging in referral agreements with other professionals can be an effective way to grow your business and create an ancillary income stream for yourself. It won’t happen overnight but persistence should pay off.