A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and Exchange Commission (SEC) imposes several rules on this practice. It is the advisor's responsibility to remain aware of and in compliance with these rules.
How Referral Fees Work
For a financial advisor, one of the most challenging aspects of the job is finding qualified clients. To meet this challenge, some advisors offer referral fees to third parties for finding them clients. The advisor benefits by earning a fee or commission when a new client is sent his way, while the referrer receives a flat fee for sending the business.
Referral Fee Rules
According to the SEC, the practice of paying referral fees is legal provided the advisor and the third party maintains a written arrangement detailing the nature of their relationship, the scope of the solicitor's activities and the fee structure. In a situation where an advisor receives an ongoing fee for managing a client's money, it is permissible for him to remit a portion of that fee to the third party referrer as long as such an agreement appears in the written arrangement.
Though the SEC does not require the referrer to register as an investment advisor, many states impose this requirement. Therefore, it remains the advisor's responsibility to know the rules for the specific state in which he conducts business. For advisors in states with registration requirements for third parties, it is advisable to check credentials before entering into a referral relationship.
(For related reading, see "How to Get Referrals.")