VI(C): Referral Fees

A financial advisor takes a prospective client out to lunch, and aggressively suggests investing in Zed Mutual Funds. Superior expected returns, great management, capital protection, etc. It all sounds so great. What do you think might be a reason why Zed Mutual Funds is dominating the conversation?

__Standard VI(C): Referral Fees__ requires that "members and candidates must disclose to their employer, clients and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services." These disclosures allow clients or employers to evaluate any partiality shown in any recommendation of services, and the full cost of the services. Otherwise, this "free lunch" could be very expensive for the prospective client.

Maybe instead you provide free services to a third party for the recommendation of the client. No money exchanges hands. Do you think you still need to disclose this information to the prospective client?

Exactly.

Actually yes; this should still be disclosed.

In summary, [[summary]]

No, there's no way that this could ever be known. At best, it's a guess.

Absolutely. If an advisor is incentivized to sell one investment more than others, that can make a big difference as to what gets presented at a lunch.

No, that wouldn't make sense. The advisor would get more business by helping clients succeed.

Do you think that it's fair that the prospective client should know about this arrangement?

Incorrect. It is certainly appropriate to disclose this.

Certainly.

Perhaps the advisor paid a third party a fee to refer this client. Do you think that Standard VI(C) would indicate that the client should be told about this before signing the agreement?

That's right.

Actually yes; this should be disclosed as well.

Under Standard VI(C), you must tell the prospective client of any compensation given for the recommendation of any services provided by the member or candidate.

"Any compensation, consideration, or benefit" needs to be disclosed to the client under Standard VI(C). Consideration isn't just money. It includes all fees, whether paid in cash or in kind.

The advisor knows that Zed will have the best future returns

The advisor earns the biggest commissions from selling Zed Mutual Funds

The advisor is hoping to steer new clients away from the best investments that are reserved for others

Yes

No

Yes

No

Yes

No

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