Standard VI(C) – Referral Fees

Standard VI(C) – Referral Fees requires CFA members to report to employers and clients any sums received from or paid to recommendations of products or services.

Compliance

Appropriate disclosure means communicating before an investment professional enters into a contract with a client or a prospective client. The reporting of referral fees includes the type (i.e., flat fee, percentage of the business) and estimated value. This should be done in writing, with both parties signing a written agreement.

Disclosure of fees received from or paid to recommendations of products or services allows employers and clients to evaluate any potential bias that may arise from referral fees.

Violation

A firm should adopt a clear policy related to the acceptance and disclosure of referral fees to avoid violations. This may include a complete restriction of such fees.

Individual members must be clear on what constitutes a referral and that the exchange of dollars is not required to qualify as such. For example, if a company refers its tax-exempt accounts to a member’s firm in exchange for a regular investment recommendation and research report, the member has entered into a referral arrangement.  Therefore, this information must be disclosed to avoid violation of sums received from or paid to product or service recommendations.

Question

Zoe Mattieu makes it clear to all clients that she pays a flat fee of $500 for referrals to her firm.  She prefers to make this information known to clients and prospective clients via verbal announcement during their first face-to-face meeting. Beyond this, there is no other communication regarding a referral policy made by Mattieu. Her firm has not seen fit to change this policy, as it receives a high number of referrals each year. Which of the following statements is most likely correct?

A. Mattieu is in violation of Standard VI(C) – Referral Fees.

B. Mattieu has not violated any Standard.

C. Mattieu has violated Standard III(C) – Loyalty and prudence.

Solution

The correct answer is A.

Zoe Mattieu is in violation of Standard VI(C) – Referral Fees because, although she communicates her firm’s referral program to clients, she does so verbally instead of via written communication. Standard VI(C) – Referral Fees indicates that information related to referral fees is required to be written, and signed by both parties.