Monday, July 13, 2009

Referrals from Investment Advisers

If an insurance agent or CPA refers clients to an investment adviser for compensation, chances are that individual or firm is considered to be acting as a solicitor for the adviser. Therefore, the adviser has to be registered and the professional acting as a solicitor can not be in-eligible for registration due to disciplinary or legal problems in the past 10 years. Most states would call the solicitor an investment adviser representative and require him to register as an IAR for the RIA, ASAP. Even if the solicitor didn't have to register, there would have to be a written agreement between the adviser and the solicitor, and the adviser would need the client's acknowledgment that they received both the RIA's disclosure brochure (ADV 2) and the solicitor's disclosure brochure.
So there's that. But, what if you saw a question like this one?

Several of your advisory clients are retired investors in need of estate planning services. Your firm does not specialize in these services and, therefore, you have an arrangement with a local tax attorney by which you receive a flat $275 referral fee for every advisory client who becomes an estate planning client of the attorney's pursuant to your referral. Therefore
A. you must disclose the referral arrangement to all clients who use the attorney's services
B. you must disclose the referral arrangement to all clients referred to the attorney
C. you need not disclose the referral arrangement
D. you have violated the Uniform Securities Act's prohibition against advisory referrals

EXPLANATION: everything the adviser does must be totally objective and, when that's not possible, disclosure of the conflict is required. If the adviser refers clients to the attorney, clients might assume he's just looking out for their interests. But, by definition, he's looking out for his own financial interests, too--so he's no longer being objective. And, maybe there are better attorneys out there at better rates. So, disclosure is definitely required.

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