Standard VI(C): Referral Fees
Disclose to your employer, clients and prospective clients, as appropriate, any compensation, consideration or benefit you receive from or pay to others for recommending products or services. Disclose it before the client enters a formal agreement, including its nature and estimated value.
Before this: Standard VI(A): Avoid or Disclose Conflicts
On the exam
- Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
- Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
- Identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards
Demonstrate VI(C) and identify compliant conduct. Expect undisclosed referral arrangements, reciprocal referrals and internal referral pay. Timing matters: disclosure must come before the client signs.
How deeply to learn each part
- Know the idea
- Understand it in general. It frames other topics, but you will not calculate with it.
- Use it
- Understand it well enough to solve a question with it. Recognize when it applies.
- Memorize
- Learn it by heart. The exam will not give it to you.
You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.
You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.
What must you disclose?
Any compensation, consideration or benefit you receive from, or pay to, others for recommending a product or service. These referral fees can be cash, soft dollars or benefits in kind, and the Standard works in both directions: you must also disclose what you pay to someone who sends you clients.
Memorize
The purpose is to let your employer, clients and prospects judge two things: whether your recommendation is biased, and the full cost of the service.
When, and what exactly?
Make disclosure before engagement : before the client or prospect enters any formal agreement for services. A disclosure after the signature does not let them reconsider.
The disclosure must cover the nature and value of consideration . Say what kind it is (flat fee or percentage, one-time or continuing, tied to performance, or a noncash benefit such as research) and its estimated dollar value.
- To whom Memorize
- Employer
- Clients and prospects as appropriate
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- When Memorize
- Before any formal agreement never after signing
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- What to say Memorize
- Nature of the consideration flat fee or percentage, one-time or continuing, performance-based, noncash
- Estimated dollar value
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Does it apply inside the firm?
Yes. Inter-departmental referrals are covered. Pay within a bank for sending clients to its asset management arm is a referral fee like any other, and the Standard does not distinguish it from payments by an outside party. Clients should be told, with the nature and value of the benefit, preferably in writing at the time of the referral.
Where do the lines fall?
| Situation | Verdict |
|---|---|
| An adviser sends clients to an accountant who in return refers clients back; nobody is told | Violation |
| A planner discloses in writing, before engagement, that she receives 10% of the first-year fee from the estate lawyer she recommends | Consistent |
| A bank’s private bankers get a bonus for each client referred to the bank’s asset management arm, undisclosed to clients | Violation |
| A manager mentions a referral fee only after the client has signed | Violation (too late) |
Try this 0 of 3
- Get the client swap right first time
- Spot the only arrangement that is in line
- Catch the disclosure that came too late
Case 1 of 4 The client swap
Marta Quiroga, CFA, is an investment adviser at Harbor Lane Advisory. For three years she has sent clients who need tax work to the accountant Felix Brandt, and Felix has sent his clients who need investment advice to her. Last year Felix sent her 9 new clients. No money changes hands. Neither Marta nor Felix tells clients about the arrangement, and Marta describes Felix to clients as "the best tax accountant in town".
Step 1 of 6 What does Marta get?
What does Marta receive for recommending Felix?
Read the case, then answer each step. 4 cases.
Compliance practices
Encourage the employer to adopt a referral policy. The firm may ban referral fees outright. If it allows them, the policy should say how to request approval, how clients are notified of approved programs, and that staff update the employer at least quarterly on the amount and nature of what they receive.
Exam tip Look for three things in the question: was there any benefit (cash or not), was it disclosed, and was that before the client signed?
Go deeper Referral fees as a specific conflict (link to VI(A))
A referral fee is a conflict of interest with a price tag: the person recommending has a financial reason to send you one way. Standard VI(A) asks you to avoid or disclose conflicts in general. VI(C) adds precise rules for this particular one: what to disclose, to whom, and when.
Memorize this
MemorizeStandard VI(C): what to know cold
| Point | The rule |
|---|---|
| What | Any compensation, consideration or benefit: cash, soft dollars or in kind |
| Direction | Received or paid |
| Tell | Employer, clients and prospects, as appropriate |
| When | Before any formal agreement for services |
| Content | The nature (flat or percentage, one-time or continuing, performance-based, noncash) and the estimated dollar value |
| Inside the firm | Inter-departmental referral pay counts too |
| Employer updates | At least quarterly on the amount and nature received |
Memory hook Any benefit, either way, before the signature: what it is and what it is worth.
Know it cold Referral benefit not disclosed, or disclosed after the client signs = violation. Non-cash and reciprocal referrals are not exempt.
- To whom Memorize
- Employer
- Clients and prospects as appropriate
-
- When Memorize
- Before any formal agreement never after signing
-
- What to say Memorize
- Nature of the consideration flat fee or percentage, one-time or continuing, performance-based, noncash
- Estimated dollar value
-
How it is asked
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Reciprocal referrals, no cash
An adviser and a broker refer clients to each other. No money changes hands and nobody tells clients. Violation?
Yes, VI(C). A benefit does not have to be cash. Trap: "no money was paid".
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Timing of disclosure
When should a planner disclose the fee she gets for referring clients to a lawyer?
Before the client enters a formal agreement. Traps: after a year, or only if asked.
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What does not need disclosing
Which is least likely to need disclosure under VI(C)?
A general recommendation with no benefit to the recommender. Cash and reciprocal arrangements do need it.
Exam traps
- Thinking non-cash or reciprocal referrals are exempt. Soft dollars and in-kind benefits count.
- Thinking disclosure after engagement is enough. It must come before the client signs.
- Forgetting internal referral pay between departments of the same firm.
- Forgetting the Standard works both ways: paying for referrals must be disclosed as well.
Checkpoint
3 exam-style questions. About 90 seconds each.
1An investment adviser and an insurance broker refer clients to each other. No money changes hands, and neither tells clients. Did the adviser violate the Standards?
2A planner receives a fee from a lawyer for each client she refers. The disclosure to clients is most appropriately made:
3Which is least likely required to be disclosed under Standard VI(C)?
Key takeaways
- Disclose any benefit received or paid for referrals, cash or not, in either direction.
- Disclose before the client enters an agreement, with the nature and estimated value.
- Inter-departmental referral pay counts too.
All Ethical and Professional Standards formulas, every lesson
Practice exam-style questions on Guidance for Standard VI: Conflicts of Interest
Questions about this lesson?
Where this comes back
- Standard VII(A): Conduct as Participants in CFA Institute Programs Guidance for Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate
Questions candidates ask
What does Standard VI(C) Referral Fees require?
Disclose to your employer, clients and prospective clients, as appropriate, any compensation, consideration or benefit you receive from or pay to others for recommending products or services, so they can judge any partiality and the full cost of the service.
Do reciprocal referrals need to be disclosed?
Yes. Consideration includes cash, soft dollars and benefits in kind. Two professionals who send clients to each other have given each other something of value, and clients need to know before relying on the recommendation.
When must referral fees be disclosed?
Before the client or prospect enters a formal agreement for services. The disclosure should state the nature of the benefit and its estimated dollar value. Late disclosure, after signing, does not meet the Standard.
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