As a financial advisor, you know you need to engage in smart networking in order to succeed. The ability to make connections within the industry and work closely with centers of influence is vital to growth and sustainability for your financial planning firm.
Of course, the biggest value someone in your network can provide is to give you a client referral. And because referring clients to other practice and accepting referrals from other advisors is a big part of operating your business, regulators have weighed in on the importance of identifying solicitation and referral arrangements.
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It’s of utmost importance for you as the RIA owner to ensure these activities are transparent and remain in the best interest of the client. So how do you go about fulfilling your responsibilities with referrals on the compliance side?
Here’s what you need to know about solicitor referral arrangements, and items to consider from that compliance perspective.
Guidance in Regulatory Interpretations
In many cases, SEC regulations may closely mirror your state’s regulations as it pertains to solicitation arrangements. Still, it’s important to check with your state regulators prior to entering into these types of relationships to make sure there aren’t any quirky differences in the regulations.
Also, be aware that there may be a state-level requirement that the third-party solicitor must be registered as an investment advisor in order to receive payment from advisory fee revenue.
Updating Your ADV
Yes, as with nearly every other compliance change your firm undergoes, there will need to be a review of the ADV with solicitation arrangements. The intention is to ensure there’s consistency between the ADV and the way the solicitation arrangement is structured.
If the state requires that the solicitor be registered (Series 65 or other substitute designation), then the Solicitor usually does not have to be registered as an “employee” of the advisory firm.
The solicitor may remain separate from the firm, as long as their registration remains effective. In general, the same items that would disqualify an individual from investment advisor registration will disqualify an individual from being a solicitor.
If your state does not require registration, be sure to check for these items on your proposed solicitor.
Developing the Actual Agreement in Writing
Not only is having a written agreement on file a regulatory requirement, but it’s also a general good practice for your business. At minimum, the written agreement should contain:
- Solicitor’s name
- Investment advisor’s name
- Relationship between the solicitor and investment advisor (for transparency)
- Statement that the solicitor will be compensated for referrals
- Terms and conditions of that compensation: this is a description of the fees that will be paid to the solicitor, how often payment will occur, clauses for termination of the agreement, and so on
- Signatures or some form of acknowledgement by solicitor and investment advisor
The Need for a Client Notification
It’s also imperative that the client be notified when a solicitation arrangement exists between the adviser and solicitor. If a referral goes from prospect to client, then the client needs to be made aware of all the terms in your written agreement.
Usually, you can generate a form and have the client sign and date the document. This is sufficient to indicate that they have been made aware of the solicitation arrangement.
Networking and establishing relationships will always play a big role in the success of individual financial planning firms. While there are compliance issues to be aware of, you can cover these bases and stay compliant as you work with others to bring more clients to your practice.
About the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing. You can connect with him on LinkedIn.