What are the disclosure requirements for referral fees under CFA Standard VI(C), and when must disclosure occur?

Standard VI(C) - Referral Fees requires disclosure of all compensation received or paid for recommending services to clients and prospects. The purpose is to allow clients to evaluate whether a referral is motivated by genuine merit or by the fee arrangement, enabling them to assess potential bias.

What Must Be Disclosed:

• Any cash payment received for a referral
• Non-monetary benefits (free research, soft-dollar credits, conference invitations)
• Reciprocal referral arrangements (you refer me, I refer you)
• One-time and ongoing compensation structures
• The nature, amount, and recipient of all referral fees

Timing of Disclosure:

Disclosure must occur at the time of the referral, before the client acts on it. The client needs this information to make an informed decision. Retroactive disclosure is insufficient.

Worked Scenario:

Financial advisor Grant at Windermere Advisors refers clients to three external providers:

1. Lawton Tax Services: Grant receives $500 for each referred client who engages Lawton. This is a direct cash referral fee and must be disclosed to every client before the referral.\n\n2. **Evergreen Estate Planning:** No cash changes hands, but Evergreen refers its clients to Grant in return (reciprocal arrangement). Grant must still disclose: \"I have a reciprocal referral arrangement with Evergreen Estate Planning. They refer clients to me for investment management, and I refer clients to them for estate planning.\"\n\n3. **Ridgepoint Insurance:** Grant receives an annual conference trip valued at$3,200 as appreciation for referrals totaling 15+ clients per year. This non-monetary compensation must be disclosed.

Compliant Disclosure Example:

"Mrs. Takahashi, I'd like to recommend Lawton Tax Services for your tax planning needs. In the interest of full disclosure, I want you to know that I receive a $500 referral fee from Lawton for each client I refer to them. This compensation could create a potential conflict of interest. I believe Lawton provides excellent service, but you should consider this arrangement when evaluating my recommendation. You are free to choose any tax professional.\"\n\n**Non-Compliant Behaviors:**\n- Referring clients without mentioning the fee arrangement\n- Disclosing fees only if the client asks\n- Describing a$500 cash fee vaguely as "a nominal relationship benefit"

• Failing to disclose non-monetary benefits because no cash is exchanged
• Disclosing only after the client has engaged the referred provider

Key Exam Points:

• Both parties (referrer and receiver) must disclose
• Disclosure must be timely (before the referral is acted upon)
• All forms of compensation count, not just cash
• Written disclosure is recommended as best practice

Practice ethics scenarios in our CFA Ethics question bank.