What does Standard VI(C) say about referral fees?

Question

AcadiFi · Accepted Answer

Standard VI(C) — Referral Fees — requires that CFA members and candidates disclose to their employer, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

Key points:

1. Applies both ways: disclose fees you receive for sending referrals AND fees you pay to receive referrals.

2. Disclose the nature and dollar value (or percentage). 'I receive referrals from Cleverdon CPA' is insufficient. 'Cleverdon CPA receives 20% of first-year management fees on referred clients, approximately $5,000 per referral' is acceptable.

3. Disclose before or at the time of the engagement. Post-facto disclosure doesn't cure the violation.

4. Employer disclosure is separate from client disclosure. Both must occur.

Example: Your firm, Sterling Pathway Advisors, has a referral agreement with Cleverdon CPA: Cleverdon sends high-net-worth tax clients to Sterling, and Sterling pays 20% of year-one asset management fees to Cleverdon. When Cleverdon refers Mr. Johansen to Sterling, compliance requires:

- Written disclosure to Mr. Johansen before he signs the advisory agreement, stating that Cleverdon receives 20% of first-year fees (approximately a specific dollar amount given his portfolio size).
- Mr. Johansen acknowledges the disclosure in writing.
- Sterling's internal records reflect the referral arrangement.
- Compliance maintains a log of all referral payments for audit.

Why this matters: clients need to know that a 'recommendation' from a CPA may be financially incentivized, not purely based on merit. Without disclosure, client trust in the recommendation is undermined. On the CFA exam, any scenario involving payments tied to client recommendations should trigger Standard VI(C) analysis, typically alongside VI(A).

What does Standard VI(C) say about referral fees?

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