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Client Referrals

Compliance Today
Blog #5
September 13, 2017

The Do’s and Don’ts of Client Referrals

We all know that the best compliment a client can give is a referral to your business. And as our parents have always taught us, when someone gives you a compliment you say thank you.  When it comes to clients referring potential new clients to your practice, saying thank you is literally all you are allowed to do.  We receive a lot of questions surrounding what is appropriate and allowed in regards to client referrals, so today’s compliance blog is dedicated to answering these questions for you.

The acquisition cost for a new client generated from a client referral is about as low as you are likely to find in the investment advisory business.   Some prospective clients may come to you from educational classes, while others may come to you from your advertising and marketing efforts.  Not only do these approaches cost money, but you still need to win the prospective client’s trust and respect before they will enter into an investment advisory relationship with you.  Referrals, on the other hand, cost no money to generate, and the prospective client is already inclined to view you positively.

It is a natural reaction, therefore, to want to engage in actions that maximize the number of referrals you receive from existing clients.  If my client is referring business to me now, imagine how much business they will refer if I compensate them somehow for referrals.   And this is where we receive the majority of our advisor questions.

Under no circumstances can you directly or indirectly compensate clients for referring business to you, or otherwise provide them with something of value in exchange for a referral.  

Compensating clients, directly or indirectly, for referrals can inadvertently turn them into solicitors and put them in violation of federal securities laws.

Simply saying “Thank You” for a referral is about as far as it goes. A simple phone call or thank you card is an acceptable way to say thank you for the compliment and the referral.

Anything you can give the client that has value would not be permissible.   While cash is an obvious problem, this would also apply to things like gift cards, or gift baskets, or waived or reduced fees.   Just remember, if you want to give clients something that has value, and the criteria to receive it is to refer a potential client, that this would be a major compliance violation and would not be permissible.

While any type of compensation for a referral is a problem, programs which formalize this practice are a huge problem.  For example, the advisor may draft a “Client Referral Program” where they codify in writing the elements of the program and how clients will be compensated (for example, any client who refers a friend will receive a $50 Visa gift card.)   Regulators routinely look for such formalized programs to compensate clients for referrals.

Under the Investment Advisers Act, it is permissible to pay compensation to a person for referring a prospective client if certain conditions are met.   The person receiving the compensation must enter into a Solicitor Agreement with Horter Investment Management. There are restrictions as to who can be a solicitor, which vary by state. Often times a solicitor must have passed the Series 65 or be exempt from taking it, and/or are required to register in their respective state.   The solicitor is required to have the prospective referral sign a Solicitor Disclosure Letter, which discloses to the referral that the solicitor is receiving compensation in exchange for referring that person to the advisor.  Since we are fiduciaries, the referral has a right to know that the solicitor who is referring them may have other motives for referring them to the advisor.

Although you cannot reward clients for referring prospective new clients to you, there are instances where you can reward certain clients. For example:

  • For participating in a Firm Special (Roll over your IRA from another custodian and win 2 Tickets to a Red’s game)
  • Having over a certain amount of Assets
  • Attending a second meeting (for new clients)
  • For being a client for a certain amount of time

Here are some other ways you can reward your clients throughout the year!

  • Client Appreciation Events – This is a great way to get to know your clients on a more personal level and build a larger rapport with them in a casual setting. These events can be anything from a client cookout, a day trip to the local zoo, a group outing to a sporting event, golf outings, and wine/beer tastings.
  • Community Events – These can be a great way to give back to the community while getting to build deeper relationships with your clients! What a great way to get current clients and prospective clients in the same place.  These events could be a simple as a shred day, an ice cream social, or a pancake social.
  • Holiday Gifts – You may give your client’s small gifts for holidays or birthdays. They can be a simple ‘thank you for being my client gift’. We go by the rule of thumb that anything under the $100 limit would be acceptable. Please be sure to check with your state guidelines if your client is an insurance client, as well.  Please note you cannot say that you are giving holiday gifts, but only to clients who referred a client during the year.   This would be a clear compliance violation
  • Have a Raffle – Challenge your clients to bring in donations during the Holidays or for a community cause. For every item they donate, give them a raffle ticket!

I hope this blog has brought you clarity around the do’s and don’ts of client referrals.  If you wish to learn more about solicitors or if you have a potential solicitor you would like to discuss, please do not hesitate to reach out to your compliance specialist for more details. Stay tuned for future blogs coming to you directly from The Horter Compliance Department.

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