Ethics, compliance factors to consider in referral arrangements

Advisors can reap many benefits from referring their clients to other professionals, and vice versa, but there are important ethics and compliance standards to consider.   

Setting up referrals using an ethical and compliant framework allows advisors to cover their bases and develop their practices with peace of mind, said Rod Burylo, an industry veteran of 36 years — including time as a compliance officer — as well as an ethics educator. Burylo is currently an associate portfolio manager with Equate Asset Management Inc. in Calgary.  

Issues to consider include vetting other professionals, and regulations around compensation and disclosures. 

The ability and integrity to deliver on a value prop  

Any advisor with a designation typically must subscribe to a code of ethics, which lays out the professional and ethical standards they must meet.   

For example, FP Canada’s code of ethics, in its standards of professional responsibility for certified financial planner (CFP) professionals, states they must act in the client’s best interest and with integrity, competence and diligence, among other things. The standards also require that financial planning professionals confirm the qualifications of third-party referrals.  

Just as a prospective client may evaluate an advisor’s value proposition and trustworthiness, advisors must similarly vet other professionals they want to refer a client to or receive a client referral from, Burylo said.  

“Part of the vetting is to first understand the specific value of the professional you’re bringing in, and then try to determine, do they have the ability and integrity to do that?” he said.   

On the ability side, advisors can look up whether the professional — such as an accountant — has professional designations, Burylo noted. They can also ask the professional if they can speak to one of their clients to confirm the clients are satisfied with the services.  

When it comes to verifying the professional’s integrity, advisors can check for client complaints made online or with a professional association. As well, they can ask to speak to a compliance supervisor about any potential complaints and how they were resolved, Burylo suggested.  

“I’m not looking for the rocket scientist necessarily, I’m just looking for people that can actually fulfil the needs of the client,” he said.   

Money matters  

Under National Instrument 31-103, advisors can receive or give compensation to other parties if disclosed to the client, and the fee is considered reasonable, among other criteria. FP Canada’s standards also require disclosure of referral fees. 

While advisors may be able to pay or receive referral fees, it depends on their business situation, dealership, code of ethics and chief compliance officer, Burylo said. Advisors should find out the specific rules and procedures that apply to them.   

“Compliance is really very specific on a rep-by-rep basis,” he said. “If you have a CFP designation and you work for [a certain] dealership, your rules or regulations, while they might be similar to everybody else’s, could theoretically be different.”  

Ultimately, advisors and their referral partners should be more interested in reciprocity — a partnership with one another — and client benefit rather than receiving compensation in any referral arrangement, Burylo said.  

If another professional asks for money rather than reciprocity, that’s probably not the best relationship, he said.   

Disclose the details  

An advisor in a referral arrangement should disclose to clients that they don’t work for the other professional they’re referring the client to, Burylo said. This can prevent the advisor from getting sued if the other professional drops the ball. 

He further recommended having an initial relationship disclosure document that mentions things such as client confidentiality, succession planning and business disruption.   

The document would spell out the circumstances in which an advisor may share with other professionals details about the client or the client’s account in the event that, for example, the advisor gets sick and someone else must handle the account. Guidance in FP Canada’s standards suggest getting the client’s written acknowledgement consenting to disclosure. 

In addition to disclosing whether they’re receiving any compensation in a referral arrangement, advisors should disclose conflicts of interest between them and their referral partners, Burylo said. 

“It’s really about making sure that if you start doing [referrals] — and everybody should because it’s such a great way to build business — that you understand what kind of rules might apply to you.”