Is it unethical to share? Consider the following situation.
A fine tax advisor was how Ron referred to his friend, James, an accountant. Ron met James several years ago when a client with a medical practice asked him several tax-related questions during an annual planning review.
The client, Dr. Carleton, wanted to reduce his personal income tax in any legitimate manner possible and find ways to place more after-tax or pretax assets into his personal balance sheet.
Ron had several ideas he wanted to explore before his next appointment with the doctor, and he felt he needed a tax professional to refer to his client. With this in mind, he searched for an accountant who worked extensively with physicians. Ron wanted someone who did not practice financial advising that involved securities and insurance.
Through networking, he was introduced to James. He called the accountant and scheduled a meeting. At this meeting, Ron mentioned having a client with specific tax concerns. He reviewed Dr. Carletons objectives anonymously, asking James several pointed questions to which James responded knowledgeably. Ron then asked if James did any work in securities or insurance. James said he did not.
At the end of the meeting, Ron told James his two requirements for developing a referring relationship with another professional: A client would never be referred to another financial advisor without contacting Ron first. And the other advisor was expected to contact Ron regarding any recommendations Ron had made to the client. This gave Ron a chance to make appropriate adjustments to his recommendations.
James agreed with the arrangement and Ron said he would be calling to schedule an introductory appointment with his doctor client.
"Because Im not licensed, I could send you an invoice for my accounting work. Usually, this amounts to about 10 percent of your commission. Does this seem fair to you?
Ron and Dr. Carleton met with James two weeks later, and the doctor was favorably impressed with the results of the meeting. Delighted, Ron began referring additional clients to the accountant. A few months later, James called Ron with a potential referral, and the two got together for a meeting.
At the meeting, James mentioned what he called revenue sharing. I like to think, he said, that your investment and insurance recommendations are more readily accepted by your clients when I give them the OK. My involvement makes you a sale. In fact, you even receive compensation for referring an insurance client to me. Likewise, if I refer a tax client to you, I need some compensation for the effort. Because Im not licensed in securities or insurance and can’t collect a commission, I can send you an invoice for my accounting work. Usually, this amounts to about 10 percent of your commission. Does this seem fair to you?
Ron had several problems with the accountant’s suggestion. First, he knew he had sufficient authority with his clients that his recommendations needed no additional professional support to be accepted. Second, he did not receive much compensation for his referrals to James. His main benefit of doing joint work with James was having his clients tax concerns competently addressed.
And there was a third problem of a more professional nature that Ron could not clarify at the time of the meeting. Ron accepted James’ suggestion for the moment and promised himself to consider the issue more thoroughly the next day.
There are a couple of professional problems in this case. For one, there’s a compliance issue. In compensating James for 10 percent of his commission, Ron may be perceived by regulatory authorities as compensating an unlicensed person for securities or insurance services. In some states, this practice may also be considered rebating. This situation can well put Rons licenses in jeopardy.
And there are other possible legal problems in becoming a party to paying for tax services, which, in fact, were never rendered in the effort to share commissions and fees generated from securities and insurance sales.
Beyond compliance, there lie ethical issues. By compensating an unlicensed professional for a securities or insurance sale, Ron is, in effect, paying a professional for services he is not qualified to provide. This circumvents the efforts of regulatory authorities to protect the public from services offered by unqualified people.
The compliance reminder
In this situation, existing compliance rules can serve as a reminder of higher ethical and professional issues. To the extent that an advisor values keeping his professional profile in good order with regulatory authorities, the advisor then has the opportunity to consider the higher issue of protecting his clients.
Frank C. Bearden, MSM, CLU, ChFC, LUTCF, is a field manager, financial advisor and agent in San Antonio, Texas. You may reach him at email@example.com.