Can Financial Advisors Pay Fees for Referrals?

In an increasingly competitive advisory landscape, the role word-of-mouth marketing plays in building a thriving practice can’t be overlooked. Referrals, whether they come from your existing clients or other professionals in your circle of influence, can lead to more conversions and lay the groundwork for long-lasting advisor-client relationships. Developing a referral program may open the door to new leads, but you must be aware of compliance requirements if you plan to compensate those who refer others.

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Can Financial Advisors Pay Referral Fees?

Yes, financial advisors can pay for referrals; that behavior is not prohibited under the Investment Advisers Act of 1940. It is, however, highly regulated by the Securities and Exchange Commission (SEC).

Previously, Rule 206(4)-1 (the Advertising Rule) and Rule 206(4)-3 (the Cash Solicitation Rule) governed compliance guidelines for advisor marketing and the payment of referral fees. In 2020, they were combined into the SEC Marketing Rule, which took effect in 2021.

Under the old Advertising Rule, advisors could not:

Use testimonials in their advertising materials
Mention past recommendations that were or would have been profitable for their clients
Include untrue statements in their advertising that could be construed as false or misleading

The old Cash Solicitation Rule, meanwhile, prevented advisors from paying cash fees to “solicitors,” unless certain conditions were met. A solicitor was defined as any person who solicits or refers clients on an advisor’s behalf, either directly or indirectly.

What the SEC’s Marketing Rule Says About Referral Fees

The Marketing Rule represents the modernization of the Advertising and Cash Solicitation Rules. Among other key changes, the Rule reframes solicitors as “promoters.” This term includes individuals who provide testimonials and endorsements. Let’s review how the SEC distinguishes between each one.

A testimonial is defined as a statement about the client or investor’s experience with the investment advisor or its supervised persons that:

Directly or indirectly solicits prospective clients
Refers prospective clients to the advisor

An endorsement is also a statement that’s intended to solicit or refer prospective clients to the advisor. The difference is that a promoter who endorses an advisor is someone other than their client. For example, you may be endorsed by another advisor or a tax professional.

So, what does this have to do with when financial advisors can pay referral fees? Under the updated rule, advisors must:

Clearly and prominently disclose whether a promoter is a client and whether the promoter is compensated for their testimonial or endorsement
Enter into a written agreement with promoters, unless the promoter is an affiliate or receives de minimis compensation (i.e., $1,000 or less or an equal value in non-cash compensation in the previous 12 months)
Exclude certain “bad actors” from acting as promoters

In other words, paying for referrals is not prohibited; you just need to observe the SEC’s rules to do it.

Advisors are also required to disclose conflicts of interest on the part of the promoter or due to the nature of the advisor’s relationship to the promoter. Advisors are barred from compensating promoters whom they know to be ineligible under the Marketing Rule.

If you have not done so already, you may need to update your Form ADV to reflect the new requirements for disclosing referral relationships.

Should Financial Advisors Pay for Referrals?

Advisors ensure content is in accordance with the SEC's marketing rule.

Instead of asking if financial advisors can pay referral fees, it may be more prudent to ask if they should. In an ideal world, you may generate referrals organically, with no need to offer compensation. If you’re not seeing that goal come to fruition, however, you may wonder whether paying for referrals is a sound investment.

On one side, paying referral fees could bring in significantly more leads. The drawback, of course, is that the people who are being referred to you may not be the right fit for your services. The time you put into attempting to nurture those leads may be better spent on other marketing activities or meetings with clients.

Paying referral fees also places a greater compliance burden on your business. You’ll need to be cognizant of the marketing rule’s requirements to ensure that you’re:

Making the proper disclosures
Observing de minimis rules for compensation
Disallowing testimonials from ineligible parties

If you’d rather avoid these requirements, you may consider how you can encourage more referrals without using compensation as an incentive.

How to Get More Referrals for Your Advisory Business

The most direct way to get referrals from clients is to ask. You can mention at the end of client meetings that you’re growing your business and you’d be happy to talk to anyone the client might know who could benefit from your services.

If that feels uncomfortable, you can work on generating referrals naturally. That begins with delivering a superior client experience that exceeds their expectations. If you’re unsure what your clients need or want most, consider having them complete an anonymous experience survey. That’s a simple but effective way to get genuine feedback on how you can improve your business.

Client appreciation events are another opportunity to gain referrals. Appreciation events allow you to spend time with clients outside the office and get to know them a little better. Scheduling events that appeal to your clients’ interests or hobbies shows them that you’re paying attention and that you truly value their business.

Networking can also lead to more referrals if you’re connecting with professionals who are in a similar vertical. For example, you might refer clients who need tax help to a CPA you know, and they may return the favor when they have a client who needs a financial planner.

There’s one more option to boost referrals. You could partner with an advisor marketing platform that matches you with qualified leads. You get the benefit of referrals to leads who fit your ideal client mold and more time back in your busy day.

For example, SmartAsset AMP is a subscription-based service built specifically for fiduciary advisors who want to automate lead generation and scale client acquisition.

AMP can deliver up to 540 validated leads per year, eliminating the need for cold prospecting. Investors complete a survey about their financial goals and preferences, then are matched with advisors based on location and asset level. You receive each lead directly via phone or email. Sign up for a free demo here.

Bottom Line

A financial advisor onboarding a new client.

Whether you pay for referrals or you don’t, they represent a critical area of your marketing plan. Weighing the advantages of disadvantages of offering a referral fee can help you evaluate whether it’s a suitable choice for your firm.

Tips for Growing Your Advisory Business

Investors are increasingly using online searches to connect with financial advice, and if your firm lacks visibility, you may get lost in the crowd. Building a search engine optimized (SEO) website, growing your email marketing list and engaging with prospects on social media can help you solidify your digital footprint. If you’re looking for ways to expand even further, you may consider working with an advisor marketing platform like SmartAsset AMP. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
If you plan to build a referral program, consider the parameters and how it will operate. For example, how will you qualify what constitutes a referral? Will you offer compensation? If so, what form will it take and how much will you offer per referral? Talking to your chief compliance officer can help you define what your referral program should look like to meet SEC marketing rule requirements. While you’re fleshing out the details, consider the potential return on investment and how often you anticipate converting prospects to clients through the program.