Sure, you can pay CPAs for referrals, but is it right?
Paying for referrals is a subject that elicits
strong responses from advisors. Perhaps it's because most have been
guided by a code that says competent professionals will cross-refer
clients at no cost simply because they can each provide complementary
services of value to the client.
But all of that changed when CPAs began doing
financial planning. As noted in last month's article, although the
numbers of CPAs earning the PFS designation aren't great, lots of CPAs
want to be involved in the advisory business one way or another. Even
if the CPA isn't earning or hiring the credentials she needs to do
financial planning in-house, she still wants a piece of the action. She
sees her client base as an asset with the potential to generate
financial planning fees, some of which should accrue to her.
Strong responses to the idea of CPAs referring their
clients to established advisors in return for a percentage of the
planning fee suggest that this practice has multifaceted ethical
dimensions. One of them is expressed by Paul Corr, a CPA and PFS
practicing in Clifton Park, N.Y.: "I'm a bit uncomfortable with CPAs
accepting referral fees. If we want to do financial planning and
investment management, we should acquire the skills to do so."
It may be difficult to put one's finger on the exact
irritant, but referring away clients for a job one could obtain the
qualifications to do one's self just doesn't feel right to CPAs like
Corr and Timothy Thaney, a partner in DeJoy, Knauf & Blood LLP of
Rochester, N.Y., who also holds a PFS: "We have been able to take many
clients away from our competitors because sooner or later, the client
realizes their CPA is not acting in their best interests."
It's too soon to tell if the referral fee programs
will last, but they certainly have raised serious issues that will
continue to generate controversy in the industry. If Corr and Thaney
are the voices of reason, their views seem all but lost among those
CPAs who focus primarily on the income potential of these referral
arrangements.
But no one is yelling louder than financial advisors
in condemning this practice. Says Bert Whitehead with Franklin,
Mich.-based Cambridge Connection, "I think this practice is blatantly
unethical, even if disclosed on an ADV. And I would never accept a
referral fee when referring clients to CPAs, as I often do. Why do we
think we have to resort to these slimy tactics to get clients?"
And others second his emotions: "As a CPA and a CFP,
I would like to comment on how bad I think these arrangements are. I
pride myself on the comprehensive financial planning I do. To simply
make referrals for a fee is a huge disappointment to our profession,"
says Neil Brown of Burkett Financial Services LLC in West Columbia, S.C.
Maybe paid referrals are a bad business decision, as
well ethically questionable, says Michael Potito. A partner in the
advisory firm of Singer Potito Associates Inc. of East Longmeadow,
Mass., Potito says, "Why wouldn't any ethical and caring CPA not want
to refer a competent NAPFA advisor to his clients without expectation
of payment if the CPA feels the client will receive what he needs? We
refer to CPAs routinely. We interview them to ascertain their expertise
and their 'fit' with our client. After we have a rapport with a CPA,
the relationship becomes symbiotic and we work as a team on behalf of
the client. This in turn breeds mutual respect and referrals flowing
both ways. The accountant ends up being compensated probably more
lucratively than with a paid referral system because, in the end, his
or her billable time is increased by working with us on behalf of the
common client."
Beyond the question of professionalism is the more
critical question of whether such practices are in the interests of
clients, as succinctly expressed by Elliot Lipson of Roswell, Ga.-based
Horizons Financial Advisors: "Advisors who enter into these
arrangements should ask, 'Am I being referred to because I'm paying the
most or because the referrer thinks I'm the best for the client?'"
Lipson questions whether the advisor who must pay
30% or 40% of the client's fee to the referring CPA is going to give
the client less service. Or, conversely, he asks, is it fair to a
client whose entire fee the advisor keeps to provide the same level of
service less a referral fee to another client?
Lipson adds, "It strikes me as a strange ethical
situation when a NAPFA member can pay a CPA a referral fee but, if we
collected a referral fee from a CPA, it would violate NAPFA's rules.
Are we not soliciting or encouraging behavior in others that we condemn
in ourselves?"
The NAPFA compensation rules on this issue are
clearer to some than to others. Says Peggy Cabaniss, a NAPFA-registered
financial advisor with HC Financial Advisors Inc. in Orinda, Calif., "I
have been told that the NAPFA Compensation Task Force has concluded
that paying referral fees is a form of 'marketing expenses.'
Their conclusion was that paying for an ad in a newspaper [or]
magazine, paying a fee to a custodian to be part of a referral program,
or paying a referral fee to another professional are all forms of
marketing."
But is NAPFA's policy-or that of any other
professional association-really that clear-cut? No, believes David
Lewis, a NAPFA member in Knoxville, Tenn. He says, "Presumably, NAPFA
members have all signed the following oath which should be the central
issue when considering referral fees:
'The advisor shall exercise his/her best efforts to
act in good faith and in the best interests of the client. The advisor
shall provide written disclosure to the client prior to the engagement
of the advisor, and thereafter throughout the term of the engagement,
of any conflicts of interest, which will or reasonably may compromise
the impartiality or independence of the advisor.'"
Again, NAPFA's rules don't specifically preclude a
referral arrangement. "Because he's getting paid, this seems to be more
unethical for the CPA than the financial planner who believes he's
going to do a good job for the client," says Lewis. "I might enter into
this kind of relationship if the CPA and I were working together for
the good of the client," a position that makes the client's welfare the
guiding factor.
Others might interpret NAPFA's oath as suggesting
that, if the CPA and financial advisor are inherently ethical and
competent professionals, then a referral would unquestionably be in the
client's best interested-a position that reduces the issue of paid
referrals to a marketing consideration as noted in NAPFA's Compensation
Task Force position.
Tom Giachetti, a securities attorney with
Lawrenceville, N.J.-based Stark & Stark, weighs in on this issue:
"I can tell you horror stories where CPAs have screwed up trying to
create an infrastructure to do financial planning. It's best when
the CPA [without experience or credentials] finds one or two advisors
he trusts, sends clients to those advisors and receives a referral fee
back with full disclosure to the client. There's nothing unethical
about this as long as it's disclosed, and the client understands she
won't pay more for services than what she would have paid otherwise.
It's simply marketing." In fact, if the client is given the opportunity
to interview several different advisors and select the one she believes
is best for her, some of the ethical concerns may vanish.
And this is the other side of the argument-one that
stresses the marketing and outsourcing aspects of paid referrals from
CPAs. "I see it as a marketing expense, not a conflict of interest or
unethical, because the accountant is doing the same thing as a broker,
[that is], completing a sale and benefiting from it," says Donald
Whalen with Versailles Financial LLC in Alpharetta, Ga. "He's just
hooking me up with one of his clients. I would like not to have to pay
but, realistically, it's necessary to get in the forefront of CPAs'
minds."
Doesn't this practice take on legitimacy if viewed
as a form of outsourcing? Advisors themselves outsource everything from
portfolio reporting to, in some cases, financial planning. Why
shouldn't CPAs have the same opportunity? "Many CPA firms do not have
the internal resources to offer financial planning, investment
management or asset custody to their clients," says Bedda D'Angelo,
whose advisory firm, Fiscal Conditioning Inc., is based in Chapel Hill,
N.C. "A referral arrangement is another way to outsource services the
firm is unable to provide internally. Most CPAs who engage in the
practice carefully profile and screen the planner whom they refer their
clients to. It deeply concerns me when members of one profession make
subjective value judgments with respect to what constitutes ethical
conduct in the practice of another profession."
Why is it assumed automatically by so many CPAs and
advisors that the client is going to get the worst of these referrals?
Maybe because every time we try to trust arrangements like these we
hear a story like this one, which Donna Cygan, a financial advisor and
owner of Essential Financial Planning in Albuquerque, N.M., told me
upon her return from a coaching workshop: "I met a broker who was
targeting CPAs as gatekeepers, and called himself a financial planner
so local CPAs in his city would refer their clients to him. He would
then sell these clients insurance and investment products and kick back
part of his commission to the CPA. He thought this was a brilliant plan
and said the CPAs he worked with loved it. I'm thinking, 'This is so
unethical.' It's legal, but I doubt he was disclosing to his clients
that the CPA was getting kickbacks."
Which reminded Cygan of that anonymous quote,
something to the effect of "The broker won and the CPA won-two out of
three ain't bad."
David J. Drucker, M.B.A., CFP, a
financial advisor since 1981, sold his practice 20 years later to
write, speak and consult with advisors. His latest book is The One
Thing... You Need to Know from Each of the Industry's Most Influential
Coaches, Consultants and Visionaries. For more information, visit
www.daviddrucker.com.