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