In an upcoming episode of The ifa Show podcast, BT head of financial literacy and advocacy Bryan Ashenden said advisers should approach referral arrangements in a similar way to other product recommendations under the best interests duty, and present clients with a number of options while laying out why a specific referral partner may be the superior option.
“If you are only going to ever mention one person, you really need to make sure you’ve got an appropriate basis to do it, and only having researched that one party probably isn’t good enough,” Mr Ashenden said.
“You need to be able to make a comparison, to go ‘they are the right one for these reasons’, and ‘for these reasons’ really means you need to be able to compare them to others.”
Mr Ashenden said rather than steering the client down a particular path, which could be problematic if the adviser was receiving an associated referral fee, the adviser may like to provide the client with several alternatives and explain the advantages and disadvantages of each.
“It doesn’t mean you have to look at everybody, but [perhaps] those in the area. You could say ‘here’s a couple of people you could go and see’, and you’re still leaving it to the client to make a choice,” he said.
“You might want to highlight one or two you know from past experience where it has worked well, but ultimately it’s about helping the client to make the informed choice.”
In a recent blog post, myIntegrity in Practice principal consultant Joel Ronchi also outlined that if advisers were going to receive a referral fee for recommending a service to clients, they should assess if it was likely to lead to a conflict of interest under FASEA Standard 3.
“Advisers need to professionally assess whether a conflict actually exists for whatever reasons, whether it be a monetary or non-monetary benefit,” Mr Ronchi said.
“The standard of professional judgement is a ‘common sense’ test approach based on the response to the question ‘would a disinterested or unbiased and reasonable person, in possession of all the facts, conclude that an arrangement or benefit could induce the adviser to act other than in their client’s best interest?’
“If yes, then a conflict would exist for the purpose of Standard 3 and, in the event advice was given to a retail client, then the standard would be breached.”
Mr Ashenden said while FASEA’s most recent guidance on Standard 3 indicated that referral fees were allowed – as long as they were paid through a licensee rather than directly to the adviser – the guidance also indicated advisers had to carefully interrogate any conflicts of interest around that fee, and indeed whether the fee was necessary at all.
“That’s the other bit that FASEA have tried to be quite clear on, is when we look at these conflicts of interest, it’s really to say would I have given the same advice if I wasn’t going to get paid that fee,” he said.
“The bit you take a bit further with referrals is to say if you would have made that referral anyway if you weren’t going to get paid that fee, why do you need to be paid?
“That’s the challenge for a lot of people is to say, ‘I can show it doesn’t conflict me because I wouldn’t have done anything different’, and therefore you need to take it to the next level and say why do you need to receive that payment.”
The issue I take with referral fees is that sometimes they are necessary in order to get the best result for a client. Let’s take an Estate Planning lawyer, if an advisor has a really good one and is willing to work with the client to get the better outcome then the advisor should get remunerated.
I like the doctor analogy. If you see a GP and they say you need to see an ENT, I would definitely want a referral to a good specialist. I don’t want to find it myself. I could careless if they get paid a commission.
Same thing here with financial advisors. A financial advisor has no best interest duty to make sure the client chooses an appropriate accountant or estate lawyer despite advice needing to find an lawyer or accountant. Not their problem. However, if an advisor has used a great estate planning lawyer and knows they are good fit for the client circumstances, they should get paid a referral fee but an AFSL will not take that risk.
Watch out insurance industry, your next, wait until commissions are capped or strangled. Watch how no advisor will recommend insurances and just flick them off to crappy insurance brokers.
Here’s a question – now that we are speaking about FASEA Standard 3:
Does this standard impact AR’s and CAR’s recommending a product owned / managed by the Dealer Group of the same AR’s/CAR’s and for which a fee is paid by the client to the Dealer Group.
The relationship is not disclosed in the SOA.
The AR/CAR does not receive any extra revenue by recommending the in-house product. However, the Approved Product List is somewhat narrow and the process for adding any new funds to the APL is torturous.
The in-house product is heavily promoted across the Adviser network and in-house planning tools/software is built to include short-cuts / links that make it easier to prepare advice documentation if the in-house product is used as compared to an external product.
The most important point here is, as a professional, “why do you need to get paid a referral fee”?
so if you don’t receive a referral fee does that mean you dont need to go through all the Bull$hit of looking at alternatives, advantages, disadvantage rubbish. compliance overload again. My GP only ever gives me one referral to a specialist not a dozen and he doesn’t outline all the advantages or disadvantages of the specialist to me.
How ill are you that you consistently require referrals to medical specialists?
All conflicts are banned, no matter how immaterial. That’s what Standard 3 says in black and white. So while in theory you can refer, you will need to avoid referring to anyone who has referred a client back to you (or may in the future), you can’t be a client of theirs and they can’t be a client of yours, they can’t shout you a coffee and the list goes on. It’s unworkable tripe. Either the FASEA board and CEO are so stupid, they don’t understand the impact of Code or they are being deliberately vexatious. I suspect the latter.
Someone explain to me how a referral fee is allowed under standard 3 of the FASEA code…. it is directly in conflict with the standard
Just another example of how stupid the FASEA Code of Insanity is. Doctors, lawyers, accountants, pharmacists, engineers etc etc. None of them have to adhere to this nonsense. FASEA was supposed to make financial planning a profession. Instead they have made every financial planner a sitting duck for lawyers and overzealous regulators.
Meanwhile ASIC get to not disclose their ‘gift’ register, Union funds get to wine and dine and corporate box the sh*t out of prospective & existing target employers and politicians and all other ‘professions’ can do these referral fees without a worry or accountability!
What a load of bullshit
Whats the view on past referral fee arrangements? i.e. agreements set up pre FASEA that are still going, for client already referred. It seems even the licenses have no idea on that one?
Don’t be a tight arse and forgoe the $$$$ and do the right thing by your clients