Not declaring referral fees receivable

In this case, the referral fees are fees paid to the adviser by other service providers (for example, a mortgage broker) whom the adviser has recommended that the client use. It is quite common for these fees not to be disclosed in an SOA.

Once again, as a general proposition, such non-disclosure is a bad idea. Most clients understand that businesses will transact with each other in this way. Whenever a payment is being made, it is always best to have it out in the open. Not doing so runs the very real risk of a client finding out about it at some later stage and then being upset about the situation – not so much that it was paid, but because the fact that it was paid was kept from the client.

But that is perhaps not even the main reason that referral payments must be disclosed. RG 175.181 states the following:

The importance of conflicts disclosure in the SOA has been explained as follows:

The disclosure of benefits received by an intermediary and any conflicts of interest assists clients in assessing the merits of a product recommendation and reduces the opportunity for advisers to act in self-interest to the disadvantage of the client.

This is what is known as a potential conflict of interest. And the potential conflict is clear: if the adviser recommends that a client use a particular service provider, and that service provider is paying the adviser, then the potential for this payment to have swayed the adviser’s advice is clear.

Any payments received by the adviser must be disclosed, in whole dollars, in the adviser’s remuneration section of the SOA. We would also recommend that some explanation be given for the association with the third party making the payment. Something like the following is good:

Implementation Fees and Costs Value
Investments and insurance (Paid by you) $400
Drawing up a will (Paid by you) $200
Referral Fee (Paid by ABC Mortgages) $400 (calculated as 0.08% of expected borrowed amount of $500,000.

Our relationship with ABC Mortgages

You are not bound to use ABC mortgages to manage your loan application. However, over the years we have found them to be a reliable and efficient mortgage broker and we recommend that you do make use of them. In return for recommendations such as this, ABC Mortgages pay us an amount equal to 0.08% of the amount that referred clients borrow. As the amount to be borrowed is $500,000, this would equate to $400 in your case.

The Dover Group