Imagine if you asked your friend for a favor and recommend a plumber. The friend recommends a plumber he knows and the plumber does a decent job. Imagine if you later discover that the friend received a portion of the plumber’s fee for the referral. How would that make you feel? Well, it would make me a little livid because what I thought was a genuine recommendation was actually a paid referral.
When I left the TPA world and joined a semi-prestigious Long Island law firm, I was asked by the top salesman at my former TPA whether we could work together by my referral of clients to them. I quickly nipped the bud on that notion by saying no because I knew his intent.
My old TPA also had a registered investment advisory (RIA) arm and it was a common practice that many of the referrals came from accountants and ERISA attorneys. What was common practice is that these accountants and ERISA attorneys (including one of the top ERISA attorneys in the country) would receive a portion of the RIA fee by referring clients to our RIA practice. They called this practice a “Paid Solicitor Solution” and used to proudly advertise it on their website. Perhaps because of a possible lack of disclosure to Plan sponsors or a crackdown by the Department of Labor, that service is no longer advertised.
Regardless of the legality of the paid solicitor solution, I have problems with it on a few fronts. A non-financial professional such as an accountant or ERISA attorney should only be compensated once and not compensated in an area where they have no license or background (such as financial advisory work). I charge a flat fee for my plan document work, so I only deserved to be paid once.
A TPA that took over a client from the renowned ERISA attorney discussed above notified the client that the ERISA attorney charged $7,000 for a plan document (pretty high for a individually designed plan when a less expensive volume submitter would have sufficed) and received a 20 basis point paid solicitor fee. Needless to say, the client was not amused.
As a “respected” ERISA attorney, I also believe that any referrals to TPAs and financial advisors should be based on my belief who will do the best job at the best price, not tainted by my financial ambition. Since I also believe that the client should make the ultimate choice, I tend to offer recommendation on 2-3 professionals per referral to ensure that the referral is based on finding the right fit for the client.
So when receiving recommendations from an accountant or an attorney on asset advisory or brokerage firms, make sure that there are a number of recommendations because multiple referrals probably ensure that a paid solicitor solution does not exist. If this paid solicitor solution does exist and the referral was biased, make sure this arrangement is disclosed to you.
I believe the best referrals are the ones that are unbiased and that the only people who should be compensated for financial advisory work are licensed, financial advisors.