Korra team · · 4 min read
Referral fees for advisors: what you must tell your client
Tell the client that you are paid, who pays you and how the amount is worked out, before you recommend anything. Some licences bar the fee, so check your own rules first.
Referral fee disclosure comes down to one rule: tell the client before you recommend. Say that you are paid, who pays you, and how the amount is worked out. Some licences go further and bar the fee, so check your own rules first.
Why disclose a referral fee at all?
Because clients find out, and because a hidden payment changes how they read your advice.
The Journal of Accountancy made the case to CPAs years ago in an article on commissions. It warned that a hidden commission arrangement, once revealed, could destroy the CPA’s credibility with a client. It added that even if a fee arrangement does not actually influence a CPA’s judgment, it may appear to, which is just as bad from the client’s viewpoint.
The same article observed that money is not usually the issue with most clients, unless the adviser fails to make the disclosure early and in a forthright manner.
The principle is wider than accountancy. The Federal Trade Commission’s guidance on endorsements says that if there is a connection between an endorser and a marketer that a significant minority of consumers would not expect, and it would affect how they evaluate the endorsement, that connection should be disclosed clearly and conspicuously. A payment for a recommendation is that kind of connection. If you run a newsletter, a community or a channel and you recommend a service you are paid by, say so.
Are CPAs allowed to take referral fees?
It depends on the client and on the state.
The national code has long had a rule on commissions and referral fees, formerly numbered Rule 503. The Journal quoted it: a member who is not prohibited from receiving a commission, and who is paid or expects to be paid one, shall disclose that fact to the person to whom the member recommends the product or service. The Journal noted that the rule prohibits commissions from certain attest clients regardless of disclosure. Attest clients are those the CPA audits or reviews.
States then add their own rules:
- Kansas adopts the national code. Its regulation, published by the Legal Information Institute, says each CPA or firm shall comply with the AICPA code regarding commissions and referral fees.
- California is stricter. The California Board of Accountancy says a licensee may accept commissions in limited situations under section 5061 of the California Accountancy Act, if the fees are disclosed in writing. It then says a licensee is still prohibited from accepting any fee or commission solely for referral of a client to a third party.
The Journal’s advice still holds: check with your own state board, because its rules may be more restrictive than the national ones.
Often allowed, with disclosure
- Consultants and fractional operators
- Business brokers
- CPAs with non-attest clients, where the state allows
Often barred
- CPAs with audit and review clients
- CPAs in a state that bars pure referral fees
- Anyone whose licence or employer forbids it
What does a proper disclosure contain?
California’s list is a good template for any adviser, licensed or not. The board says the disclosure must:
- be in writing and be clear and conspicuous;
- be signed by the recipient of the product or service;
- state the amount of the commission or the basis on which it is computed;
- identify the source of the payment;
- identify the relationship between the source and the person receiving the payment.
- It is in writing, clear and easy to see
- The client signs it
- The amount, or how it is worked out
- Who pays it
- How you are connected to the payer
A basis is enough where the amount is not known yet. “A share of the fee the marketplace earns if your deal closes” is a basis. It is true, and the client can ask what the share is.
When should you disclose?
Before the first conversation about the service, not at signing. The Journal’s article says the timing matters most: an adviser who discloses later than the first discussion may end up in a defensive posture. It suggests a short letter and saying it again in person.
How does this work for Korra partners?
Three parts of our partner system are built for disclosure:
- The share never comes out of the business’s price. A partner’s share is paid from the fee the buyer pays us. The business pays nothing, and its price is not reduced.
- The business names you. Nobody is attached to a business without its own click or code, after a real conversation.
- Your own fee is shown. If you also charge the business a fee, you tell us, and we show it to every business you introduce.
That does not replace your own disclosure. Tell the owner, in writing, that you are paid if their deal closes. The shares are printed on the partner page, so you can point to it.
If your licence bars a fee for a pure referral, you can still tell a client the option exists and take nothing. The words for that conversation are in the partner kit.
Questions
- Is a referral fee legal?
- In general business, yes, when it is disclosed. Licensed professions have their own rules. Some bar the fee for certain clients, and California bars its accountancy licensees from a fee paid solely for a referral.
- Do you have to state the exact amount?
- California’s board asks for the amount or the basis on which it is computed. Where the amount depends on a deal that has not happened, state the basis and offer to explain it.
- Is an email enough?
- Written and clear is the standard to aim for, and a signed copy is the strongest record. Check whether your own regulator requires a signature, as California’s board does.
- What if you forgot to disclose at the start?
- Disclose now, in writing, before the client takes another step. A late disclosure is uncomfortable. A discovered one is worse.
Sources
- Commissions and Contingent Fees — California Board of Accountancy
- Disclosing Insurance Commissions — Journal of Accountancy
- Kan. Admin. Regs. § 74-5-103 - Commissions and referral fees — Legal Information Institute
- FTC’s Endorsement Guides: What People Are Asking — Federal Trade Commission
Figures are as reported by the publishers above. Discussion threads show what people said; they are not facts or Korra results.
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