Fee-Only Advisors and Third-Party Referral Rules
- Fiduciary Financial Advise
- 23 hours ago
- 10 min read
Fee-only advisors earn their fees directly from clients, avoiding commissions or product-related payments to reduce conflicts of interest. However, third-party referral agreements - such as partnerships with CPAs or attorneys - introduce potential compliance challenges. The SEC's Marketing Rule (effective November 4, 2022) governs these arrangements, requiring clear disclosures, written agreements, and strict conflict management.
Key takeaways:
Referrals are considered advertising if compensation is involved.
Mandatory disclosures must outline relationships, compensation, and conflicts.
Promoters with certain regulatory or criminal violations are ineligible for compensation.
State-specific laws may require solicitors to register as Investment Adviser Representatives (IARs).
Advisors must update Form ADV to reflect referral arrangements and maintain detailed records.
Compliance involves verifying promoter eligibility, ensuring proper disclosures, and adhering to state and federal regulations to maintain fiduciary standards.
Federal Regulations for Third-Party Referrals
On November 4, 2022, the SEC introduced the modernized Marketing Rule (Rule 206[3]-1), replacing the outdated 1961 Advertising Rule and 1979 Cash Solicitation Rule (Rule 206[3]-3) [6]. This change streamlined decades-old regulations into a single framework, creating one set of rules for all compensated referral arrangements - a key update for fee-only advisors.
The SEC also updated terminology to align with modern practices, swapping out "solicitor" for "promoter." A promoter is anyone - whether compensated or not - who provides a testimonial (statements from current clients about their experience) or an endorsement (statements from non-clients like CPAs, attorneys, or lead-generation services indicating approval) [7]. When an advisor compensates someone with cash, reduced fees, or directed brokerage, it qualifies as advertising under federal law [7].
SEC Marketing Rule and Rule 206[4]-3
Under the Marketing Rule, referrals must include clear and prominent disclosures. These disclosures should clarify the promoter's relationship to the advisor, any compensation received, and any material conflicts of interest [7]. For instance, in 2023, the SEC penalized nine investment advisers for violating this rule, issuing fines totaling $850,000 [6].
Advisors are required to ensure their promoters comply with the rule by implementing policies and procedures to monitor adherence [5]. Additionally, the rule prohibits compensating "ineligible persons", such as individuals with certain SEC disqualifying actions or convictions (felony or misdemeanor) within the past 10 years [7]. However, as of January 15, 2026, new SEC guidance allows advisors to compensate promoters subject to certain Self-Regulatory Organization (SRO) final orders, provided the SRO did not bar or suspend the individual and appropriate disclosures are made [9].
Written Agreements and Documentation Requirements
Formal written agreements play a critical role in maintaining compliance for referral arrangements. Unless the compensation is considered de minimis (defined as $1,000 or less within the past 12 months), a written contract between the advisor and promoter is required [7]. This contract must outline the promoter's responsibilities and compensation terms [10]. It should also establish who is responsible for delivering mandatory disclosures to prospective clients.
Advisors must also maintain thorough records as required by Rule 204-2. These records include copies of all advertisements, documentation of oral testimonials or endorsements, and evidence supporting any material claims made [8]. If an advisor cannot provide these records when requested, the SEC may assume non-compliance [11]. Furthermore, advisors need to update their Form ADV to accurately reflect referral relationships and compensation arrangements, as these are a key focus during SEC examinations [7].
Form ADV Disclosure Requirements
Form ADV serves as the primary disclosure document for investment advisors. Fee-only advisors are required to update specific sections to reflect third-party referral arrangements. These updates must provide enough detail for clients to clearly understand the advisor’s practices and any potential conflicts [4]. This aligns with the broader SEC compliance guidelines discussed earlier.
Form ADV Part 1 and Part 2A Disclosures
Item 14.A of Part 2A focuses on arrangements where a non-client provides an economic benefit for advisory services. This includes referrals from third-party solicitors, CPAs, or attorneys. Advisors must clearly describe the conflicts these arrangements create and how they are addressed [4].
Item 5.E of Part 2A requires disclosure when an advisor or supervised individual earns sales-related compensation, like asset-based charges or mutual fund fees. It must also indicate whether this compensation offsets advisory fees. Similarly, Item 4.A of Part 2B mandates disclosure of commissions, bonuses, or other sales-based compensation [4].
The SEC emphasizes the importance of clarity. Vague language, such as stating an advisor "may" have a conflict, is not acceptable. If referral fees are involved, this must be stated explicitly. Advisors should use plain and straightforward language to explain conflicts, as overly lengthy disclosures can obscure important information [4].
Maintaining accurate updates and records is key for compliance. When making significant changes to compensation or referral disclosures, these must be noted in Item 2 of Part 2A during the annual update. Advisors are required to file Part 2 of Form ADV electronically via the IARD as a searchable PDF and ensure brochure supplements (Part 2B) are available for SEC review [12].
Conflicts of Interest and Promoter Eligibility
Identifying and Disclosing Conflicts of Interest
Upholding fiduciary responsibility demands more than just identifying conflicts - it requires clear, thorough disclosures and careful evaluation of promoters. Referral arrangements often lead to conflicts since promoters might prioritize financial incentives over impartial recommendations. To address this, advisors must implement a structured, regular review process tailored to their specific practices[13].
"An adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest that might incline it to render advice that is not disinterested." – SEC Division of Investment Management [4]
When handling disclosures, precision is key. For instance, in The Robare Group case (November 2016), the SEC determined that vague language like "may" receive compensation was inadequate when a fee arrangement was already in place. Similarly, in SEC v. Westport Capital Markets (September 2019), disclosures that merely suggested firms "might" gain additional compensation proved insufficient, especially when firms were actively collecting 12b-1 fees[4].
Disclosures must explicitly state that the promoter is compensated, detail the compensation terms, and explain the inherent conflict. This information should be presented in a way that is both clear and prominent - whether during solicitation or in advertisements[3][14]. Once conflicts are fully disclosed, the next step is to ensure promoters meet eligibility standards.
Promoter Eligibility and 'Bad Actor' Disqualifications
After addressing conflicts, verifying that promoters are suitable is crucial for compliance. To do this, consult public resources like the SEC's Investment Adviser Public Disclosure (IAPD) database and FINRA's BrokerCheck. Additionally, require promoters to complete a detailed questionnaire about any past regulatory or criminal issues and include contract clauses mandating immediate notification of any disqualifying events.
To meet the "reasonable care" standard, conduct annual re-certifications and document every step of the verification process. Keeping thorough records ensures adherence to SEC requirements and demonstrates a commitment to maintaining ethical standards[13][14].
State Regulations and Licensing Requirements
State Registration Requirements for Solicitors
While federal rules set a baseline, many states add their own layers of regulation. For instance, California and Texas require third-party solicitors to register as Investment Adviser Representatives (IARs) to receive referral compensation, even for impersonal referrals[2]. In Wisconsin, anyone compensated for referring clients to a state-registered investment adviser typically must register as an IAR as well[17]. On the other hand, some states don’t require solicitor registration for referrals involving only SEC-registered advisers, provided federal rules like the SEC Marketing Rule are followed[17].
Before engaging third-party solicitors, always verify state-specific requirements through the relevant administrative code or securities division website. Skipping this step could result in regulatory violations for both the solicitor and the investment adviser.
Professional Restrictions for Attorneys and CPAs
Beyond state registration rules, professional licensing boards place additional restrictions on attorneys and CPAs. For attorneys, these rules are often strict. For example, the New York State Bar Association explicitly forbids lawyers from accepting referral fees from investment advisers:
"A lawyer may not accept a fee from an investment advisor for the referral of clients to the advisor." – New York State Bar Association[18]
This prohibition stems from the belief that referral fees create an irreconcilable conflict of interest, even if the client consents in writing. This is particularly true when the funds in question relate to matters where the attorney previously represented the client.
For CPAs, the rules vary but can also be stringent. In New Jersey, CPAs in public practice are strictly barred from receiving commissions or referral fees for clients for whom they perform audits, financial statement reviews, or examinations of prospective financial information[19]. However, for non-audit clients, CPAs may accept referral fees if they provide written disclosures signed and dated by both the client and the referring party[19]. Additionally, the AICPA's Rule 503(c) mandates that CPAs disclose any referral payments to the client at the time of the referral[2].
Some states also enforce a "nexus" requirement, meaning there must be a direct connection between the CPA's professional responsibilities and the services the client receives from the adviser[2]. Before entering into referral agreements with attorneys or CPAs, it’s essential to check with the applicable state licensing board or bar association to ensure compliance.
Compliance Best Practices for Referral Programs
Structuring Compliant Referral Programs
It's essential to document all referral arrangements. If a promoter earns more than $1,000 annually - whether through cash or non-cash compensation - they must sign a written agreement with your firm[15]. Non-cash rewards like gift cards, event tickets, or other perks should be valued at their fair market rate and included in this $1,000 threshold.
The written agreement should clearly outline the payment details, including the exact amount and the conditions under which it will be paid. Avoid vague terms like "reasonable compensation", as the SEC expects agreements to be precise. Each agreement should include specific disclosures tailored to the arrangement[2].
Another critical step is conducting background checks to ensure promoter eligibility. The SEC Marketing Rule prohibits compensating individuals with certain felony or misdemeanor convictions related to fraud, bribery, or false reporting within the last 10 years[2][15]. To streamline this process, use a standardized checklist that includes reviewing SEC disqualification orders and verifying professional references. If you're working with CPAs, make sure there’s a clear connection between their professional duties and the advisory services you offer. For example, California's Accountancy Act and similar regulations in other states require this "nexus" to be established[2].
For fee-only advisors, additional rules apply. The CFP Board emphasizes:
"A CFP® professional may describe his or her or the CFP® Professional's Firm's compensation method as fee-only only where: (a) the CFP® professional and the CFP® Professional's Firm receive no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation."[1]
This means that if you - or any related party - receive commissions, 12b-1 fees, or similar compensation tied to client referrals, you cannot use the "fee-only" designation. To align with fiduciary standards, establish policies that prevent referrals to related parties if those referrals generate sales-related compensation[1].
Monitoring and Oversight of Solicitors
Once referral agreements are in place, ongoing oversight is critical. The SEC requires firms to make a "bona fide effort" to ensure solicitors comply with the terms of their written agreements[2]. This responsibility doesn’t end after the agreement is signed - it’s an ongoing obligation.
Start by requiring pre-approval for all marketing materials solicitors plan to use. Regularly audit their communications to ensure they align with your Form ADV disclosures. Watch for red flags like outdated brochures or exaggerated claims that go beyond what’s stated in your disclosures[2].
Solicitors must also deliver required disclosure statements to prospective clients. A practical way to verify this is by requesting signed client acknowledgments confirming they received both your Form ADV Part 2A and the solicitor’s disclosure statement. Keep these records organized, as the SEC will expect to review them during examinations[2].
Your Form ADV should also be updated regularly. Items 11 and 14.A of Part 2A must accurately detail all referral arrangements and the conflicts of interest they create[2][4]. Avoid ambiguous language like "we may have conflicts" when those conflicts are real. The SEC Division of Investment Management has made it clear:
"An adviser disclosing that it 'may' have a conflict is not adequate disclosure when the conflict actually exists."[4]
Finally, work closely with your compliance officer to maintain a proactive compliance culture. Schedule quarterly reviews of your referral program to evaluate solicitor performance and stay ahead of any new state registration requirements[16]. This regular review process helps identify and address potential issues before they escalate into regulatory violations, reinforcing the transparency and accountability central to fiduciary duty.
Conclusion
Following third-party referral rules is essential to preserving the trust that forms the foundation of every advisor-client relationship. The SEC Marketing Rule, effective November 4, 2022[3], brought together previous advertising and solicitation regulations into one framework aimed at promoting transparency and accountability. For fee-only advisors, these rules are especially critical since maintaining that designation requires avoiding all sales-related compensation, including referral fees to affiliated parties[1].
At its heart, the rule emphasizes full and fair disclosure of conflicts of interest. The SEC Division of Investment Management explains: "An adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest that might incline it – consciously or unconsciously – to render advice that is not disinterested"[4]. This means firms must be explicit about how promoters are compensated and disclose any relationships with third parties. Vague or ambiguous statements about potential conflicts won’t suffice when actual conflicts exist. Upholding this level of transparency is the cornerstone of any referral agreement.
Another safeguard is the prohibition against compensating promoters with specific criminal or regulatory disqualifications within the past 10 years. This ensures that only individuals meeting strict standards are allowed to represent your firm[2].
Additionally, state-specific rules add another layer of complexity to referral arrangements. Staying informed and compliant with these varying requirements demonstrates a commitment to both legal adherence and protecting client interests.
FAQs
What compliance rules must fee-only advisors follow under the SEC Marketing Rule?
Fee-only advisors are held to critical standards under the SEC Marketing Rule to ensure their advertising practices remain honest and straightforward. This includes following detailed rules regarding disclosures, testimonials, endorsements, and third-party ratings.
Advisors must present information in a clear and accurate manner, steering clear of overblown claims. Additionally, they are obligated to disclose any material conflicts of interest. These regulations, in effect since May 4, 2021, aim to promote transparency and prioritize the interests of clients.
How do state regulations impact third-party referral arrangements for fee-only advisors?
State rules play a crucial role in shaping how fee-only advisors manage third-party referral arrangements. These regulations often emphasize the importance of clear disclosure and transparency, ensuring clients are aware of any referral agreements in place.
In some cases, state laws may go further than federal guidelines, such as SEC Rule 206(4)-3. They might limit specific payment models or introduce extra compliance steps. Advisors need to carefully interpret and follow these rules to uphold their fiduciary duty and keep their clients' interests front and center.
Who can qualify as a promoter under the SEC's Marketing Rule?
The SEC's Marketing Rule doesn't lay out specific eligibility requirements for promoters. Instead, it focuses on setting clear standards for investment advisers involved in marketing efforts, including advertisements and solicitations. These standards are built around key principles like transparency, accuracy, and a strong commitment to fiduciary duties.
For fee-only fiduciary advisors, it's crucial to ensure that any third-party referral agreements align with these rules. This approach helps safeguard clients' interests while staying fully compliant with regulatory expectations.
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