One effective and relative easy way to grow a business or obtain new clients is to receive introductions from another party. The individual making the referral typically already has the trust of the person they are introducing; therefore, their opinion is viewed with significance. The referrer has faith that the business they are introducing will indeed solve the individual’s needs. If a financial adviser wants to develop a business alliance, prior to asking for leads, the adviser must establish credibility by providing excellent service in their direct dealings with the referral source. In order to foster that reliability, it is critical to go above and beyond whenever dealing with a possible sphere of influence.
Formal vs. Informal Referral Relationships
In any business, an informal relationship can exist between two parties exchanging referrals without a particular formal arrangement or without payment of a fee. It is a relationship in which two parties establish mutual trust and whereby each feels comfortable introducing the other to their respective clients.
Another avenue is to formulate a formal business partnership defined by a form of payment for referrals based on a contract between two parties. In the registered investment adviser (RIA) industry, this is commonly done through the creation of a solicitor arrangement. A solicitor is generally any individual or entity soliciting, referring, offering or negotiating the sale of investment advisory services on behalf of a third party financial adviser for monetary compensation.
The implementation and use of solicitors can be a very successful channel for an adviser looking to grow their business. A common source of introductions to high quality individuals and high net worth prospects is through the development of alliances with other professionals such as accountants or attorneys. Such alliances with the proper accountants and attorneys can be an efficient method to obtain new clients with complex financial situations that typically already have established tax and estate planning relationships.
An informal exchange of client referrals among attorneys, accountants, and financial advisers is a common practice. However, since each practitioner offers unique expertise needed by clients, it may be more beneficial to develop a formal business partnership in order to construct a team that brings together the group’s extensive capabilities to help a shared client on various matters. By implementing a team structure, additional services can be provided to clients and each business can offer a more seamless holistic service offering increasing their overall value to clients.
RIA Compliance and Regulatory Considerations When Establishing Solicitor Relationships
If a financial adviser wants to implement a formal arrangement with an attorney or accountant or any other third party, there are certain rules and laws to abide by. Under SEC Rule 206(4)-3, the terms of the fee to be paid and solicitor activity being conducted must be documented via a written agreement. Some additional requirements include that the solicitor provide a copy of the RIA firm’s disclosure brochure and separate solicitor disclosure brochure. In addition, the investment advisory firm must obtain written confirmation that the prospective client received the required documents prior to establishing a client relationship. It’s important to note that the improper use of solicitors is a common defiency discovered during RIA regulatory audits.
Solicitor licensing requirements vary from state to state. Certain jurisdictions deem anyone “who solicits, offers, or negotiates for the sale of or sells investment advisory services” within the definition of an investment adviser representative (IAR). In such instances, an individual IAR must meet the licensing requirements and also be registered with an RIA firm in order to conduct business. The IAR qualifying examination is the Uniform Investment Adviser Law examination (Series 65); however, the combination of the Series 66 and Series 7 licenses held within the last 24 months or holding a qualified professional designation may allow an individual to be exempt from needing to take the Series 65 exam.
Creation and Registration of “Solicitor Only” RIA Firms
Individuals that will solicit on behalf of an RIA firm often are required to not only qualify as an individual IAR, but also establish his or her own investment advisory firm. The business focus and activity of these types of “solicitor only” RIA firms will be exclusively focused on making referrals and facilitating introductions to financial advisers. Yet, even if an investment advisory firm is created solely to act as a solicitor for a third-party investment advisory firm, there are certain compliance requirements to which the firm must adhere. These requirements vary by state but will often include the formal establishment of a compliance program including the adoption of a written policies and procedures manual. Proper books and records will need to be kept as well as certain files related to advertising and correspondence. The disclosure documents and agreements will need to be maintained and the firm will need to file a Form ADV renewal admendment annually.
Don’t Rush into Formal Relationships and Alliances
Forming a joint venture in financial services and in particular in the development of strategic alliances with other professionals like attorneys and accountants can fuel the growth of an investment adviser firm. However, as in any successful collaboration, it will take time to develop a lasting partnership. Be patient and careful to only establish formal alliances with other professionals that share common ideals and business values that align with those of your financial advisory practice. Any collaboration and business relationship should be forged on the basis of working together to better serve and help a mutual client. Strategize with potential partners as to how combined efforts will ensure that shared clients are getting the proper expertise and value from a team of “best in breed” providers.
Both sides of a partnership must be committed in order to make it last. It’s crucial that if compensation is being paid or shared that all sides feel that it is a fair split. In the case of becoming a solicitor, there are financial and time investments required to register a new RIA firm and ensure that all required individuals complete the necessary IAR examination requirements. Estate attorneys and accountants can be great strategic partners; however; other professional groups listed below have also proven to be successful centers of influence and partners to many investment advisory firms over the years:
- Insurance brokers
- Divorce attorneys
- Mortgage brokers
- Real estate agents
- Personal finance writers or bloggers
- Business coaches
- Life coaches
- Private equity firm professionals
- Private bankers