Referral fees allowed, but proceed with caution

In an upcoming episode of The ifa Show podcast, BT head of financial literacy and advocacy Bryan Ashenden said advisers should approach referral arrangements in a similar way to other product recommendations under the best interests duty, and present clients with a number of options while laying out why a specific referral partner may be the superior option.

“If you are only going to ever mention one person, you really need to make sure you’ve got an appropriate basis to do it, and only having researched that one party probably isn’t good enough,” Mr Ashenden said. 

“You need to be able to make a comparison, to go ‘they are the right one for these reasons’, and ‘for these reasons’ really means you need to be able to compare them to others.”

Mr Ashenden said rather than steering the client down a particular path, which could be problematic if the adviser was receiving an associated referral fee, the adviser may like to provide the client with several alternatives and explain the advantages and disadvantages of each.

“It doesn’t mean you have to look at everybody, but [perhaps] those in the area. You could say ‘here’s a couple of people you could go and see’, and you're still leaving it to the client to make a choice,” he said. 

“You might want to highlight one or two you know from past experience where it has worked well, but ultimately it’s about helping the client to make the informed choice.”

In a recent blog post, myIntegrity in Practice principal consultant Joel Ronchi also outlined that if advisers were going to receive a referral fee for recommending a service to clients, they should assess if it was likely to lead to a conflict of interest under FASEA Standard 3.

“Advisers need to professionally assess whether a conflict actually exists for whatever reasons, whether it be a monetary or non-monetary benefit,” Mr Ronchi said.

“The standard of professional judgement is a ‘common sense’ test approach based on the response to the question ‘would a disinterested or unbiased and reasonable person, in possession of all the facts, conclude that an arrangement or benefit could induce the adviser to act other than in their client’s best interest?’  

“If yes, then a conflict would exist for the purpose of Standard 3 and, in the event advice was given to a retail client, then the standard would be breached.”

Mr Ashenden said while FASEA’s most recent guidance on Standard 3 indicated that referral fees were allowed – as long as they were paid through a licensee rather than directly to the adviser – the guidance also indicated advisers had to carefully interrogate any conflicts of interest around that fee, and indeed whether the fee was necessary at all.

“That’s the other bit that FASEA have tried to be quite clear on, is when we look at these conflicts of interest, it’s really to say would I have given the same advice if I wasn’t going to get paid that fee,” he said.

“The bit you take a bit further with referrals is to say if you would have made that referral anyway if you weren’t going to get paid that fee, why do you need to be paid? 

“That’s the challenge for a lot of people is to say, ‘I can show it doesn’t conflict me because I wouldn't have done anything different’, and therefore you need to take it to the next level and say why do you need to receive that payment.”