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Also available as podcast (Episode #132)
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What Is An RIA Solicitor Agreement?
TL;DR – A “solicitor” agreement enables an RIA to pay solicitors for referring prospective clients to the RIA. An example of this could be a center of influence (COI) relationship such as a CPA firm, that wishes to refer business to your RIA for wealth management services, and in turn share in the revenue generated from the advisory relationship. Such arrangements are permissible provided certain regulatory and disclosure requirements are followed. It is also important to consider established industry best practices for such arrangements.
Host:
Brad Wales
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Full Transcript:
What is an RIA solicitor agreement? That is today’s question on the Transition To RIA question and answer series. It is episode #132.
Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today’s episode, we’re going to talk about… what is a solicitor agreement?
That’s maybe a term you’ve heard, maybe a term you haven’t heard before. But it is something that is essentially made available to advisors that transition their practice into the RIA model, and it might be something very appealing to you.
So I want to talk about what it is, so you have it on your roadmap for a possible motivation for making a transition with your practice.
A “solicitor arrangement” is a regulatory term. Think of it as a paid referral program.
With your practice you might have centers of influence that you’ve built relationships with and that you refer clients to them and then they maybe refer clients back to you.
Maybe you have some of those that work very well. Other times, you’ll hear frustrations where some of them are more one-sided in the direction of which direction the referrals are going.
In the RIA space, you’re absolutely able to continue to do that and have your centers of influence and have your referral partners that you send folks back and forth to.
What is allowed though, and we’ll get into the semantics to this, if you desire to, you can make some of those referrals a paid referral relationship. The referring partner, the center of influence that is referring someone to you, you can compensate them for that referral.
Perhaps to incentivize them to make those referrals. Perhaps, as we’ll get into, because you’ve sort of joined forces of how you position yourselves together in the marketplace.
It is a solicitor arrangement that enables you to be able to do that, to have those paid referrals.
An example of where this can come into play is maybe you’re the financial advisor, you’re the RIA, and you have a center influence that has a CPA practice. And the CPA – and this happens a lot, I talk to a lot of CPA practices that reach out to me on this sort of thing – they say… “A lot of our clients ask if we can help them with their investment needs? They have these assets that need to be invested and planned for and all those sorts of things.”
Perhaps the CPA firm doesn’t desire to do that in-house, or they just recognize they do not have the expertise or the capacity to do that in-house. And so what they do is they perhaps work with an RIA on a solicitor arrangement.
They say (to an RIA)…. “We’re going to refer those clients and those needs to you. You’re going to help them with that part of the equation, the financial plan and the asset management, all the things that you do as an RIA. And for that, let’s work out some sort of economic arrangement for that.”
How a CPA might position that with their clients is to say… “Clients, we realize you have needs beyond the specific tax planning or tax resources that we provide for you. But we also realize that our expertise is on the tax side. Instead of trying to become experts on the investment side, we’ve realized there are better resources out there that are experts on that. More so than we could ever be in-house ourselves. And so as opposed to trying to build out a wealth management arm to our practice, we’ve partnered with this third party wealth management firm and we have an arrangement of where we refer folks to them and let me tell you all about it and here’s why we think that’s something you should explore.”
That’s an example of how some CPA practices (as referring partners) position it. And it’s a very valid explanation.
There are likewise some CPA practices and tax planning firms that do build out their own advisory services in-house and that’s fine. They might start their own RIA for it.
But others, again, whether due to capacity, or what they’re passionate about, or sometimes they just want to stay in their lane, there is a way to potentially go into this solicitor type arrangement.
This is something any RIA can do in theory; any advisor under an RIA can do. The question though is if you’re under another RIA will they allow you to do it?
If you are at a large wirehouse firm you are technically under a broker-dealer and an RIA. It’s just a very large RIA. When you open a fee-based account you’re under the RIA side of things. Often referred to as the corporate RIA.
Any RIA, even very large RIAs, can put solicitor arrangements in place. But they have maybe chosen not to for various reasons.
If you have your own RIA, it gives you the ability to implement this if you want. Or if you were to join an RIA, you’d want to inquire with them and see if it’s something they accommodate.
Now there are several things you must think about if you were to put something like this into place. Which for simplicity of the conversation, let’s assume you’d be starting your own RIA (vs joining an existing one.)
First, there are compliance responsibilities, things that must be done a certain way to do this properly and not run afoul of the regulations.
As an example, the arrangement must be disclosed to clients. It is typically noted in the ADV.
If you’re not aware, every RIA’s ADV Part 2 has a specific section that outlines whether they have any solicitor agreements. Many RIAs do not have such agreements. But you can look up any RIA and see if the answer is we do not have any those, or if they do have them.
They are disclosing that in their ADV document, which is a publicly available document and is given to their clients.
Next, a referred client must acknowledge in writing their awareness of the solicitor arrangement.
If you were to set up a solicitor arrangement, with the help of your chosen compliance consulting firm, you would have an acknowledgement form created that the client would sign, that they understand that there is this paid referral relationship in place.
Next, somewhat related to compliance, there are also record keeping steps involved. You need to keep track of everything.
If you have an arrangement with, again, picking on a CPA firm, if they were to refer clients, you need to keep track of who they’ve referred over. You need to keep track of who becomes a client. You need to keep track of whatever the compensation arrangement is (which I’ll give examples of here shortly.) You need to keep track and facilitate the payments back to them.
So there’s some recordkeeping that goes along with it.
And if you have such arrangements in place, it is reasonable the regulators, if they see on your ADV you have such an arrangement, when they come out to examine you, it’s very likely they’ll ask you questions about it.
So there are compliance parameters to have in place. Which again, your chosen compliance consulting firm will help you with that, but you must make sure you do it correctly.
The next variable to think through is what sort of arrangement would you have for this with the referring party? The solicitor that’s sending you clients.
There are no set rules on this. You can structure this, for the most part, however works best for you, your referring partners, and the potential clients.
A typical arrangement is some amount of basis points back to the referring partner. Or it could be a percentage of revenue.
A typical arrangement is 25 basis points. So if I’m the CPA… “I refer this client to you, RIA, you’re going to do all of your services, you’re going to charge your fee (ex 1%), and 25 basis points of your 100 basis points (in this example), you’re going to pay back to me on an ongoing basis.”
Or you could express it as a percentage of the fee. Which if you happen to charge exactly 1% fee, than 25 basis points, is the same thing as 25% of the fee.
You could do it on basis points, you could do it as a percentage of the fee. That’s something you work out with your referring partner that you both agree with.
But to give you an idea, that 25 bps, 25% range is a typical rate. You could do less, you could do more. Again, it’s just what makes sense for both parties.
And keep in mind, because you are sharing some of your revenue with this referring party, the remaining economics need to still work for you and make it a profitable relationship.
Another example of a potential arrangement is perhaps simply a one-time fee paid to the referring party. “If you refer someone to me and they become a client and bring their assets to me, I give you a one-time fee of $X.”
There is a lot of flexibility in how you can do it. Again though, it all must be disclosed and it must work for all parties involved.
Another variable is time length.
Some arrangements are perpetual. You might say… “CPA firm, refer someone to me, and we’ll pay you 25 basis points. That fee is in perpetuity this year, next year, every year after that, as long as we still have the client.”
I’ve seen other arrangements where it’s perpetual, but for a set period of time. Which I guess I shouldn’t use the word perpetual for that. It’s perhaps an ongoing referral fee paid, but only for the first five years of the client relationship. There’s an end date to it.
Again, you have flexibility. Do you want to do perpetual, or do you want to do an end date?
I’ve also seen others that get a little creative and they say (to the referring party)… “I’m willing to do this essentially perpetual, and we’ll do 25 basis points. However, that’s under the circumstances that you continue to send me at least X referrals a year.”
That’s not to force some number of referrals, but basically to say… “If you refer some people to me and it works out, which is great, and then maybe next year you refer some more people, and then for whatever reason after that you stop referring anyone to me, I’m not going to keep paying you for the next 20 years (on those prior referrals) when we’re no longer really actively having this referral arrangement any longer. Yes, you sent them over, but you stopped referring people to me.”
So I have seen others that do this where they don’t put a set time limit on in like five years, but they do have terms making sure the referral relationship stays active for the ongoing referral payments to continue.
You have this flexibility. It is something you’d want to think through of how to put it in place. I’m happy to share with you if you have questions on what I’ve seen.
Then the final thing I’ll note, and I’m not necessarily covering everything to do with solicitor arrangements, is to always maintain control of your process with clients.
You presumably have a process for how you work with prospective clients, perhaps that first conversation, that first meeting, how you work them through the prospect stage, how you onboard them as clients, how you work with them on an ongoing basis after that.
I have heard of scenarios where an advisor had that locked in and that worked for them and then maybe a referring partner tried to start dictating to the RIA how they should do things.
There needs to be some degree of partnership. Particularly again that CPA example where part of the partnership is to work together on the tax part of everything. But you want to really define on the front-end with your referral partner what those expectations are.
If they start trying to dictate to you, for example, how many times a year you need to be meeting with the client. Or how to onboard the clients. Or how to work them through your prospect funnel. I would be vary cautious of that.
If your process works, don’t let someone else dictate what you should be doing. That’s not going to be a good referral partner for you. That is going to create issues down the line.
Again, you do need to find that middle ground where there is some amount of overlap. That’s the whole reason you’re doing this. But be very protective of what your process is and don’t let anyone dictate to you how to do things.
That’s just a suggestion. It’s not a regulatory requirement or anything like that, but something I’ve seen and I think it’s important that you think through.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. Talking about this sort of thing is something I discuss with advisors all the time of what are the additional things you can do if you were to transition your practice into the RIA model. What additional flexibility you’ll have, investment solutions available to use, how to define your value pro, etc.
And one way you might then be able to grow your practice is to consider establishing these sorts of solicitor arrangements
Again, this is the sort of thing I help advisors with all day long. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers.
And at the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
And with that, I hope you found value on today’s episode, and I’ll see you in the next one.
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