Most planners have arrangements with colleagues, friends and local businesses for referring clients. It’s hard to find new clients and even harder to find clients that are worth having – so the art of referrals is to choose your sources wisely.
Accountants and lawyers are an attractive source of referrals. Clients who need their services are likely to have either significant assets or a clear and present need for financial planning services so many successful planners actively cultivate referral relationships with them.
But despite the best will in the world, these relationships can turn sour, so it’s important to establish them so they run smoothly not only in the honeymoon period, but also in the divorce phase.
Referral arrangements can take a number of forms as described below.
The simplest is a mere referral, where the referrer simply provides the prospect with the planner’s contact details and some information about the services they provide.
These can be wonderful sources of new clients but they are a little uncertain. If the referrer does no more than hand over information, there is no guarantee the prospect will contact the planner.
It’s more effective for the referrer to ask the prospect’s permission for you, the planner, to contact the prospect. If you’re efficient and do so promptly, there is a good chance that you will convert the prospect into a client.
It’s then up to you to service and develop a professional relationship of trust with the client. If the referral arrangement comes to an end, there’s a high likelihood that the client will stay with you, due to the personal nature of the services that you will have provided.
Referrer authorised representative
One technique which many find increases the success of referrals is for the referrer to badge their services with your planning brand.
Given that the referrer is holding themselves out as a provider of financial services, they will need to be appointed as your authorised representative.
As a licensee, you will be responsible for any financial services that the referrer provides to clients, so you’ll need to carefully consider what, if any financial services you want them to provide.
You also need to be careful that you don’t become liable for the referrer’s other activities, which, in the case of accountants, could include accounting, audit, and tax advice.
To protect against this, make sure you:
• Carefully define which elements of the referrer’s business fall within what you have authorised them to do. With accountants, ensure that standard accounting services are outside this.
• Ensure that the referrer clearly explains to clients which of the advice and services that they provide are under your AFSL and for which the referrer is personally responsible.
• Ensure that the referrer does not step over the line and provide financial product advice or services. The difficulty is that the referrer might already be providing financial advice (as opposed to financial product advice) and the temptation to ‘blur’ the lines can be high.
Another common structure for a referral arrangement is a joint venture (JV).
The rationale for this is that the planner and referrer can both share in the benefits brought by the client.
These include not only remuneration upfront and trail commissions, but also, if the referral arrangement is successful, the development of a valuable asset.
Generally a separate company will be incorporated in which the planner and referrer hold shares.
The joint venture company can either provide the planning services or, if it is an arm’s length entity to both you and the referrer, it can be appointed as your corporate authorised representative.
Either way, as shareholders, the referrer and planner will be able to participate in the profits earned by the JV company and in the value of the business they create.
Let’s look at some of the pitfalls of joint venture and authorised representative arrangements.
• Compliance risk – We’ve already seen that in both arrangements, as licensee, the planner carries the compliance risk for any financial services that the referrer provides, even if they are provided inadvertently. Both the referrer and the JV must abide by your compliance requirements and accept that non-compliance will result in termination of the authorisation.
• Distribution of revenue – As the planner, you need to be properly compensated for the risk to your AFSL and the contribution that you make in terms of your systems, processes and procedures.
The referral partner may not appreciate this contribution fully and may seek a greater share of the revenue as the party providing the client base. Generally, the planner would receive any plan fee and an agreed percentage of the ongoing remuneration. The parties would then share in the profits of the joint venture company as dividends paid to shareholders.
• No referrals – What if the referrer’s promise of a ready and willing client base of referrals does not eventuate? Tying the referrer’s revenue share to client referrals incentivises the referrer to bring profitable clients to the business.
• Expenses – If you share offices and resources with the referrer, then agree the basis on which you will pay for those resources upfront. Link it to market pricing. If you are dealing with accountants or lawyers, then predefine the basis on which they contribute their services to the joint venture. Should they be entitled to do so at full, or even partial, commercial rates, when you are contributing your time, expertise and systems for a salary plus profit, or should they be compensated on a cost recovery basis?
Avoid tying your contribution to expenses to the share of revenue that you generate for the firm. One client with this arrangement, who successfully developed the planning side of the business, ended up subsidising the rest of the referrer’s business.
• Non-exclusivity – What if the referrer has other JVs with other financial services providers, such as general insurance brokers or life writers?
• Termination – Perhaps the biggest issue is what happens when the relationship irretrievably breaks down or even if it happily terminates? For example, the referrer might decide to obtain their own AFSL or they could reach a potentially more profitable relationship with another planner.
Who will have the ongoing right to service the clients of the joint venture? Are you happy for the referrer to directly compete against you?
When going into a joint arrangement, it’s easy to overlook the fact that over the life of the venture, just like a marriage, the relationship will become increasingly complex.
Think about your friends and colleagues who have been divorced: did they split amicably with no arguments about kids or property? Did they have to go through the Family Court? Were they happy with how much it cost them in legal fees? How much easier would it have been if they had a prenuptial agreement?
Unless the rules are laid down in advance, when negotiations and discussions are easy because goodwill abounds, significant and sometimes irretrievable problems can occur after the relationship has broken down and communication is poor.
That is what a shareholder's agreement in effect is – a prenuptial agreement for business.
There will be a cost to obtain a well-drafted shareholder’s agreement that is customised for your circumstances.
Many clients initially feel that they cannot justify the cost but this small upfront outlay will pale in comparison to the potential legal fees, personal time and potential loss that you could incur if you don’t have one.
One of our client's separation from his referral partner was made so difficult that it affected his health for years afterwards, impacting his ability to look after his clients and operate the business for some years after the split.
He had no documentation in place to govern their rights and responsibilities – a form of corporate Russian roulette.
As a wise man once said “Bad advice is much more expensive than good advice”.
Claire Wivell Plater, managing director, The Fold Legal
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