Standard IV (B.8) - Disclosure of Referral Fees

D

Under Standard IV (B.8), appropriate disclosure involves disclosing the nature of the consideration or benefit given or received for the recommending of services.

Consideration includes all fees, whether paid in cash, in soft dollars, or in kind.

Standard IV (B.8) of the CFA® Level 1 curriculum addresses the disclosure of referral fees. Referral fees are compensation paid to individuals or entities for referring clients or customers to financial professionals or investment firms. These fees can take various forms, including cash payments, payments made "in kind," or soft dollar referral fees.

A. Referral fees paid in cash: Referral fees paid in cash refer to direct monetary payments made to the individuals or entities that refer clients. This could be a fixed fee or a percentage of the assets or fees generated from the referred client's business. For example, a financial advisor may pay a referral fee of 1% of the assets under management for each client referred.

B. Referral fees paid "in kind": Referral fees paid "in kind" involve compensating the referrer with goods or services instead of direct cash payments. For instance, a financial advisor may provide the referrer with a vacation package, gift certificates, or other non-monetary incentives as a form of referral fee.

C. Soft dollar referral fees: Soft dollar referral fees involve the payment of commissions or rebates to the referrer in the form of trade execution services, research, or other products or services. Soft dollars are credits or rebates that the investment firm receives based on the trading volume generated by the referred client's business. The investment firm may allocate a portion of these soft dollars to the referrer as a referral fee.

D. All of these answers: The correct answer is D, "all of these answers." Standard IV (B.8) requires disclosure of all types of referral fees, whether paid in cash, paid "in kind," or in the form of soft dollars. Financial professionals and investment firms are required to provide clear and explicit disclosure to clients and prospective clients regarding any compensation arrangements they have with third-party referrers.

It's important to note that disclosure is essential to ensure transparency and to help clients make informed decisions. By disclosing referral fees, clients can assess any potential conflicts of interest and understand the incentives that may influence the recommendations they receive from the financial professional or investment firm.