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It is no secret that establishing and maintaining relationships with Centers of Influence (COIs) can be both advantageous and challenging. A trusted professional relationship ensures that your firm offers the full breadth of services that your clients require beyond your core competency. But far too often the referral stream is one-sided.
To set yourself up for success, it is paramount that you communicate consistently, continuously educate and invest into your COI partnerships, and it is important to review your firm's strategy at least annually as part of your business planning process.
In working with your peers, a strategy that we have seen become top-of-mind is formalizing your COI partnerships via "The Promoter Rule."
In this post we thought that we'd share the steps required of an RIA and COI to establish a formal partnership under this rule. As always your tru Experience and Compliance teams are here to help so please reach out to your team if you'd like to learn more.
The Promoter Rule:
The Promoter Rule, originally established under the Investment Advisers Act of 1940, regulates the compensation of individuals who solicit clients on behalf of registered investment advisors (RIAs). Essentially, it prohibits RIAs from compensating individuals for soliciting clients unless specific conditions are met. To ensure compliance and transparency, both the RIA and the Center of Influence (COI) must follow certain steps when setting up an agreement.
Steps for the RIA and COI:
(1) Identify Compliance Requirements: The RIA must understand the regulatory requirements of the Promoter Rule and ensure that any referral arrangement complies with these regulations. Your tru CCO can help educate and monitor to ensure full compliance within the SEC's guidelines.
(2) Draft a Promoter Agreement: The RIA should draft a written agreement outlining the terms of the referral arrangement. This agreement should specify the compensation structure, the services to be provided, and any other relevant details. It is important that the compensation provided be reasonable and not excessive, and aligns with industry standards. Your tru CCO can provide a sample agreement to give you a head start.
(3) Disclose Relationship to Clients: Both the RIA and COI must disclose the referral arrangement to clients in writing before entering into the agreement. Need help? tru has templates.
More on Disclosures to Clients:
Disclosure to clients is a crucial aspect of compliance with the Promoter Rule. Both the RIA and the COI must disclose the referral arrangement to clients in writing before any services are provided. This disclosure should be clear, comprehensive, and provided in a timely manner to ensure that clients are fully informed about the relationship between the RIA and the COI.
Clients should be made aware of the compensation arrangement, the nature of the relationship between the RIA and the COI, and any potential conflicts of interest that may arise. This disclosure helps to maintain transparency, build trust, and ensure that clients can make informed decisions about their financial relationships.
In summary, setting up a compliant referral agreement under the Promoter Rule requires careful attention to regulatory requirements, drafting written agreements, and providing timely disclosure to clients. By following these steps, both RIAs and COIs can establish referral arrangements that comply with regulatory standards while fostering trust and transparency with clients.
Conclusion:
Establishing compliant referral agreements under the Promoter Rule requires meticulous attention to regulatory guidelines, clear communication, and transparency with clients.
By following these steps and leveraging resources provided by your tru compliance team, both RIAs and COIs can foster productive partnerships while upholding ethical standards and client trust.