Gifts and Conflicts of Interest

I received a call yesterday from an RIA firm that had been providing magazine subscriptions and other gifts to clients that referred new clients to the firm.  The managing member of the RIA firm said that he had attended a seminar at one of the industry’s bigger conventions and the speaker had suggested such an incentive program and had assured them that it was OK as long as no actual money involved.

OK, short answer, don’t go there.  This is an issue that has been debated, as the Advisor’s Act talk in terms of prohibitions of gifts of money.  In an early decision, the SEC implied that the prohibition extended to both money and non-money gifts where same was clearly in exchange for the referral.

Occasional gifts of sports or theater tickets should be fine as long as there is no demonstrable pattern of such gifts that could be construed as compensation for referrals. RIAs often send a gift card or a similar gift to clients on their birthday.  As long as the gift is not excessive ( in excess of $100), such gestures are arguably valid business expenses to thank clients.

The real issue with regard to any form of compensation to clients in exchange for referrals has to do with actual or potential conflicts of interest and disclosure of same.  This is a slippery slope and could possibly depend on the actual facts of the case.  In cases where this practice is involved, I have always argued that the failure to disclose is a violation of the Advisor’s Act if the practice is not disclosed at all in both the RIA’s Form ADV and specifically in writing to the potential client. RIAs should remember that full disclosure is one  of the primary duties under the Act.

One of my ongoing concerns is that many consultants do not take the time to research legal decisions and enforcement actions to fully inform themselves of applicable legal and regulatory standards.  Knowledge of the Advisor’s Act and the relevant regulations is absolutely necessary. However, failing to research all sources of relevant compliance information can result in serious consequences for both the RIA and the consultant.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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