Views on the integrity of global capital markets
19 October 2017

Ethics in Practice: To Refer or Not Refer? Case for Week of 16 October

CFA Institute Ethical Decision-Making Framework

Analysis now posted below!

Ready for your weekly ethical workout? Keep Reading!

Case

Raphael, an investment adviser for Enright Financial Solutions (EFS), enters into an understanding with a friend who is a lawyer regarding the referral of clients. Raphael will refer EFS clients needing legal services to the lawyer in return for the lawyer recommending clients needing financial advisory services to Raphael and EFS.  This arrangement is

  1. acceptable since there are no payments involved.
  2. acceptable as long as the lawyer discloses the arrangement to the clients he refers to Raphael.
  3. acceptable as long as EFS is aware of Raphael’s agreement with the lawyer.
  4. unacceptable.

Analysis

This case deals with a mutually beneficial referral arrangement whereby service professionals refer clients to one another. Although such an agreement is not necessarily unethical and may ultimately be beneficial for the clients, there is a potential for a conflict of interest that must be disclosed. CFA Institute Standard VI(C): Disclosure of Conflicts, Referral Fees requires members to disclose to the employer, clients, and prospective clients “any compensation, consideration, or benefit received from or paid to others for the recommendation for products of services.” This disclosure allows both clients and the employer to evaluate any partiality shown in the recommendation of services and the full cost of those services. Although there is no money changing hands between Raphael and his friend, there is mutual consideration and benefit. The fact that no money is exchanged would not preclude disclosure (Choice A). Choice B addresses the disclosure issue but places the onus of disclosure on the lawyer and not on Raphael. Standard VI(C) requires Raphael to disclose the referral arrangement to any clients he refers to the lawyer and any potential clients referred to him by his friend. Choice C also addresses the disclosure issue by correctly stating that Raphael must disclose the arrangement to his employer. But this does not go far enough because Standard VI(C) requires disclosure to be made to clients, prospective clients, AND the employer. Does Raphael disclose any information about the arrangement to this clients or EFS? The facts of the case do not mention that he made the appropriate disclosure. The CFA Institute Ethical Decision-Making Framework calls for you to identify all relevant facts before making a decision.  Assuming Raphael made no disclosure to his clients or employer, this arrangement would be unacceptable (Choice D).

Have an idea for a case for us to feature? Send it to us at ethics@cfainstitute.org.

More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the CFA Institute Code of Ethics and Standards of Professional Conduct and let us know which of the choices you believe is the right thing to do and why. If you are not a CFA Institute member, you can post your choice and reasoning in the comments section below. For CFA Institute members, we would like you to join the conversation in our new Member App and post your responses there. Later in the week, we will post an analysis of the case and you can see how your response compares.

CFA Institute Member App

The Member App gives our members access to a content from multiple CFA Institute publications, including these weekly Ethics in Practice posts. Best of all, the app allows in-app submission of Continuing Education credits, which members can earn by reading and participating in the conversation for each case. (0.25 CE, 0.25 SER). The app is available in the Apple and Google Play stores. After downloading, simply log in using your CFA Institute website credentials (e.g., john.doe@cfainstitute.org + password). Hint: Save the post to your library in the app to find it easily.

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Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the director of ethics education at CFA Institute. He is responsible for development and maintenance of the CFA Institute Code and Standards, as well as the design and management of the CFA Institute Ethical Decision Making training programs. Stokes holds a JD degree.

1 thought on “Ethics in Practice: To Refer or Not Refer? Case for Week of 16 October”

  1. Nica says:

    D- Unacceptable

    Even though there is no referral fees involved, Members must disclose referral benefits(non cash benefits) received to employers, clients and prospects.

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