Clients frequently ask their CPAs for guidance on selecting a wealth advisory firm. Often, CPAs have done their own due diligence to identify wealth advisers who they believe are high
quality, charge reasonably in a transparent manner, and act as a fiduciary.
Certainly, CPA firms can offer wealth advisory services, but many choose not to based on compliance complexities, operational and employment costs, and parameters
around maintaining independence. So, for those CPAs who opt to work with a wealth adviser on client matters, a solicitor agreement may be needed.
Solicitor agreements provide compensation to the CPA firm for referring clients to a wealth management firm and provides financial support for the collaboration it takes to assess a client’s full financial picture, including taxes and long-term
goals. Clients are best served when their professional advisers work together to find solutions that provide results tailored to the client’s specific goals and needs.
Here is an example of how this might work: the wealth adviser
provides a solicitor agreement to the CPA that allows the wealth advisory firm to pay a portion of the investment management fee to the CPA firm in return for referring clients. The wealth advisory firm will charge the client its normal fee and share
part of the fee with the CPA firm.
A key factor in this arrangement is that the client pays no more to hire the wealth adviser. This allows the CPA to be compensated without the added costs and complexities of adding wealth advisory
services within the firm.
Before a CPA firm decides to enter into a solicitor agreement, it must perform its own due diligence on the wealth advisory firm. Because CPAs are highly trusted by clients, a referral to a wealth adviser
carries significance. A CPA firm is independent and objective in everything it does and how it delivers advice to clients. You will want to be sure that any wealth advisory firm you send clients to conducts its practice in the same manner.
Here are a few questions you should consider:
- Is the wealth advisory firm registered with the Securities and Exchange Commission (SEC)? Make certain there are no outstanding violations on the firm or any of their advisers.
- Is the wealth advisory firm a “fee only” adviser? This means they do not charge any commissions or contingent fees and that their fees are transparent.
- Will the wealth advisory firm act as a fiduciary, putting clients’ interest ahead of its own and having a duty to preserve good faith and trust?
- Does the firm have professionals with industry-level credentials? It is also important to look at their years of experience.
- How many assets does the adviser have under management?
- What is the minimum portfolio size the firm will accept?
- What is the investment philosophy?
- Is the adviser tax-aware in managing portfolios and understanding the coordination of long-term tax ramifications with investment advice and management?
- Does the firm have the depth to assist a more complex client who may own a closely held business?
- What is the average size of its clients? (Some advisers specialize in certain types of clients or work.)
- Does the firm have the resources to work with ultra-high-net-worth families where investment management and planning requires a different level of experience?
- Does the firm use a team approach with specialists from various areas?
- Does the adviser have references? In some cases, you may already have clients who are working with a wealth advisory practice you are considering.
Understand that solicitor agreements are not exclusive. This means your CPA firm may enter into a number of these agreements with different advisers. Some CPAs like to give out a few references to clients as options to consider; others like to have a
menu of options to choose from and refer from a list depending on facts and circumstances.
When seeking to establish or continue a solicitation arrangement with an SEC-registered investment adviser, both the investment adviser and CPA must do so consistent with applicable SEC1 and state law requirements.
For the SEC, current
solicitor rules require the following:
- Establish a written agreement setting forth certain terms and conditions of the referral arrangement.
- The solicitor will provide prospective clients with the adviser’s brochure at the time of the solicitation.
- Provide clients with a separate written disclosure document containing certain information pertaining to the solicitation arrangement, including a description of the compensation to be paid to the CPA.
- The wealth adviser must obtain (and maintain for recordkeeping purposes) a signed and dated document from the client acknowledging receipt of both the adviser’s and the CPA’s written disclosure statement.
In addition, the adviser must have a reasonable belief that the solicitor continues to qualify to serve under applicable state and/or federal securities laws and can discharge their obligations.
State requirements regulating solicitors differ. It is important, before engaging solicitors in a particular state, to determine if any corresponding filing, registration, and/or qualification requirements are applicable to the adviser and/or the solicitor.
Subsequent to a review of SEC and state law requirements, the roles and obligations of the SEC adviser and CPA solicitor should be set forth in a well-defined solicitation agreement outlining each party’s obligations.
The majority of states rely on the SEC definition of investment adviser representative under the Advisors Act when determining who will or will not be required to be registered in that state. An investment adviser representative is generally a person
who provides investment advice and/or services in the state on behalf of an advisory firm. Under the SEC definition, an individual will not be considered an investment adviser representative if he or she is not a “supervised person” of
an advisory firm. The SEC defines a supervised person to be any of an advisory firm’s officers, partners, directors (or other persons occupying a similar status or performing similar functions), or employees or any other person who provides
investment advice on behalf of the advisory firm and is subject to the advisory firm’s supervision or control. A nonemployee independent contractor who provides investment advice on behalf of the advisory firm is subject to the advisory firm’s
supervision and/or control. Thus, a solicitor for an SEC-registered adviser who is not a partner, officer, director, or employee of the SEC adviser is not a supervised person, unless the solicitor provides investment advice on behalf of the investment
If the CPA solicitor is not a supervised person under the SEC definition, he or she will be subject to state registration requirements for solicitors, to the extent applicable (which differ from state-to-state). In Pennsylvania,2 a solicitor does not need to register as an investment adviser or investment adviser representative if the solicitor meets the following:
- Is in compliance with all requirements of cash payment for client solicitation under the Pennsylvania Code (i.e., the current SEC requirements referenced above)
- Provides impersonal investment advisory services (i.e., services that do not purport to meet the objectives or needs of specific clients)
- Is not subject to any disqualifying order, judgment, or decree under Pennsylvania law
Pennsylvania CPA solicitors for an SEC-registered investment adviser should review the above to determine if the registration exemption is available.
Solicitation arrangements can be beneficial to CPA firms and their clients. The regulations may seem a bit daunting at first when considering such an agreement. Just know that a well-established wealth advisory firm will likely be working with an experienced
SEC attorney who may be able to assist with understanding how to establish such an agreement.
1 Although solicitor/referral arrangements are subject to the amended rule that becomes fully effective in November 2022, for purposes of this article it is assumed that the solicitor will seek to enter into referral arrangements that will result in greater than $1,000 of total annual referral fee compensation. Based upon this assumption, Stark & Stark’s recommendation is to continue to comply with the current rule requirements referenced.
2 This is a general, abbreviated discussion. It is not legal advice as to whether registration is required in any specific situation. State laws are subject to both nuance and change, and counsel should always be consulted.
Angie M. Stephenson, CPA, PFS, CFP, is partner, senior wealth adviser, and COO with Domani Wealth in Lancaster. She can be reached at email@example.com.
Thomas D. Giachetti, JD, is chair of the investment management and securities practice group with Stark & Stark in Lawrenceville, N.J. He can be reached at firstname.lastname@example.org.