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Solicitors (Or How do I make money on this?)

My firm is frequently asked if it can pay people for referrals, and the short answer is “probably.”  The SEC calls third parties who send investment clients to investment advisors “solicitors,” and there is a specific rule governing solicitors and solicitor arrangements – SEC Rule 206(4)-3.


Under this rule, an investment advisor may pay cash referral fees to non-employees if the solicitor sends business to the firm.  However, there are numerous “hoops” that both the investment firm and solicitor must go through.  Generally, there are four basic requirements:

  1. There must be a written solicitor’s agreement between the solicitor and the investment advisory firm that sets forth the scope of the solicitor’s activities;
  2. The solicitor must deliver a copy of the firm’s legal disclosure document to the individual or business being solicited (Form ADV).  The solicitor is provided this form by the investment firm;
  3. The solicitor must deliver a disclosure to the potential client that states they are getting paid for the referral; and
  4. The solicitor must have basic record keeping requirements.  This is typically done on a spreadsheet provided by the investment advisory firm.


There is a proposed rule change from the SEC that would eliminate the solicitor having to provide Form ADV, but it has not yet been formally adopted.  However, given that the form can be delivered electronically, most solicitors should still err on the side of attaching Form ADV to correspondence with a potential client.


Some people are prohibited from acting as a solicitor.  Anyone that has been barred or suspended by the SEC or a state regulatory agency, anyone convicted of a felony or misdemeanor listed in the statute (typically financial crimes and violent crimes), anyone that has recently filed bankruptcy, and anyone that falls into any number of “bad actor” provisions may not be a solicitor.  Other than that, virtually anyone can fill the role.


However, the solicitor may not provide investment advice to the potential client. This is one of the items that is most highly audited in solicitor arrangements.  If a solicitor says “I looked at your portfolio, and you would be better off investing in ABC instead of DEF.  You should talk to firm Y,” then they have crossed a line.  This can get both the solicitor and firm in trouble.  However, saying “I’ve worked with firm Y, they’re great, and I really like product ABC, you should talk to them,” is perfectly fine. 


Solicitor agreements are almost always terminable at will as well.  This means either party (solicitor or firm) can simply end the arrangement.  The firm, if it ends the arrangement without cause (e.g. the solicitor did nothing wrong), is still obligated to pay the solicitor on the referred clients.


Solicitors do have to be cautious in advertising, as they are required to abide by all of the SEC’s rules regarding advertisements.  Typically, the firm prohibits the use of any advertising that has not been pre-approved by the firm.  A firm generally prefers solicitors to use their own networks, as opposed to mass advertising, but that is not always the case.


So why would you be interested in becoming a solicitor?  Well, first and foremost for most solicitors, is money.  Take a standard solicitor arrangement currently used by my firm:


A.    Any solicitor that refers a client is entitled to 20% of the gross management fee collected from the client, paid out over five years; and


B.     Provided the client stays with the firm (e.g.  you get paid if the firm gets paid).


By way of example – if Solicitor Steve refers a client to investment firm Y’s strategy, Steve signs up, invests $100,000, and Steve agrees to a 1% fee, then the solicitor would receive $200/year for five years, provided Steve remained a client.  As the fee is tied to the investment, if Steve’s account goes up in value, so does the solicitor fee.  New solicitor’s often think that does not seem like much, but it is actually a significant portion of the investment firm’s revenue.  Advisory fees just are not a large amount when compared to the amount of the investment.  Receiving 20% of annual gross revenue is a significant hit to the firm. 


Think of it this way, if you were a solicitor and brought a firm $100m in business, that firm would gross $1m on the year on a 1% fee structure.  You would get $200,000/year (if the investment stayed constant), and the firm has to run its entire business on the remaining $800,000 – paying traders, lawyers, rent, government fees, insurance, client representatives, etc. 


Please do not send us an email asking if you can become as solicitor.  The above is for informational purposes.  If and when we want to grow our network of solicitors (likely soon), there will be a post specifically devoted to asking if people would like to be solicitorsThis post is meant to introduce the concept so people can understand what a Solicitor is, how to become one, and understand the payment structure.  Fee free to ask any questions ABOUT solicitors though!

Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio and oversees Lorintine Capital's distressed real estate debt fund.

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