When should disclosure of referral fees be made?

• A. Never required.
• B. After entering into a formal client relationship.
• C. Only to employers hiring the advisor.
• D. To prospective clients before entering into a formal client relationship.

Answer: (D)

Disclosure of referral fees must be made to prospective clients before they enter into a formal relationship. This upfront transparency reveals any potential conflicts of interest so the client can judge whether the advice is objective and in their best interests. When a referral fee exists, it can create an incentive to steer the client toward a particular product or service, even inadvertently. By informing the client in advance, the advisor upholds fiduciary duties, promotes trust, and allows the client to provide informed consent or seek alternatives if they are uncomfortable with the arrangement. It’s not appropriate to disclose only after a relationship has begun, nor is it sufficient to limit disclosure to employers or never disclose at all; the early, comprehensive disclosure protects the client and maintains ethical standards.