The Hindu Business Line : From `all-talk' to `a business model'

In the world of medicine, referrals happen all the time. The word `referral', for starters, means `the act or process of referring somebody or something to somebody else, especially of sending a patient to consult a medical specialist,' as explained on http://encarta.msn.com. Many accountants too share clients with investment advisers on a reciprocal basis, writes Thomas Grady in Making Referral Relationships Pay, from Bloomberg (www.bloomberg.com).

Much of such sharing between practising accountants and others happens `as a professional courtesy, meaning, no compensation passes between the investment adviser and the CPA (certified public accounting) firm when revenue is generated from the shared client', notes the author. A problem with such gentleman's arrangements is that of balance: "More often than not, either the investment adviser or the CPA firm sends fewer referrals through the mutual gate, causing the strategic alliance to deteriorate and finally cease."

There should be `some way to measure how productive the alliance is', insists Grady. "Simply taking a body count of how many referrals were made by each partner is an especially flawed metric. It doesn't take into account the size of a potential client's account or how serious that client is about signing on." Also, move from the `all-talk' agreement to `a business model' that involves revenue-sharing, advises the author.

We are treading an area that is US-specific, please note. If an individual wants to receive `commission from sales activity in the investment world', he must join the NASD (National Association of Securities Dealers). An individual cannot become a registered representative (RR) unless he first affiliates with one of the more than 5,000 brokerage firms and passes one or more of various securities tests crafted by the NASD.

The book describes `three tests most commonly taken to become an RR'. The first, called Series 6, costing $60, "is a moderately difficult test of 100 questions for which the CPA is given two hours and fifteen minutes to answer." A pass in this test authorises `the sale of open-end mutual funds, variable life insurance, and variable annuities'.

The second is Series 7. At $200, this is `a six-hour mental migraine requiring 250 answers'; `one of the most gruelling marathons'. This test goes beyond Series 6 to cover `individual stocks, bonds, options, closed-end mutual funds, and direct participation programs (such as limited partnerships)'. The third test is Series 63, `the tamest' of the three tests. "The CPA is allowed 75 minutes to answer 65 questions at a cost of $70." This Series is required by the CPA's state of domicile in order to render advice within its borders.

After clearing the test, the CPA can receive commission, in various forms, `all funnelled through the brokerage firm'. Interestingly, the statutes don't explicitly call for `clear and perpetual disclosure of commission — how much and whence it comes', one learns. As a result, "Clients rarely know how much commission is generated from individual products sold to them, who receives it, and how long that commission stream persists."

Useful read for CAs too, with one caveat: that they stay within the confines of the code of conduct laid down by the Institute of Chartered Accountants of India.

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