What should be one of the most pleasant and trouble-free aspects of a professional life is one of its most complex: saying “thank you” for a client referral.
I wondered then, and still wonder why lay people expect monetary rewards from real estate agents and other licensed professionals. Is it because of a mistaken belief that we are earning thousands of dollars in fees? Is it because of greed? An expectation that we will compensate them because they have seen others (illegally) compensated? Or is it a belief that in business, reciprocity should be a guiding principle – you scratch my back, and I will scratch yours?
But when I give a new neighbor the name of my pediatrician or dentist, I have no expectation that the next time I receive professional service from my physicians that I will get a discount or cash back. I never even expect a thank you – and rarely have I received one. The only expectation I have is that my neighbor will receive the same professional service from my doctor and dentist, or I will never refer these professionals again. Why don’t consumers have the same expectation of real estate practitioners and other licensed professionals?
Many business people – even those in regulated businesses – are permitted to accept and give referral fees and gifts. It is considered a polite gesture to give individuals who refer others a fruit basket, a modest gift certificate, or a dinner out. While many corporations have codes of ethics limiting the amounts that can be spent on wooing business clients, there is a general understanding that reciprocity can be a form of business protocol and etiquette.
To make matters more complex, federal laws may govern referral fees. In real estate, the Real Estate Settlement Procedures Act (or RESPA) enacted in 1974, specifically prohibits kickbacks and referral fees – the paying or receiving of any fee or thing of value for the referral of business related to the settlement or closing without rendering a service. Settlement services are broadly defined to include more than just the traditional services performed by a lender, mortgage broker or title company, such as origination, processing, or funding a loan. Rendering credit reports, termite inspections, and home inspections are all considered settlement services. Even those fees that are fully disclosed and agreed to by buyers or sellers are illegal. So mortgage brokers or loan officers or title company clerks getting a $100 kickback from the surveyor firm they recommended to a buyer would be in violation of RESPA. Any person who violates RESPA’s provisions may be fined up to $10,000 or imprisoned for up to one year, or both. Additionally, the person violating RESPA is liable to the person charged for the settlement service for three times the amount paid for the settlement service. In addition to criminal penalties, RESPA violations are being combined with other private lawsuit claims such as antitrust violations, exposing violators to additional civil liability.
Let’s set aside the issue of law, for just a moment. What are some of the ethical issues in giving or receiving referral fees?
As I mentioned earlier, I don’t have any qualms about providing modest thank-you gifts to individuals who send me business–with one proviso: those referrals should be unsolicited. In other words, I should not make offers to reward consumers if they send me business. If satisfied clients wish to send me referral business without prompting on my part, it seems appropriate and polite to send a small gift.
If a firm wants to woo my business with token gifts, such as donuts, ballpoint pens, or even educational seminars – as long as there is no expectation that I will buy or recommend the firm’s products, the gifts are acceptable. However, if the firm is trying to buy my recommendation of their product with expensive trinkets or junkets, the gift is really a bribe.
Another offensive practice that is currently making the rounds is paying fees to be placed on referral lists. If I must pay to have my firm placed on a “List of Recommended Vendors,” I would conclude that the so-called recommended vendors are simply the ones who can afford the price of being on the list. The value of such a list is ethically questionable.
Reprinted with permission.