A "finder" is an individual who is able to link up a client with something or somebody that fills a need for them or their enterprise. Paying finders constitutes compensation for the service of locating the thing sought.
The state of Texas imposes a limitation on both the types of activities that are legally eligible for a finder’s fee and the amount of the fee. There are other provisions under federal laws.
Finder's Fee Defined
A finder's fee is also called a referral fee, which explains the concept quite well. This fee is in the nature of a commission paid to a third party who enables a deal by bringing it to the attention of interested parties. It is a commercial trade: In exchange for introducing the parties to the deal, the finder receives a commission.
This involves a presumption that the parties would not have located the deal or worked together on it without the intermediary, so the facilitator warrants compensation for bringing them together.
Payment of a Finder's Fee
Who pays the finder's fee depends on particular deal. Sometimes the buyer of the transaction is on the hook for the finder's fee, but other times it is the seller. A finder's fee is not legally binding absent a contract, and in these cases, it is simply a gift.
For example, if one neighbor recommends that another neighbor use a particular realtor to close a sale, the realtor may give that person a gift, but they are not legally obligated to do so.
However, in a business situation, finder's fees are the subjects of contracts. This makes them legally binding if they fall within the confines of state law. They can be enforced by the finder as part of contract law.
Finder's Fees Not Permitted in Texas
Some types of finder's fees are simply not permitted in Texas. These include:
- Finder's fees for real estate brokers: Real estate brokers cannot collect finder’s fees for sending a client to a certain lender or home inspector.
- Finder's fees for doctors: A medical doctor cannot collect a finder’s fee for referring a patient.
- Finder's fees for investment advisors who also hold another investment role: Under the Texas Securities Commission rules, it is an illegal conflict of interest for a finder to hold dual roles.
- Finder's fees for charitable events and fundraisers: Texas state employees and officials cannot pay finder’s fees out of proceeds from charitable events and fundraisers.
Attorney Finder's Fees in Texas
Many states regulate finder's fees, and Texas is one of them. The state regulates both the types of situations in which finder's fees are permitted and also the amount of the fees. For example, Texas has regulated the fees that one law firm can charge another in order to maintain professional ethics.
For many years, Texas did not impose any rules about how attorneys could or should divide fees when a case is forwarded from one firm to another. Essentially, one firm could get a percentage of the lawyers' fees simply for making the transfer.
But in 2005, the Texas Supreme Court enacted new referral fee rules. These forbid "pure” referral fees where the referring lawyer has no role in the case other than forwarding it.
Attorney Referral Fees Only in Certain Cases
Since that time, attorney referral fees in Texas must be based on either a proportion of services or joint responsibility. Texas attorneys must get the client’s written consent in advance for either of these arrangements.
In the former case, each attorney must perform substantial services on behalf of the client with respect to a particular legal matter and there must be a “reasonable correlation” between the services performed and the sharing of the fee.
In a joint responsibility case, the referring lawyer has ethical responsibilities for the representation, including investigating the issue and referring the matter to a lawyer competent to handle it. They must also monitor the matter throughout the representation.
Texas Investment Advisor Finder's Fee Rules
In Texas, finder’s fees may be paid for bringing accredited investors together with the company issuing securities. But the investment advisor who claims the fee cannot also act in another capacity. That is, as a matter of business law, they cannot recommend stocks to invest in, or hold any other investment role.
More and more investment advisory companies are bringing in help for business development, including developing relationships with influencers who can provide referrals, or by paying directly for referrals. This can be with upfront cash or ongoing revenue-sharing agreements.
But the fear is that this practice of paying for referrals can create a conflict of interest for the finder that results in recommendations to the advisor firm regardless of how good they actually are or how appropriate the fit is for the person being referred.
SEC Securities Laws on Soliciting Clients
Because of this, the Security and Exchange Commission places regulatory requirements on solicitor relationships. This includes mandatory disclosures to potential clients and the requirement for registration for solicitors themselves. In this sense, a solicitor is any person who, directly or indirectly, seeks out a client for an investment advisor or refers them to an investment adviser.
Soliciting a client and referring a client are often used interchangeably, but they are actually distinct activities. To “solicit” is to engage in sales activity to encourage a client to work with an adviser. To “refer” is to introduce a client to an adviser, even if the solicitor does not convince, encourage or recommend the adviser.
The Texas State Securities Board requires that these finders register as investment advisers. Applicants must submit registration forms and pay fees electronically through the Investment Adviser Registration Depository (IARD) system.
Texas Rules About Private Security/Bounty Hunters
Like investment advisors, private security agents must be registered with the Texas Department of Public Safety, Private Security Bureau. This includes bounty hunters, who are charged with finding missing individuals (usually those who skipped out after bail) for a fee.
The DPS protects the public by requiring fingerprints and background checks on applicants, as well as investigating and resolving complaints.
Finders in this context are considered private investigators and cannot practice until registered with the state. Texas DPS requires that an applicant complete and submit an application along with the fee listed on the application, in order to get a license. The individual, the company and all its employees must be registered. Start early – the process can take up to two months to complete.
Texas Regulates Real Estate Agents and Brokers
One may not think of real estate agents and brokers as getting finder's fees, but that's exactly what happens when they get a commission, which is transaction-based compensation. They are paid for bringing a buyer or seller to a real estate investment deal or real estate transaction. In Texas, both agents and brokers are regulated.
Buying a home can be the biggest investment a person makes in their lifetime. Real estate agents work as salespersons, but also assist in the paperwork and many steps of the complex transaction.
They are managed by real estate brokers who are responsible for all brokerage activities and usually represent either the seller or the buyer. In exchange, the broker and real estate agent get a commission, calculated as a percentage of the sales price.
Real Estate Professional Licensing
The Texas Real Estate Commission (TREC) is responsible for licensing these real estate professionals in the state to ensure that they are qualified to help consumers to buy and sell property. Before receiving a license, each applicant for agent or broker must pass a background check by which the TREC assesses the applicant's trustworthiness and integrity.
There are also qualifying educational requirements to complete and a licensing exam to pass before they are granted authority to practice. An unlicensed person cannot sell real estate.
Note that TREC does not regulate real estate or brokers' fees. Rather, the fees are set by the written agreement or real estate contract. That means that the contract also constitutes a finder’s fee agreement between a licensed broker and a client. It pays to carefully review the contract before signing any representation agreement or service agreement.
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.