SEC fines Zoe Financial $450K over undisclosed referral conflict

Zoe Financial, the New York-based advisor-matching service that later built a turnkey asset management platform, has agreed to pay a $450,000 civil penalty as part of a settlement with the Securities and Exchange Commission, which had found a years-long failure by the firm to disclose conflict of interest to its current and prospective clients.

The conflict, according to the SEC, centered around a financial incentive the firm had to recommend certain financial advisors to clients and prospects that went through its referral program.

According to the SEC's order published Monday, the violations covered a roughly two-year period between January 2023 and December 2024. Over that time, the RIA stood to gain when the clients it referred went to advisors using its Zoe Wealth platform, and it did not disclose that conflict to clients.

The agency also found that Zoe did not accurately describe how it handled a separate conflict involving certain advisory firms that held minority stakes in the company.

"Investment advisers have a fiduciary obligation to fully and fairly disclose material conflicts of interest," said Sheldon Pollock, associate director of the SEC's New York Regional Office.

Zoe started as a referral service in about February 2018. People looking for an advisor completed a questionnaire on its website covering their age, goals, assets, location and income. From there, an algorithm was used to rank matches from Zoe's network, which held roughly 128 to 225 advisory firms during the period covered by the SEC order. Advisors who signed a Zoe client agreed to hand over a portion of the advisory fees they collected from that client.

Zoe's referral funnel goes beyond the algorithm. In cases where a prospect received matches but did not book a call, a Zoe salesperson typically followed up and often suggested other advisors. The SEC found that in about 46% of cases, Zoe clients who hired a network advisor chose one the algorithm had not originally put forward. According to the order, the salespeople had no specific guidance or training on which factors they could or could not weigh.

In January 2023, Zoe launched Zoe Wealth, which offers sub-advisory services, help with account onboarding and back-office support for advisors. At the time, founder and Chief Executive Andres Garcia-Amaya described the move as a natural extension of matchmaking.

"Now, we've given them a platform to manage the client relationship more efficiently," he told InvestmentNews in an interview.

While advisors continued to pay a referral fee for each new client relationship through Zoe Financial's referral service, the Zoe Wealth platform introduced a separate fee based on advisory assets.

According to the SEC, internal communications show the company was focused on bringing more advisors and more assets onto Zoe Wealth. Growth on the platform also raised the enterprise value of Zoe, which announced a $29.6 million Series B fundraising round led by Sageview Capital in April last year.

According to the SEC, Zoe employees drew a direct line between using the platform and getting more referrals. It cited how one former vice president, who did not oversee the sales team, told an advisor he would not "call it a quid pro quo, but obviously the firms that are using Zoe Wealth are just going to get more referrals."

Over time, the SEC said Zoe began telling advisors they would be removed from the network if they did not adopt the platform. By the end of 2024, it had cut ties with most of the advisors who declined. While the algorithm itself did not consider whether an advisor used Zoe Wealth, the SEC said salespeople who did know which advisors used it frequently ended up shaping the final recommendation.

According to the SEC, Zoe fell short of its disclosure obligations because the brochured for its referral program failed to mention Zoe Wealth until October 2024. At that point, the firm filed an updated disclosure saying it "reserves the right to require advisers to use [Zoe Wealth], and maintain a cumulative minimum account value at the platform, in order to also be included in the adviser referral program," which the regulator found did not communicate Zoe's financial stake in the arrangement. It wasn't until late that December when the firm finally acknowledged its "incentive to refer [u]sers to [investment advisers] that utilize the Zoe Wealth Platform," according to the SEC

Beyond that, the SEC said some RIAs participating in the referral network held indirect minority interests in Zoe. The company said it managed that conflict by referring clients "solely based on that individual's answer to questions during the potential client's onboarding process," though the SEC found the salespeople's discretion to recommend advisors for other reasons made the disclosure misleading.

Zoe Financial consented to a censure and a cease-and-desist order without admitting the SEC's findings. The firm must also pay the $450,000 penalty ordered by the SEC within 14 days.

In accepting the settlement, the SEC acknowledged remedial steps Zoe had taken, including revising its compliance manual to specify that salespeople are not to give their own advisor recommendations, as well as hiring a full-time, in-house chief compliance officer.