Re­ports from fi­nan­cial ad­vi­sors and in­dus­try data in­di­cate that clients are not re­fer­ring their friends and fam­ily mem­bers as fre­quently as they did in years past. Still, there are ways to en­cour­age in­tro­duc­tions

Investment Executive - - FRONT PAGE - Dan Richards is CEO of Cli­entin­sights ( cli­entin­ in Toronto. For more of Dan’s columns and in­for­ma­tive videos, visit in­vest­mentex­ec­u­ DAN RI CHARDS

Why client re­fer­rals are in de­cline, and what you can do.

HIS­TOR­I­CALLY, RE­FER­RALS HAVE been the pri­mary way in which fi­nan­cial ad­vi­sors at­tract new clients. And those re­fer­rals came rel­a­tively eas­ily as a re­ward for do­ing a good job for ex­ist­ing clients. But times have changed. When I talk with ad­vi­sors to­day, I hear a dif­fer­ent story: many talk about re­fer­rals “dry­ing up.” In­dus­try data backs this up.

The Fi­nan­cial Per­for­mance Study of Ad­vi­sory Firms, a 2016 study of ad­vi­sors in the U.S., found that client re­fer­rals rep­re­sented less than 2% of as­sets un­der man­age­ment (AUM) in 2015. Fur­ther­more, to in­crease AUM, re­fer­rals were sig­nif­i­cantly less im­por­tant than the com­bined AUM from a va­ri­ety of other busi­ness-de­vel­op­ment tech­niques.

There are sev­eral rea­sons re­fer­rals have dropped from his­tor­i­cal lev­els:


Some clients re­main scarred by the “near death” ex­pe­ri­ence of 2008. At one round­table with in­vestors that I hosted re­cently, sev­eral par­tic­i­pants said that even though they liked and trusted their ad­vi­sors, they would be cau­tious about re­fer­ring friends.

The rea­son came down to the re­spon­si­bil­ity that would come with mak­ing those in­tro­duc­tions and the risk of jeop­ar­diz­ing friend­ships should we see an­other sharp drop in fi­nan­cial mar­kets.

Added to this con­cern is the fact some clients who re­ferred friends and fam­ily to ad­vi­sors in the past re­ported that the friends felt pres­sured to meet the ad­vi­sor. Even for clients who now deal with a dif­fer­ent ad­vi­sor, that mem­ory still may make them overly cau­tious.


Even if your clients are happy with the job you do and the re­la­tion­ship you have with them, that isn’t al­ways enough to lead to an en­thu­si­as­tic re­fer­ral.

One rea­son for that lack of en­thu­si­asm is that many ad­vi­sors are per­ceived to op­er­ate very sim­i­larly, us­ing words to de­scribe how they op­er­ate that are in­dis­tin­guish­able from the terms used by other ad­vi­sors.

This is no dif­fer­ent from rec­om­mend­ing your ac­coun­tant or lawyer to a friend. Even if you’re happy with your ac­coun­tant, if you feel that the job he or she does for you is fun­da­men­tally no dif­fer­ent from what other ac­coun­tants would per­form, you’re less likely to pro­vide an en­thu­si­as­tic re­fer­ral.


Fi­nally, there’s the re­al­ity that most in­vestors with sig­nif­i­cant in­vestible as­sets ei­ther are work­ing with an ad­vi­sor or have worked with one in the past be­fore de­cid­ing to man­age their money on their own. As a re­sult, there are fewer in­vestors ac­tively look­ing to move.

We also have to add the im­pact of buoy­ant mar­kets. In Jan­uary, I spoke with an ad­vi­sor who said that prospec­tive clients are re­luc­tant to change what they’re do­ing be­cause mar­kets have been strong since 2009.

How­ever, when we hit an in­evitable cor­rec­tion, a flood of in­vestors will be look­ing to move. Of course, that de­pends on the na­ture of the cor­rec­tion. A sharp pull­back may cause in­vestors to pull out of the mar­ket en­tirely, sim­i­lar to what we saw some clients do in 2008.

Given the re­al­ity of these ob­sta­cles to re­fer­rals, here are three steps to in­crease re­fer­rals: 1. RE­DUCE THE RISK TO CLIENTS Most ad­vi­sors in­stinc­tively rec­og­nize the im­por­tance of re­duc­ing the risk for clients in mak­ing re­fer­rals. That’s one rea­son why some self-styled “re­fer­ral ex­perts” urge ad­vi­sors to get clients to talk about the value you pro­vide.

There are two prob­lems with ask­ing clients to de­scribe the value you pro­vide. The first is that, quite frankly, do­ing so is a bit weird, and you risk hav­ing clients view you as be­ing like some­one who sells used cars rather than as a pro­fes­sional. Hon­estly, can you see a suc­cess­ful ac­coun­tant or lawyer say­ing to a client: “Be­fore we go fur­ther, can you tell me all the ways that I’ve cre­ated value in our re­la­tion­ship?”

But there’s a sec­ond, more fun­da­men­tal is­sue: for clients to talk about the dis­tinct and unique value you pro­vide, you first have to pro­vide dis­tinct and unique value. One key is fo­cus­ing nar­rowly on the clients you work with and the prob­lems that you solve for them. By mak­ing the tran­si­tion in your busi­ness to be­come the safe choice for the clients you serve, you re­duce the risk for clients to pro­vide re­fer­rals to other mem­bers of your tar­get com­mu­nity.

Re­mem­ber, clients don’t make re­fer­rals to help their ad­vi­sors; they make them to help their friends. As an ex­am­ple of an ap­proach to be­come the safe choice, one Amer­i­can ad­vi­sor fo­cuses on own­ers of au­to­mo­bile deal­er­ships. Among other tools to ad­dress a key risk for these auto deal­ers, this ad­vi­sor de­vel­oped a pro­pri­etary port­fo­lio that un­der­weights con­sumer cycli­cals and auto stocks.

An­other ad­vi­sor con­cen­trates on own­ers of mid-size busi­nesses and hosts break­fast ses­sions twice a year to which he brings out­side speak­ers to dis­cuss hot-but­ton top­ics, such as best prac­tices for hir­ing on­line, in­creas­ing em­ployee re­ten­tion and ways to re­duce the risk of em­ployee lit­i­ga­tion. 2. TAR­GET THE RIGHT CLIENTS When you read ad­vice on re­fer­rals, there’s lots about the ad­vi­sor’s role in mak­ing re­fer­rals hap­pen. What’s sel­dom men­tioned is the role the client’s mind­set plays in mak­ing re­fer­rals hap­pen.

A re­search study I con­ducted in 2012 sheds im­por­tant light on how dif­fer­ent clients re­spond to the same con­ver­sa­tion. This study gath­ered in-depth in­for­ma­tion from 500 clients. When asked how many times they’d in­tro­duced their ad­vi­sor to friends or fam­ily in the past two years, the an­swer from slightly more than half of sur­vey par­tic­i­pants was “none”; from one in five, the an­swer was “once”; and 25% of par­tic­i­pants had made two or more in­tro­duc­tions.

When asked whether their ad­vi­sor had brought up the topic of re­fer­rals, 19% of those who had not made in­tro­duc­tions said their ad­vi­sor had men­tioned it, vs 22% of study par­tic­i­pants who had pro­vided mul­ti­ple in­tro­duc­tions.

The next hy­poth­e­sis was that clients who pro­vided re­fer­rals were more sat­is­fied with their ad­vi­sor’s per­for­mance. But, again, there were no mean­ing­ful dif­fer­ences among clients who’d made mul­ti­ple re­fer­rals and those who had not.

For­tu­nately, we asked one other ques­tion that ul­ti­mately pro­vided the an­swer: we asked the clients who com­pleted the sur­veys whether they had made re­fer­rals over the past two years to other pro­fes­sion­als, such as ac­coun­tants, lawyers, bankers, doc­tors and den­tists. We found that clients who re­fer their ad­vi­sor fre­quently were more likely to re­fer other pro­fes­sion­als. (See ta­ble at top right.)

There are at least two im­pli­ca­tions to this re­search:

You need to give re­fer­rals greater im­por­tance when iden­ti­fy­ing your most valu­able clients. Clearly, re­fer­rals are your most im­por­tant form of non-fi­nan­cial com­pen­sa­tion from a re­la­tion­ship. When you seg­ment clients in terms of the com­mu­ni­ca­tion they’ll re­ceive, en­sure that you give “high-re­fer­ral DNA” clients — those who pro­vide re­fer­rals — the recog­ni­tion they de­serve.

Make re­fer­ral recog­ni­tion a pri­or­ity. I re­call talk­ing to a client who’d re­ferred a fam­ily mem­ber, but was an­noyed that she hadn’t got­ten so much as a “thank you” from her ad­vi­sor.


Con­ven­tional wis­dom is that ad­vi­sors need to raise the sub­ject of re­fer­rals with their clients. Most ad­vi­sors long ago moved past the pres­sure-based ap­proaches of the 1970s. That be­ing said, there’s a cot­tage in­dus­try of re­fer­ral coaches who ex­pound the view that to max­i­mize re­fer­rals, you need to have clear con­ver­sa­tions with clients about your value and about the ben­e­fits that they have ex­pe­ri­enced in work­ing with you.

But a 2008 re­search study spon­sored by Van­guard Group calls into ques­tion the im­pact of talk­ing to your clients about re­fer­rals. That study polled clients who had pro­vided re­fer­rals and asked about the cat­a­lyst for the re­fer­rals. The sur­pris­ing find­ing: only 6% of re­fer­rals were trig­gered by a con­ver­sa­tion with an ad­vi­sor. (See ta­ble be­low.)

Con­ver­sa­tions that you ini­ti­ate re­gard­ing re­fer­rals are much less im­por­tant than a read­ing of our in­dus­try’s “re­fer­ral lit­er­a­ture” would lead us to be­lieve.

Yes, re­mind­ing clients pe­ri­od­i­cally that you’re open for busi­ness and would be happy to talk to their friends does make sense.

Given that re­search by the U.S. Fi­nan­cial Plan­ning As­so­ci­a­tion found that 75% of new clients didn’t pre­vi­ously have an ad­vi­sor, it might make par­tic­u­lar sense to let your clients know that, should some­one they know be man­ag­ing money on his or her own, you’d be happy to talk to them.

But once you’ve raised this mat­ter a cou­ple of times, don’t make these con­ver­sa­tions a source of anx­i­ety for you or your clients. In par­tic­u­lar, use your ex­ist­ing client com­mu­ni­ca­tion as a low-stress way to raise aware­ness of your ser­vices among peo­ple in your clients’ net­works.

One ad­vi­sor achieves suc­cess by send­ing clients an email each Fri­day af­ter­noon en­ti­tled “Your Week­end Read­ing and View­ing.” He sends links to an ar­ti­cle and a video he has found help­ful or en­joyed. The ar­ti­cles tend to be more se­ri­ous and fo­cus on fi­nan­cial is­sues; the videos are more light­hearted or thought-pro­vok­ing.

He has re­ceived es­pe­cially good feed­back on some of the up­beat videos that he has shared. Af­ter a while, this weekly email be­came a ve­hi­cle through which clients may in­tro­duce the ad­vi­sor to their friends in a way that is com­fort­able for both the clients and their friends.

By shar­ing these emails, clients im­plic­itly rec­om­mend the ad­vi­sor to their net­works — and, over time, this ad­vi­sor be­gan get­ting calls from prospects who had been get­ting his emails.

In­di­rectly, what be­gan as a ve­hi­cle to stay top of mind with clients be­came a way to get low-key in­tro­duc­tions to his clients’ net­works.

Clients who re­fer their ad­vi­sor fre­quently are more likely to re­fer other pro­fes­sion­als

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.