(March 2006)

When advisors assess the value of clients, they typically focus on concrete, tangible measures — such as clients’ assets and the commissions the clients generate.

What advisors don’t always take fully into account is the impact of the referrals clients provide. In fact, referrals are the most important form of non-financial income you derive from client relationships. In some cases, the value of the referrals dwarfs the commissions that particular clients may generate.

It is hard to overestimate the importance of referrals in bringing new clients on board. Recent research of affluent investors who had selected a new financial advisor showed referrals were involved 70% of the time.

Looking at the source of referrals in a typical practice, there is a remarkable concentration among a small proportion of an advisor’s clientele. If an advisor receives a dozen referrals over the course of a year, seldom do these come from 12 different clients. Rather, for most advisors, a disproportionate number of referrals come from a small number of “referral advocates.”

The value of one of these referral advocates can be substantial.

Suppose a client provides three referrals annually, each with average assets of $300,000. Over the course of five years, say you successfully bring half of those clients on board. That’s more than $2 million in new assets generated via referrals from that one client alone.

If commissions represent 1% of assets, and assuming asset growth of 6% a year, over the course of five years those three referrals per year will represent $72,000 in commissions. And that’s before any further referrals from the eight clients who joined you courtesy of that original client.

Two things have to happen to unleash a referral advocate in your business — one within your control, the other entirely beyond it.

The factor beyond your control is whether a client has the makeup to be a referral advocate. Two things determine someone’s potential to become a referral advocate: opportunity and referral predisposition.

A client’s opportunity to provide referrals is a function of the circle of people he or she knows and the client’s influence within that circle. The more people with whom your client deals who fit the profile of your target clients, the more your client’s opinion is sought by those people and the more your client is respected among those people, the more opportunity your client has to provide referrals to you.

Referral predisposition is an intangible factor that reflects the willingness of a client to provide referrals when asked by friends and families, and to introduce their financial advisor to people they know. This quality can be referred to as a client’s “referral DNA.” You can have two clients who appear identical in every respect, but one of the two has a much higher predisposition to provide referrals because of his or her referral DNA.

How do you determine whether someone has the potential to become a referral advocate? While there is no hard and fast rule, the best predictor of future referrals is past referrals.

Whether a client has the potential to be a referral advocate — with both the opportunity and the referral DNA — is beyond your control. It’s an entirely serendipitous event.

What’s not serendipitous — what is entirely in your hands — is what you do to communicate with your clients about referrals.

The initial step is to raise the issue of referrals with clients. At a minimum, you need to let your clients know you are open for business and would welcome introductions to friends and family members. Even as low-key and benign an approach as saying, “Should you be talking to someone who is unhappy with their advisor, I’d be grateful if you’d suggest they give me a call” is better than not raising the subject at all.

Once you have received one referral, there are three things you can do to increase the likelihood of turning that referring client into a referral advocate and getting more referrals.

The first step is to do everything you can to have clients who have provided a referral feel validated in their decisions.

One advisor has put in place a 90-day communication strategy for all new clients. He contacts clients after they have received the confirmation of their initial purchase to answer any questions. He calls them again after they receive their first statement to deal with any queries or concerns.

@page_break@Ninety days out, he sets up a short check-up meeting, to ensure everything is on track. As part of that meeting, he asks new clients to complete a short report card on their experience to date — and then asks for permission to share it with the client who referred them.

The second step is to reinforce referral behaviour by giving clients who provide multiple referrals with exceptional treatment. Even if they are only in the middle of the pack in terms of assets and revenue, a referral advocate deserves the same service experience as your very best clients.

Having done that, you need to let referral advocates know they are getting special treatment, and why. Consider saying something along the lines of: “My goal is to provide all of my clients with good service. For clients like you who introduce me to people they know, I do some special things to convey my appreciation.”

The final step is to implement a recognition strategy for referral advocates.

You’ve already begun that process by moving them into the top tier of client treatment. You can build on that by having a strategy in place to say “thank you” tangibly when clients refer you to someone they know.

As you think about segmenting your clients, by all means consider the revenue clients generate. But in identifying your priority clients, be sure not to overlook the intangible factors, such as the referrals they provide and the potential to become referral advocates. IE



Dan Richards is president of Strategic Imperatives Ltd., a Toronto-based consultancy that delivers training to financial advisors. He can be reached at richards@getkeepclients.com. For other columns in this series, go to www.investmentexecutive.com.