(April 2006)

Advisors need to foster and encourage referral advocates — clients who are the source of regular referrals to people they know. One of the keys to maximizing referrals is asking in an effective fashion.

Last spring, I launched a six-month pilot program to test and evaluate a broad range of approaches to obtaining client referrals. Twenty-four successful advisors participated in the program.

Here are the top misconceptions, learned through the program, about what it takes to have an effective referral conversation:

> Myth one: As professionals, advisors shouldn’t have to ask for referrals. Good work should be sufficient for clients to refer friends and family spontaneously.

In a perfect world, this would be true — and we wouldn’t have to raise the topic of referrals. Regrettably, reality differs. Research demonstrates that while a small number of clients will make referrals without being prompted, the large majority won’t initiate an introduction unless asked, either by a friend or by their advisor.

> Myth two: Successful advisors ask clients for referrals on a regular basis.

In 2005, I had the opportunity to chair a conference on strategies to attract affluent clients. It was attended by 200 advisors, all of whom had invested time and money to participate. So, presumably, they had higher-than-average motivation when it came to marketing their services.

During the conference, I asked participants to complete a short questionnaire on referrals. The first question was: “In the last 10 meetings you have had with clients who have been with you three months or longer, in how many did you raise the issue of referrals?”

Seven in 10 answered “zero,” with another 20% responding that they had raised this subject on one or two of the 10 occasions. So the topic of referrals is seldom brought up.

In digging deeper, advisors were asked about the things that prevented them from talking with clients about referrals. The biggest obstacles by far were concern about being seen as pushy salespeople and the apprehension that clients would feel pressured. It’s not that advisors don’t want to raise the subject of referrals; most simply don’t know how.

> Myth three. The majority of clients will provide referrals if asked by their advisor.

In recent years, many of the bank-owned investment dealers have commissioned client surveys. A consistent finding is that 70% of clients say they will provide referrals if asked — but only 15% have ever had their advisor introduce the subject. The obvious conclusion: all you have to do is ask.

This has prompted much head-scratching among financial advisors whose experience is at dramatic odds with this finding. It is an example of flawed research methodology, in which the questioner is asking one thing and the respondent hearing another.

Yes, 70% of clients would provide a referral if asked. But what clients mean is they would provide a referral if asked by a friend, family member or colleague.

When clients are asked explicitly how likely they would be to provide a referral when asked by their financial advisor, the likelihood of them doing so plummets.

Client research indicates advisors have to overcome two big barriers to get clients to refer them.

The first is clients’ concern about what happens if they recommend their advisor to friends or relatives and things do not work out. What is their responsibility? Will their friends become upset with them and will the relationship suffer? The vicissitudes of the markets make many clients apprehensive about providing referrals. Even if their advisor is generating good returns today, things could change dramatically in six or 12 months’ time.

The second barrier relates to clients’ anxiety that their friends will feel pressured and imposed upon if their names are given to an advisor.

To have an effective referral conversation, both of these apprehensions — that clients may be jeopardizing their friendships and that their friends will feel imposed upon — need to be addressed.

> Myth four. The best way to ask is directly, using approaches such as “Whom do you know that I could help in the same way I’ve helped you? I can take their names right now.”

In all likelihood, advisors get more poor advice on asking for referrals than on any other subject — and this is one example.

In research with affluent Canadians who had selected new advisors, more than 30 approaches to the referral request were evaluated. Approaches such as the one above — direct approaches based on putting clients under pressure — consistently scored at the bottom of the list.

@page_break@There are effective approaches to asking for referrals — but this is not one of them.

> Myth five. The best way to ask for referrals is indirectly — using low-stress, low-pressure approaches such as “Should you be talking to someone who is unhappy with their advisor, please have them give me a call.”

Low-key, low-pressure methods such as the one above have the virtue of not antagonizing clients and the benefit of letting clients know that you’re open for business.

Successful advisors who bring up the topic of referrals for the first time report that a remarkable number of clients respond: “I didn’t know you were taking on new clients.”

So, asking in this fashion is better than not asking at all.

That said, ultra low-pressure approaches, such as this one, will not generally garner a positive result in the short to mid-term. (The same can be said of advisors who include requests for referrals as a postscript in a letter or a box in their newsletters. Advisors who have done this are hard pressed to think of any instance in which they have received a referral as a result.)

Yes, there are cases in which an advisor gets lucky and a client happens to be talking to a friend who is looking for a new advisor the day after this conversation. But the odds of this happening are distinctly against you.

When it comes to referrals, it seems, if you want to get an answer, you actually have to ask the question. IE