Do You Know a Good Advisor?

By: Philip Palaveev

As originally published by Financial Advisor magazine.

Referrals remain the primary source of growth for advisory firms, and there is absolutely nothing wrong with that. In a 2019 survey conducted by The Ensemble Practice LLC, we found that 63% of the organic growth for the average advisory firm came from referrals. Nearly half of the new clients came from a recommendation from existing clients and the rest came from referrals from other sources—custodians and other professionals.

Not only are referrals a fantastic source of growth opportunity, but they get you better clients. A Wharton Business School research report (“Referral Programs and Customer Value” by Philipp Schmitt, Bernd Skiera and Christophe Van den Bulte) finds that referred customers stay longer with the business, have more loyalty and are more profitable.

Still, many firms in the advisory profession feel vulnerable when only relying on referrals and have a vague sense that they should be investing more in marketing to create more “systematic growth.” I understand the nervousness, but I side with David Maister, a Harvard professor who states in one of his books (True Professionalism) that “You should not spend a single dollar on marketing until at least 50% of your new clients come from unsolicited referrals from existing clients.”

So, I would like to spend some time on referrals—how they originate and what we can do to make sure we capture their full potential.

How Clients Decide

Clients really need referrals to make good decisions when choosing an advisor. The number one factor that clients consider when selecting a new advisor is “trustworthiness”—a sense of whether they can trust the professional. This is clear from surveys such as the one conducted by State Street Global Advisors. In that survey, 69% of clients said they considered the advisor’s trustworthiness when choosing whom to work with. Trust is critical, but how do we know whom we can trust?

To find out, we use the transitive property. If I trust Lauren and Lauren trusts Brandon, then perhaps I can trust Brandon, too. Thus, if my friend/colleague/relative/gym buddy whom I trust and respect is a client of yours and she or he trusts you to be their advisor, I can probably trust you. The same is true for service providers. I trust my CPA/attorney/consultant/banker, and they say a lot of good things about you. So I think I can give you a chance.

In the absence of this transitive equation, clients will still try to form a perception of trust: They will use their impressions of meetings and communications. They will read through websites and materials. They will try to ask around and look for signs of good reputation such as awards or published work such as articles or books. Marketing can significantly help this process of forming perceptions, but I would argue that nothing is as effective as hearing a good word from someone you already trust.

‘Response’ Referrals—Do You Know A Good Advisor?

Julie Littlechild, a prominent advisory industry consultant, has spent a lot of her career studying advisory client loyalty and referrals, and is one of the foremost experts on the subject. In her research report “Driving Growth Through Client Referrals,” she finds that 67% of clients say they are comfortable providing a referral but only 23% have actually done it.

The reason referrals can be scarce is that 48% of them, according to Littlechild, are “response referrals,” a recommendation in response to the question “Do you know a good advisor?” Unfortunately, this question is quite rare. In a survey of 300 wealth management clients, the research firm Qualtrics found that only 0.3% were “very unhappy and actively looking to leave!” Another 1% of respondents were “unhappy” and perhaps likely to do the same.

If you are waiting for the do-you-know question, you will only see 1.2% of the potential client universe.

Recruiting Referrals—The ‘Happy Client’

It is well known that satisfied customers are much more likely to refer others to your firm, but “satisfied” may not nearly be enough. The Wharton study found that when customers gave a satisfaction rating of 5 out of 5 they were six times more likely to make a referral than those who had the seemingly high satisfaction score of 4.8.

Just keeping clients happy is not enough. To cross over into the area of satisfaction—where clients proselytize on your behalf to others—we need to somehow create those delightful experiences that our clients will rave about and perhaps also set up the situations where they have the chance to express their satisfaction.

Recruiting Referrals—A Story About Myself

My favorite stories are stories about myself. This is not just me, and it is not because I am a narcissist. (I am not. I was tested.) This is true for all of us. We love to tell stories that validate the image we have of ourselves. When we make a referral, we tell a story about who we are and how others should see us.

Psychologists call this “impression management,” and it may be the No. 1 reason we make referrals. Recommending a trendy new restaurant to a friend signals that “I am in the know! I know the best places!” Recommending a vacation in Croatia says “I am a sophisticated citizen of the world!" Recommending a boxing gym says “I am a boxer! I am kind of like Rocky but without the steroids and the very questionable shorts.” We all do it all the time.

The problem with many advisory firms is that they don’t provide much of a story. What story does it tell somebody if you say you have worked with me and my financial advisory firm? Many years ago, Kaycee Krysty, at the time CEO of Laird Norton Tyee in Seattle, told me that she wanted her firm to be “like this best-kept-secret restaurant that you only tell your good friends about because you don’t want it to get too crowded.” That is exactly the kind of image that would drive referrals, but unfortunately for many firms, the experience and image they create are too sterile and don’t tell a story. The stories are there, but they need to be discovered, articulated and expressed. Unfortunately, most firms just give up too easily or try to “outsource” the story-writing. Someone else can write your bio, but they can’t live your life.

Recruiting Referrals—Joining A Community

The “best kept” secret strategy speaks of another opportunity as well. We all tend to “recruit” worthwhile people to the communities we belong to—truly belong to. If we derive a sense of belonging from a study group, we will tell people we meet about it. If we are part of a running club, we tell a select few others about it. Even if we start a baking group, we will try to get our friends to make quiches with us.

The more a firm is seen as a community, the more likely it is to engage in this kind of recruiting. A firm can do that by carefully targeting already established communities, with clear identities. Take, for example, Christopher Street Financial and its focus on gay and lesbian clients. Alternatively, you can focus on a specialized industry. RAA Advisors in Dallas works with the airline community. It’s even enough for a firm to serve one geographic location if the area is compact and defined enough and if the firm’s clients identify with it. My friend Pat Barrett in the little town of Anacortes, Wash., says that he has a “love affair with the local community.” Community building is a very powerful driver of referrals. But you cannot and should not fake belong to a community. It has to be genuine.

How Many Referrals Are Enough?

So referrals are vital, but how many can you get and what is the benchmark for doing a good job? My recommendation has been that firms target 10 referrals a year for every 100 clients they work with. But the data suggests advisors aren’t there: On average, advisory firms generate three new relationships from referrals for every 100 clients (4.5%). Perhaps not every referral turns into a client, but if you think about it intuitively, the closing rate of referrals should actually be much higher than the industry standard closing rate on prospects, which is 67%.

How to Create More Referrals

The answer is clearly not to ask for them. Stephen Wershing makes that clear in his book Stop Asking for Referrals. The same is evident in Littlechild’s research; she finds that only 5% of referrals come by asking for them.

So let’s look at our strategies again:

  • Get your clients to a very high level of satisfaction—nothing short of a 10 out of 10.
  • Provide a story to tell that reflects well on clients.
  • Build a community that others want to recruit to.

There is one more strategy that we have not discussed but it is very important. Julie Littlechild notes that another common driver for a referral is helping a friend. Most referrals start with someone discussing a problem and the client suggesting the advisor as a solution.

Unfortunately, many of our clients may not actually know what we can help with. They may have trouble distinguishing between the problem and the tool for its solution. In the words of Theodore Levitt, a Harvard professor: “People don’t want a quarter-inch drill. … They want a quarter-inch hole.”

So the clients may not be aware of what you offer them unless you train them to recognize signals by doing certain things. For instance, you could discuss:

  • Assisting their parents with their retirement.
  • Making substantial contributions to a charity
  • Dealing with a chronic illness in the family
  • Wanting to “get off the treadmill … ”

Unfortunately, most clients don’t actually recognize the signals and miss opportunities.

Referrals That Don’t Arrive

Finally, all the numbers we have seen so far suggest that there might be some “leakage” in our referrals. It may be that referrals “check us out” but never actually engage. Some of the leaks may be due to poor follow-up on our part. For example, only 38% of firms in the industry track their leads, according to our 2019 survey.

Who Makes Referrals Happen

We started with a strong statement that referrals should be prioritized over “corporate” marketing, but this is where we need to state that referrals are marketing. For a referral to arrive, we need to make sure that prospective clients who are looking us up actually find a picture they are comfortable with. This is where our website and other presences should shine. Do we tell a compelling story of who we are? Do we seem relatable? Do we speak to our expertise in the specific market we specialize in? Time and again, advisor websites are bland and unrelatable. They don’t need to “sell” to prospects, but unfortunately they often “un-sell” those who actually want to reach out.

Finally, we need to ask the question: Who is responsible for referrals? Even more important, if referrals are the No. 1 opportunity for growth, why do we look at “business development” as being very different and separate from serving clients? This has also been the conundrum that frustrates me a lot when working with the emerging leaders in our G2 Leadership Institute. If 50% of new clients originate from existing clients, how can someone be “great” at service but not be a “business developer”?

Referrals are key to the growth of our industry. They are not, however, just the passive result of “doing a good job.” On the contrary, a strong pipeline of referrals is the result of purposefully creating special moments for clients and training them to tell a story that reflects well on who they are and where they belong. In the words of David Maister: “If your clients are not telling their friends about you, maybe your work is not as great as you think it is.”