If you want to stir it up with any red-blooded financial advisor, just ask what referral service he or she uses. They either love or hate them. And with the three major custodial referral services-Fidelity, Schwab and TD Waterhouse-transforming themselves in a dramatic fashion, there is more to love and hate than ever before. (Advisors have similar passion about the association-sponsored referral services, too, which we'll get to in a minute.)
While some referral services have received glowing reviews, there are also reports of spotty service, unqualified client leads and system quirks. We set out to find out why and discovered some hard truths. The first truth about referral services, if you don't know it already, is this: They are tilting toward higher-end, asset-rich planning shops to the exclusion of smaller firms. They've realized that doing a referral service right is an expensive endeavor. "We invested more than $10 million in this program in 2002 alone," says Schwab Institutional's Rob Klapper, senior vice president of Schwab's Advisor Network. In effect, these firms are building matchmaking services run out of each firm's network of branches by the very reps that staff them.
Why so much expense and trouble? Advisor-delivered assets have become vital, especially during the prolonged market downturn that has left many retail investors paralyzed. Advisors contributed more than 40% of new assets to Schwab's overall bottom line in the second quarter of 2002. At Waterhouse, advisors brought in almost 50% of new assets year to date and account for fully $17 billion-or 17%-of the firm's $100 billion in assets. That gives advisors the kind of clout they have never had before. But it's not just any advisor that these firms want. Advisors who have wealth management practices and can handle high-end clients are the most attractive to Fidelity, Schwab and Waterhouse.
At a minimum, that means you have to have about $50 million in assets to get invited into these referral services (they really are available by invitation only) and have clients who average at least $500,000 to $1 million in assets. As part of its referral system, Schwab, to date the only broker-dealer that charges advisors to be part of its referral network, is delivering clients who have on average close to $1 million in assets, Klapper says. The minimum charge is $10,000 or 15 basis points on the assets of referred clients, whichever is more.
While the new fees and some higher hurdles for participation introduced earlier this year have caused an uproar among a number of planners, there is no denying that Schwab offers a unique service. In essence, branch reps are being trained to refer clients to the one advisor they believe will best suit investor needs. Under the new program, the conversion rate (or the percentage of referrals that advisors turn into clients) has grown from about 12% in 1997 to north of 35% in 2002. "We expect the conversion rate to go to 40% next year and to add about 60 advisors (which will bring the number participating to about 400)," says Klapper.
That means Schwab will have 400 branches working to refer prospects to more than 400 advisors. "For the first time, we're tightly integrating the advisor referral network into our overall affluent strategy, whether the dollar is proprietary, goes to U.S. Trust or to the advisors in our network, our investment consultants are compensated on a dollar for dollar basis. Our rep will even go with clients to the first visit to the advisor's office to help them close the business," Klapper says.
At Waterhouse, average clients referred by the firm's system have between $600,000 and $735,000 in assets to invest "and advisors uncover additional investable assets 60% of the time," says Tom Bradley, president of the firm's institutional services unit. At the same time, the conversion rate of referrals to clients is only 15%. "It's much lower than we'd like to see," he adds. "We're trying to figure out why." To increase client retention, the firm is examining its rep training and advisors' ability to close customers. Currently, Waterhouse investors who are referred to advisors get one to three advisor names on average.
To enhance its referral system, Waterhouse is also doing joint seminars with advisory firms. Advisors do the presentations and Waterhouse invites the investors. "We call customers who we feel may be a good fit," Bradley says. Former FPA Chairman Roy Diliberto, chairman of RTD Financial Advisors Inc. in Philadelphia, recently joined Waterhouse and was one of the first to hold a joint seminar, Bradley says. "The program is still very young, but we're continuing to make improvements," he says. There is no cost to Waterhouse's program "and no plans today to charge advisors."
Fidelity's service has referred about $620 million to advisors since its launch in April 2001, says spokesman Dan Flaherty. The average client has a little over $1 million in investable assets, though the firm declined to disclose the conversion rate for referrals or how many advisors have been enrolled in the program. "It's still early," Flaherty says. "Seventy of our local investor centers are doing referrals right now, and we expect to have the system rolled out fully to the remaining 18 centers by the end of the year so that all of the reps know when to make referrals and where."
Fidelity's requirements are similar to the other custodians, with a few nuances. Advisors entering the Fidelity program must have a minimum of $50 million in assets custodied at Fidelity, must have been an RIA for the past three years, be primarily fee-based and be able demonstrate investment management or planning expertise or both.
Flaherty says he is not aware of any plans to charge advisors for enrollment in the Fidelity referral service. "We're compensated on our advisors' volume of business and when they make trades. That's what we're here for."
So far, despite the millions in investments, all three brokerage referral services are getting mixed reviews. One of the greatest drawbacks to these programs, say advisors, is turnover in the brokerage branches and lack of training of reps. Since many clients are "reformed" self-directed investors, there also seems to be some tendency for clients and maybe even branch reps to chase hot investments.
"A balanced advisor like us could hardly get interest from the branch manager and brokers at Schwab," says Mark Gleason, a planner in Glendale, Calif. "And even if we did, the rep would be transferred in four months and it would take months to get another meeting set up. It was just a waste of time that Schwab charged us for."
To be fair, Gleason's go-round happened a couple of years ago. Gary Pulford, a principal with Gamble, Jones, Morphy & Bent in Pasadena, Calif. enrolled in Schwab's referral service 30 days ago and already signed on a $250,000 client. Pulford, who met with the client in one of Schwab's branches, says the 15 basis-point fee seems reasonable. "We met with a number of CPA firms who wanted to charge 50 basis points. This is a lot less expensive than hiring a marketing director," he adds.
Michael J. Chasnoff, president of ACS Financial Advisors in Cincinnati, met with the reps in Fidelity's Cincinnati's branch about a year ago and since has signed on six new referrals from them with an average account size of $2.5 million. "Four of the six clients were already Fidelity clients. They also consolidated other accounts with us, which was good," Chasnoff says.
Jonathon Krasney, a planner in Brookside, N.J., says he's had a similar experience with Waterhouse. "The better you get to know branch personnel, the more referrals you're likely to get," he explains. "I've gone out to the branches and gotten to know the people there on a one-to-one basis." While Krasney's minimum is $500,000, tilting toward $1 million, he's been referred clients in the $200,000-to-$300,000 ranges, but expects that to change as the program matures.
Planners can also use the Financial Planning Association and the National Association of Personal Financial Advisors. Both associations offer referrals for consumers who call the associations or log on to their respective web sites looking for advisors. Both services offer geographic-based searches only and are designed to be public services, not advisor marketing tools. Still, their growing referral pipeline is testimony to the pent-up demand for advice.
About 5,000 consumers log on to the FPA's Web site (www.fpanet.org) each month to search for planners in their locale and another 300 investors call, e-mail or write the FPA looking for a planners, spokesperson Heather Almand says. Between 5,000 and 6,000 of the association's 28,000 members participate in the referral system. The FPA does not currently have a feedback loop, though they have considered developing one. Paul Bednarsky, an Irvine, Calif.-based planner, who launched his fee-based firm several years ago, says he gets between 10 to 20 referrals a year from the FPA and converts about 25% into clients.
Other planners, however, complain that the FPA's zip-code based system eliminates them too often, or ends up spitting out a list that resembles the Yellow Pages. While Rome, Ga.-based planner Bonnie A. Hughes' gets NAPFA referrals who live in Atlanta, she says the FPA knocks her out of the running for Atlanta clients because she's 60 miles away.
NAPFA has received about 36,000 requests for planners year to date and expects to net 40,000 by year-end, a remarkable number considering the association has only 840 members. "We're not tracking conversion, but we have a strong sense that when someone comes on our site (www.napfa.org) they're more determined and ready to have an engagement," says NAPFA Executive Director Ellen Turf. Member feedback seems to bear this out. Ron Pearson, a planner in Virginia Beach, Va., says he does little more than send his newsletter to the 100 or so NAPFA referrals he gets each year, but a full 40% of his clients are NAPFA referrals.