Efficaciously sourcing new clients is critical to the business success of most if not all financial advisors desiring greater business success and personal wealth. The issue, then, is: “What are the most powerful and cost-effective ways to garner new clients?”
To address this matter, we surveyed 611 financial advisors who met the following criteria:
• Investment management is their core and primary offering.
• They have five or more years of continuous experience as a financial advisor.
We segmented the sample of financial advisors based on average annual income over the last 24 months (Figure 1). Almost 60% of the financial advisors had incomes below $250,000. About a third had incomes between $250,000 and $500,000. The remaining 10% had incomes greater than $500,000.
It’s important to note we’re defining success as income after all expenses. Production or gross revenues, while a very useful measure in many circumstances, does not necessarily translate into personal wealth. For example, we know of an independent financial advisor that generates $1.4 million per year. The only complication is that it’s costing him $1.6 million to do so. While there are many ways to define success, starting with doing an exceptional job for clients, income is how most people create their lifestyles and it’s how we measure success.
Where Do New Clients Come From?
Financial advisors source new clients in a variety of ways. We asked our sample, “Over the previous two years, how did you get the majority of your new clients?” Overwhelmingly, the answer was from their current clients (Figure 2). Nearly three-quarters of the financial advisors reported that current client referrals are the answer.
A little more than 10% identify centers of influence as the source for most of their new clients. Importantly, centers of influence are a more common source of new clients to the more successful financial advisors. From here, a variety of other means of sourcing new clients diminishes in value.
Clearly, client referrals are the dominant approach to sourcing new clients. But that doesn’t make it the best approach.
Where Do The Best New Clients Come From?
Instead of considering the number of new clients, let’s consider how financial advisors are sourcing their best new clients. We’re defining “best” as the “most profitable” clients to the financial advisor. This doesn’t always translate into assets under management per client. The fees being charged the client are also part of the equation. For example, the fees are higher for an equity-based managed account than for fixed income.
When it comes to how financial advisors have obtained their “best” clients over the last two years, the answer is solidly from centers of influence. Two-thirds of them cite centers of influence as the source of their most profitable new clients. About 30% report their “best” new clients came through client referrals. All other means are much
Centers of influence, unquestionably, are the most important source of new high-net-worth clients (the most profitable). This is especially evident when considering the incomes of the financial advisors. In conclusion, while client referrals generate the most new clients, centers of influence provide the “most profitable” new clients.
Taking this comparison a step further, we calculated the revenue differential per client between referrals from current clients and referrals from centers of influence. The difference is considerable:
What this means is that for every $100,000 in revenue a client referral is worth to a financial advisor, based on this sample, a referral from a center of influence is worth slightly more than $2 million in revenue. There are a lot of assumptions in this calculation, such as:
• The compounding growth rate of the investment portfolio is 6% net of all fees.
• The client provides no new assets to be managed.
• The length of the investment management relationship is eight years.
• No additional financial services are provided to the client by the financial advisor.
• The asset allocation and the fees charged the “average client” by each financial advisor remain constant.
This revenue differential of “21.1 to 1” is certainly not set in stone. By changing the assumptions, the revenue differential will change. The takeaway from this calculation is that there is a tremendous difference in revenues from the clients a financial advisor sources through client referrals and those that are provided by centers of influence.
Focusing On Centers Of Influence
These findings just reinforce what the preponderance of financial advisors already know:
Cultivating centers of influence is the best way to grow a profitable investment management business.
This perspective is common knowledge in the industry, which is why the greater majority of financial advisors are focusing on building meaningful relationships with centers of influence. About nine out of 10 financial advisors are already making efforts to cultivate centers of influence (Figure 4). There’s a slight percentage increase coinciding with increases in income.
More telling is that, generally speaking, relatively few financial advisors are having very much success cultivating centers of influence (Figure 5). Overall, only about 10% report they’ve been very successful. Those earning less than $250,000 annually are not being effective at all. Meanwhile, about a fifth of those earning more are achieving solid results.
Knowing that centers of influence can be the key to considerable professional success and substantial personal wealth, coupled with the fact that few financial advisors are being very effective, results in a very strong interest in becoming good at sourcing new clients from them (Figure 6). Overall, 70% of financial advisors want to learn how to effectively cultivate centers of influence. This high level of interest is weighted to the more successful financial advisors.
At the same time, nearly a quarter of the financial advisors are very interested in learning how to generate more client referrals. This high level of interest is weighted to the less successful financial advisors. Few financial advisors are seriously interested in the other means of sourcing new clients.
Centers of influence are the most potent way to source the best new clients. Across the industry, it’s presently not the way to source the most new clients. Very telling is that centers of influence deliver the most profitable new clients, by orders of magnitude.
It’s an industry truism that to be extremely successful, the answer is cultivating centers of influence. While most financial advisors are making such efforts, few are obtaining consequential results. The reason for this is that few financial advisors are systematically employing a methodology that will enable them to succeed, and that’s why 70% are extremely interested in learning how to cultivate centers of influence.
Russ Alan Prince is president of R.A. Prince & Associates Inc. and Executive Director of Private Wealth magazine.
Brett Van Bortel is Executive Director of Consulting Services, Invesco Consulting and co-developer of the street-smart networking framework.