In surveys, financial advisors often say client referrals are the most important way they cultivate new relationships and grow their practices. But research over the last two decades suggests client referral levels are declining. Clients—especially affluent clients—are less inclined to refer their peers and associates to advisors they are using.
There are two main interconnected reasons for this. In part, clients are less inclined to make such recommendations because of the “social risk.” Complementing this is the failure by a large number of advisors to psychologically prepare their wealthier clients before asking for the referral.
Social Risk
If an affluent client’s investment portfolio underperforms, he or she is the only one who knows (outside of loved ones and accountants) and can change advisors accordingly. But when he refers a peer to an advisor and that person loses a substantial amount of money, there are all sorts of adverse social, personal and possibly professional complications.
In researching the thinking and actions of affluent investors over the years, we found that their willingness to make referrals has declined. The big drop came in 2008, and there has not been a recovery. A survey of 89 qualified purchasers in 2013 suggests that while 85% of them readily referred their associates to their financial advisors (and other professionals) before 2008, fewer than one in 10 of them have made such a referral since (Figure 1).
In 2012, we asked 169 affluent investors (those with a minimum of $1 million in investable assets) whether it was more important to them that their own investment portfolio had decreased by a certain percentage or that a close friend or relative they referred to a financial advisor suffered the same loss (see Figure 2). The importance they placed on these scenarios depended on how much was lost, but in many of the asset declines, it was far worse that they had referred somebody to a poor performer.
Interestingly, it was not until both investment portfolios had fallen to significant depths that the clients placed more importance on their own losses—somewhere around drops of 40%, at which point they felt that their own losses were more significant than the complications they faced because of their referral.
There are many methodological complications with this study. Nevertheless, it does shed some light on the issues of cultivating affluent investor referrals. With volatile markets and varying investment portfolio performance, there is for many affluent investors a considerable social risk in making introductions.
Complicating the situation is that although most financial advisors say they get most of their new clients from existing ones, most of them are not taking the necessary actions to generate the referrals.
Problems Asking
A study of 258 financial advisors in 2013 found they tended to get fewer than three referrals from their clients per year. In delving deeper into the matter, we found that the financial advisors were not motivating their clients to provide them with referrals.
Most simply failed to ask (Figure 3). And if they don’t ask, the odds are pretty good they will not get a referral.
A substantial number of financial advisors dislike asking for referrals. In Figure 4, we note some of the major reasons. Topping the list is that they are uncomfortable asking. After that, they say “the opportunity did not present itself.” (What many advisors need to understand is that they have to create the opportunities.)
They also said they do not want to make the client uncomfortable or harm the relationships. This rationale speaks to the quality of the relationships. It begs the question, how much of a trusted advisor is he or she?
Further complicating things is the way they ask (see Figure 5). The least used approach—“To ask about a specific individual you know the client is close with”—is identified as the most effective.
While this particular study of financial advisors was not focused on affluent clients, we have found that asking for introductions from the wealthy is even more difficult, for many of the same reasons noted here. Since these affluent clients are often very important to the profitability of a financial advisor’s practice, there is a strong desire to tread carefully around them, and the idea of asking for referrals makes many advisors especially anxious.
Conclusions
In sum, affluent clients are more reticent than ever about providing financial advisors with referrals. For affluent clients, the “social cost” increasingly outweighs any upside for making referrals. At the same time, financial advisors tend not to be very adept at asking their clients for introductions. For most of them, this is a stressful activity that they fear could antagonize the client.
While there are very effective methodologies for garnering referrals from clients—including affluent clients—most financial advisors are not learning about them. Fewer than one in five advisors has been given a strategy to ask clients for referrals he or she is comfortable with (see Figure 6).
Powerful methodologies for garnering client referrals do indeed exist. What this means is that advisors need to make a concerted effort to identify those approaches that are viable and that they are—by temperament and disposition—most comfortable with.
Russ alan prince is president of R.A. Prince & Associates.
Brett Van Bortel is director of consulting services for Invesco Consulting.