The fastest-growing financial firms use client referrals to gain a significant percentage of new clients, but even some of the best firms don't promote referrals aggressively enough and do not track their outcomes effectively to build a strong base for business development, says Scott Slater, managing director of business consulting for Schwab Advisor Services.

Referrals from current clients and from other business professionals are the foundation of growth and can be an effective way to build business contacts, gain new clients and increase assets under management. But many highly productive firms rely too much on other marketing techniques and on growth in current clients' assets, says Slater, instead of mining the possibilities of referrals.

In a recently released 2011 RIA Benchmarking Study from Charles Schwab, 54% of advisors said client referrals was one of three top strategic business growth initiatives they intended to pursue for 2011. At the same time, 42% indicated they do not currently track client referrals as a measure of success and 60% do not track client satisfaction in a systematic way.

"People think clients will not move from one advisor to another in this kind of market, but that is not true," Slater says. "They are looking for someone to trust."

But advisors are too passive about the process, he adds. "Referrals are a contact sport and require face-to-face exchanges.  You can't stick the suggestion at the bottom of a newsletter."

The proof of success is in the numbers. The fastest-growing 20 percent of firms from Schwab's 2010 Benchmaking Study grew 20% in assets under management. Of that group, two thirds of their business came from referrals from existing clients or business professionals. The proportion was the same for the other 80% but they only grew at a third of the rate of the fastest growing firms from these channels.

"Asking clients for referrals has to become a top priority for a firm, not just for the partners but all advisors who interact with clients," Slater says. "You do not need to talk with every client about it; target the ones who have referred someone to you in the past."

Advisors should be trained to promote referrals. Schwab has a Referral Accelerator Program to train advisors in developing referrals from existing clients and other business professionals.  

"Ask clients what their friends' advisors are telling them and ask if that friend may want another opinion," he advises. "Referrals are critical but most firms are not doing a good job of promoting it. They are now becoming more focused on it, but it needs to become part of the culture of a firm's business."

Firms need to track the success for each advisor. Keep track of the number of referrals and how many conversations did  each advisor have with a client about it and how many  resulted in gaining new clients, Slater advises.