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.

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