If you want qualified potential customers sent your way, who will you call?

    While many advisors around the country struggle to bring in new clients and grow their businesses, others enjoy an embarrassment of riches-they have so much new business they don't know how to handle it. Why?   
    In many instances, prospect-loaded advisory firms have discovered the power of a referral network. Referral networks are offered by not-for-profit membership organizations such as the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), as well as by for-profit marketing companies and alliance groups, such as Paladin Registry and Garrett Planning Network. They're also offered by custodians, such as Charles Schwab & Co., Fidelity Investments and TD Ameritrade Inc., as well as mutual fund companies and other businesses serving advisors.
    To independent advisory firms, referral networks are critical. Wirehouse brokers and agents at big insurance companies have the power of big brands and marketing campaigns behind them. The giant financial services firms use search engine techniques to lure prospects to their Web sites. To an independent advisor, a good referral network can level the playing field.
    Yet precious little reliable information about referral networks is available, despite their vital importance to advisory firms. No objective measurement of the relative effectiveness of referral networks exists.
    If you depend on your custodian's data, you could be getting a one-sided view of how good a referral network really is. The effectiveness of the NAPFA and Garrett networks are known to members, but not beyond the province of these membership groups. No one, to my knowledge, has examined the FPA's effort. And almost nothing, beyond what's in their marketing materials, is known about the for-profit marketing companies, like Paladin and WiserAdvisor.com. (You can register for my newly formed, advisor-only discussion board about referral networks at www.forum.advisorproducts.com.)
    I spent several days last month finding out which referral networks are working. I e-mailed hundreds of advisors and asked them about their referral networks. About 75 responded, and I interviewed about 15 respondents who had provided the most detail about experience with referral networks.
    Some advisory firms reaping success from referral networks may simply excel at marketing. Some undoubtedly ride the strength of a single charismatic advisor or one or two gifted salespeople with a knack for converting prospects to clients. And some may simply be better at investing or planning than advisors not affiliated with a referral network, and are gaining clients because of their track records. Still, some clear patterns and lessons emerge.

Philosophical Differences
    A compelling factor in the success of a referral network seems to be its values and philosophy. The best example of this is the success several advisors reported with the NAPFA referral network.
    Take the case of Robert Nusbaum, founder and president of Middle America Planning in Pittsburgh. According to Nusbaum, consumers who contact him through the NAPFA referral network know they want a fee-only advisor. By the time they contact him, they are pre-sold. Nusbaum says he receives six referrals a month from NAPFA and closes 80% of them. Carolyn McClanahan, an advisor in Jacksonville, Fla., tells a similar story, receiving a lead a month from NAPFA and closing 80% of them.
    Not every advisor who gets NAPFA referrals reported such strong results. Advisors with minimums over $500,000 seem to have less success with the NAFPA referral system. However, for an advisor serving the middle market, like Nusbaum, or one just starting out, like McClanahan, the NAPFA referral network would seem to offer a steady source of referrals, and many advisors have built their practices on the strength of NAPFA's network.
    Why do advisors report such a strong close rate on a referral service run by a not-for-profit membership organization that gives the leads away for free? It's because NAPFA has a philosophy that consumers identify with and that differentiates NAPFA advisors from the competition. You may need to understand NAPFA's history to really get it.
    NAPFA, with about 1,200 members, is a relatively small membership organization compared with the FPA. But it has always wielded far greater influence than its numbers would indicate. Over the last quarter century, its members steadfast commitment to extolling the benefits of working on a fee-only basis has helped force fundamental change in how Americans pay for financial advice.
    NAPFA's popularity with the consumer financial press, which has always been enamored with the fee-only concept, has inspired a groundswell of consumer support and shed light on the shortcomings inherent in giving investment advice on a commission basis. Thanks in part to NAPFA's influence, wirehouses began offering fee programs, and advisors in all corners of the financial services industry changed their mode of compensation.
    In the last couple of years, NAPFA has embraced a new platform, calling on advisors to accept the role of a fiduciary for clients. Just as its fee-only platform transformed the financial advice business in the last two decades, the new mantra could reshape the financial services industry in the years ahead.
    With NAPFA members now campaigning in the media, lobbying regulators and conferring with national consumer groups, the fiduciary platform is likely to become the new litmus test for consumers seeking a financial advisor. It just also happens to be a potent force that can drive leads to the NAPFA referral network.

The Fiduciary Bandwagon
    Tapping the same vein is Paladin Registry. Unlike NAPFA, Paladin Registry is a for-profit marketing company. It is one of a handful of marketing companies I learned of in researching this story. The others most often mentioned are WiserAdvisor.com and FinancialAdvisorMatch.com. Paladin differentiates itself from its competitors by embracing the fiduciary movement and focusing on how important it is for consumers to find an ethical and competent advisor.
    Paladin was founded and is run by Jack Waymire, a 63-year-old veteran executive in the financial services industry. Waymire, from 1983 to 1996, worked at Lexington Capital Management, which in addition to a mutual fund family offered brokerages access to its money managers beginning in the early days of Wall Street wrap account programs. In 1996, when Lexington was sold to SunGard Data Systems, Lexington's wrap manager business was rebranded as Select Advisors, and Waymire ran it until January 2004. At that same time, his book, Who's Watching Your Money? was published by John Wiley & Sons, and he began a nationwide tour to promote it. The book's subtitle: The 17 Paladin Principles For Selecting A Financial Advisor. The word Paladin, according to Wikipedia, the free encyclopedia, is derived from the Latin and is used to describe virtuous heroes.
    "I was a guest on 50 or 60 radio talk shows," recalls Waymire. "And callers would say that they liked the ideas I talked about in my book, but they wanted to know where they could find an advisor." Waymire decided to build a network of advisors.
    Launched in April 2005, Paladin Registry now has 16 contract and full-time employees. Waymire says 300,000 consumers have used the site, and it is now generating 4,000 leads a month for the 720 advisors who have signed up for the service.
    Waymire says his firm charges advisors a basic fee of between $35 and $125 monthly, depending on location. Those in more highly-populated metropolitan areas pay the $125 fee. In addition to the basic fee, Paladin offers a premium listing through a program known as Paladin Advocates Limited. Advisors paying an additional $100 fee receive more leads.
    Waymire recently partnered with Investopedia.com. A consumer portal Web site with articles about financial planning and investing, Investopedia is basically an online encyclopedia of personal finance. Investopedia will offer an "Advisor Finder" link on its site where consumers will get access to the Paladin database and get referrals. Paladin advisors will charge an additional fee for each referral from Investopedia.com, and Paladin does not get a piece of that fee.

Leading Competitors
    WiserAdvisor.com, another referral service, is different from Paladin in a number of ways, including how it charges. It levies fees for each lead based on the type of services requested by a consumer. Leads for consumers requesting help with portfolio management, estate planning and business finances cost an advisor $50 each, while a lead for retirement planning help is $40, education planning $35 and taxes or insurance advice $25.
    What's so very clever about WiserAdvisor is that there are no membership fees, and advisors say the company has stood by a money-back guarantee when they've complained about getting a lead that was not qualified.
    WiserAdvisor makes signing up a no-risk proposition. Consequently, many of the same advisors who have taken the time to join Paladin, because they are interested in generating leads, also join WiserAdvisor. However, WiserAdvisor, at least so far, appears to be generating fewer good leads and has a less favorable buzz, based on my anecdotal research.
    While WiserAdvisor CEO Tom Murcko says the company does perform a background check on advisors, it does not require advisors to say they are fiduciaries, which is a Paladin requirement. WiserAdvisor requires that an advisor have at least two years of experience, and manage at least $10 million or have at least 30 clients. WiserAdvisor is not marketing the advisors it allows into its network as being a superior group, while Paladin-which takes a strong stance on the value of finding an advisor who is a fiduciary and who is competent-allows members of its registry to use the Paladin logo in their marketing materials and markets each registry member as receiving a "five-star" ranking.
    Murcko says WiserAdvisor has signed up 1,700 advisors, but refuses to say how many employees are on the WiserAdvisor staff or how many leads it generates monthly. "We are a privately held company and don't discuss those things for reasons of competitive intelligence," says Murcko.

Paladin Versus WiserAdvisor.com
    Joseph Ryan, of WJRFinancial in Quincy, Mass., says he started using Paladin in the spring of 2005 and WiserAdvisor in the beginning of 2005. Paladin has averaged one lead every two months, while WiserAdvisor has averaged slightly less. He says 20% of the Paladin leads are converted to clients, while just 10% of WiserAdvisor's leads become clients.
    Paul Bennett of Private Wealth Advisers in Great Falls, Va., says he also has been using Paladin and WiserAdvisor. Bennett had initially signed up to receive referrals from Paladin for consumers seeking hourly advice for solving a particular financial problem or working on a single issue. He was receiving as many as ten leads a month for a couple of months earlier this year, but almost all of them were for the hourly service. His firm, which recently hiked its minimum from $500,000 to $1 million, found the hourly referrals unproductive. Bennett says he opted out of that part of Paladin's service three months ago, and he now receives two or three leads a month. Excluding the hourly project leads, Bennett says that in the past 15 months Paladin sent his firm a total of 30 leads-20 of which met his minimum-and he has picked up ten of them as clients. He says that in the first seven months of this year, he received 26 leads-14 of which were for the hourly service. WiserAdvisor, according to Bennett, provides him many fewer leads. "I'm not seeing much from them lately," he says.
Pay Per Click
    Murcko refused to discuss any details about how WiserAdvisor generates leads for advisors. Waymire, in contrast, is happy to explain that Paladin is buying search engine terms and using "pay-per-click" technology.
    With pay per click, a consumer might use an Internet search engine to find an advisor by keying in the search term "find a financial advisor." The search engine sells ads that show up on top and on the side of the search results page. These ads are for companies that buy the search terms relevant to their businesses, for instance, "find a financial advisor." About 60% of all U.S. searches are run over Google, according to Hitwise, a company that tracks market share for major search engines. "Our biggest competitors (in pay per click), are Schwab, Fidelity and Ameriprise," says Waymire.

Consumer Content
    Paladin and WiserAdvisor.com both try to create content that lures consumers. Paladin's content is focused on telling consumers how to pick a good advisor. An excerpt:
    "There is a tremendous range in the quality of the advisors who would like to influence or control your financial future. There are outstanding, incompetent and unethical advisors and most of them sound a lot alike. This broad range of quality and lack of mandatory disclosures create a major risk for you. ... Several Tips increase your awareness that bad advice is your single biggest financial risk. You'll also learn that 85% of advisors are sales reps who are paid commissions to sell you investment and insurance products. They are not paid to help you achieve your financial goals, which makes them very risky."
    In addition to its lengthy guide about how to hire the right advisor, Paladin's partnership with Investopedia is also a search engine play. When a consumer searches for a term like "variable annuity," for instance, the tenth result from the search is a link to Investopedia. Paladin is hoping some of the consumers utilizing Investopedia's glossary will use Paladin's Advisor Finder.
    WiserAdvisor is using a similar tact. Murcko says WiserAdvisor is one of the sister companies he runs as CEO of WebFinance Inc. The other two are investorwords.com and InvestorGuide.com, both of which are investor destinations on the Web. Consumers visiting these financial portals can click on a link to "find an adviser" and be transported to WiserAdvisor.com.

Custodian Networks
    Schwab, TD Ameritrade and Fidelity, the three largest custodians serving advisors, all offer referral services through their branches, and all three say they are revamping their networks.
    Schwab has the oldest and most well-developed program, but several advisors who responded to my query reported that leads coming from Schwab in recent months dropped off sharply.
    "They were a big part of our growth for a lot of years," says Eric Kallen of Hayek Kallen Investment Management LLC in Fairhope, Ala. "In the last couple of years, we've seen basically no referrals and new business come out of that network."
    According to a former Schwab employee, who previously worked as a registered rep in a Schwab branch, Schwab reps began sending more leads to the in-house Schwab advice programs, and Schwab branch reps have also been promoting the company's wrap accounts. Advisors interviewed for this story also said Schwab was sending more leads to its own advice programs.
    "As we have increased the number of model-driven advice solutions for the mass affluent, and improved the skill set of our financial consultants (branch reps), that's resulted in an ability to service certain clients in-house," says Alison Wertheim, a Schwab spokesperson. "Those are clients who are looking for advice and are comfortable with a model-driven approach."
    Schwab concedes referrals are down. "Yes, referrals to the Network have declined this year versus prior years," says Wertheim. "However, as of June 2006 we converted $2.6 billion in assets and are on track to convert more assets in 2006 than the other custodian referral programs have converted since their inception."
    Schwab also says its retail advice programs are expanding. "Schwab's retail offering is focused on providing advice to the mass affluent in a scalable way-delivering largely model-driven equity and mutual fund advice," says Wertheim. "And of late we have added a broader array of financial products for our financial consultants to consider as options for their clients."
    While Schwab used to say that its branch reps were not better compensated for referring advisors in-house-to a Schwab advice product or U.S. Trust-than they were for referring to an advisor, this changed in recent months, which explains the sudden drop in referrals to RIAs.
    In the past, says Wertheim, Schwab branch reps had referred clients to investment specialists that work for Schwab Private Client, an advice service geared to the mass affluent. However, in recent years Schwab has hired CFPs and experienced brokers as branch reps and these financial consultants (FCs), as they are now called by Schwab, are keeping the clients for themselves. That's because, according to Wertheim, they are paid in perpetuity on assets they bring in, whereas they are only paid a three-year trail fee if they refer the account to a Schwab Private Client specialist or an RIA that is part of Schwab Advisor Network (SAN). "When they don't refer it to someone else inside the branch, the FCs get paid on an ongoing basis to reflect the additional time and effort associated with providing ongoing client service," says Wertheim. However, that will change in 2007, when the new SAN fee schedule takes effect. Then, branch reps will be paid in perpetuity on SAN assets, Wertheim says.
    Schwab plans to increase pricing for SAN to 25 basis points effective January 2007. For an advisor who charges a 1% asset management fee, this would represent a 67% increase over the current SAN arrangement, which entitled Schwab to 15% of an advisor's fee. Schwab also will eliminate the higher fee for advisors who are in another custodial network referral program, Wertheim says.
    Many advisors around the country have built their businesses on the strength of SAN referrals. If Schwab can make as much or more profit on SAN assets without being the primary advisor responsible for investment management and customer service, SAN will return to its former strength and begin spilling off referrals once again. My guess is the sudden and mysterious drop in referrals experienced in recent months will be reversed after the new pricing and compensation plan for branch reps takes effect.
    TD Ameritrade is also remaking its AdvisorDirect referral program. It is a small program relative to Schwab. With $1.8 billion in total assets associated with the program, it is dwarfed by the $31 billion in Schwab's program. However, TD Ameritrade's Brian Stimpfl says the company has established clear goals to make the program more successful and that it has momentum.
    Stimpfl says the redesign of AdvisorDirect began in March 2005. At that point, the program was six years old but had lured just $1 billion in assets, and only 18% of referrals were converted by advisors to clients. Since March 2005, however, the program has brought in $800 million in assets and the conversion rate has climbed to  30%. "Our goal for 2007 is to increase the conversion rate to over 40%," says Stimpfl. He says TD Ameritrade is investing more in training branch reps to match the right advisor with retail clients. The fee for participating in AdvisorDirect is $10,000 a year or 15% of the advisor's management fee, whichever is greater.
    It does appear that TD Ameritrade has hardly begun to tap its retail client base. When Stimpfl pointed out that the acquisition of Waterhouse by Ameritrade, which closed last January, doubled the number of retail accounts that could potentially be tapped by the referral program, I pointed out that Ameritrade discount brokerage accounts are probably not all that valuable to advisors. Stimpfl shot back some convincing data: TD Ameritrade holds just 25% of the investable assets of its retail clients, and average assets grow 44% after a client is referred to an advisor in the AdvisorDirect program.
    Fidelity's referral program, AdvisorAccess, is "being re-architected," according to spokesman Stephen Austin. The program which was rolled out in 2002, has brought advisors about $4.5 billion in assets, a relatively small amount compared with Schwab's program, but Fidelity is planning on leveraging its leadership in the 401(k) market to bolster the program.
    Austin says Fidelity will strengthen the program by making referrals to advisors of individuals with more than $1 million in assets and who are candidates for rolling over a 401(k) into an IRA. Total 401(k) assets topped $2.1 trillion at the end of 2004 in the U.S., and Austin says Fidelity owns 20% of those assets. "Our competitors' don't have a 401(k) that is as large as ours," says Austin. "So giving them access to the rollover is significant."
    Fidelity currently does not charge for referrals "but I cannot comment on what we'll be doing in the future," says Austin. With TD Ameritrade and Schwab both charging advisors ongoing management fees, you can bet Fidelity will want to be compensated for referrals in the future, especially if they indeed are able to tap the rollover market.

FPA Needs Improvement
    Perhaps the referral program most often mentioned by advisors is the FPA's. It's also the least effective. Bennett, the advisor in Great Falls, Va., says he was getting three to five leads per month from FPA and that it dropped off recently, but he only closes on 5% of the referrals. Curtis Smith, of Interactive Capital Management in Houston, says he had been receiving 15 to 20 leads a month from FPA and that it has trickled off in recent months. "But most of these leads don't amount to much," he says.
    McClanahan, who reports success with the NAPFA referral system, says she does not get leads from the FPA site.
    FPA gives a listing away for free with a membership, and it charges an additional $99 annually for a premium listing on its referral Web site, where consumers can go to be matched with a planner.
    "They make the public go through a not-so-easily navigated site and a series of steps with less-than-obvious navigation links," says Chris Vail, of E-Liquidity in Haverford, Pa., who pays for an enhanced FPA listing. "They could do a lot better at 'idiot-proofing' the search experience for people trying to find a planner."
    With thousands of listings, the FPA referral system is challenged. Allowing consumers to filter its member database by mode of compensation would upset many of its members. FPA risks its referral system becoming irrelevant unless it makes some decisions about how it matches consumers with planners.

Garrett Planning Network
    I have to admit that I am totally conflicted in covering this one because my company designed and hosts the Web-based referral system used by Sheryl Garrett's network. But we just provided the technology backbone. GPN provides the marketing that powers the system, and it is successful at that.
    Tom Nowak or Quantum Financial Planning LLC in Graslake, Ill., says he averages one referral every two months from GPN and half of them hire him. Nusbaum, who says he gets six referrals a month from NAPFA, says he doesn't "get quite as many" from GPN, but that he converts about 80% to 90%. The key to the success of GPN's referral program is its focus on providing hourly advice, which many consumers want. In addition, founder Sheryl Garrett is often quoted in the press. 

Andrew Gluck is CEO of Advisor Products Inc., a Westbury, N.Y., a marketing company serving 1,500 advisory firms.