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.