Growing a financial planning business through referrals has long been accepted as the top strategy for building a practice, and in recent years one study after another has validated the approach by showing that the majority of advisors generate the majority of their growth through referrals.
Yet an increasing number of studies are showing that a significant portion of growth-by-referrals is not really through any proactive referral marketing strategy, but instead is merely the result of passive referrals that show up on their own.
Which in turn means that if passive referrals are actually how a majority of advisors are generating growth, it may be more a testimonial to the ineffectiveness of advisors as marketers at all, rather than the benefits of a referral strategy implemented on a purely passive basis.
This doesn't necessarily mean a proactive referral marketing approach cannot be used to generate new clients... but it does raise the question: have we overstated how effective referrals really are in growing a business? Is referral marketing really a best practice, or simply the only result that's left in the absence of any other marketing best practice?
The inspiration for today's blog post was a recent conversation I had with another financial planner, who lamented the fact that he got so few referrals from clients. "One article after another says referrals are the best way to grow a practice," he noted, "I feel like I must be doing something wrong, because I only added a couple clients in all of 2011 from referrals." For instance, the Advisor Benchmarking study for 2011 from Rydex | SGI showed that "referrals from existing clients continue to be the most sought-after source of AUM growth over the next five years, according to nearly half of all advisors (49%), more than double the next most important source of new clients."
Financial Advisor Referral Sources
Yet the study goes on to note that 'Passive referrals from existing clients' was cited as the most common source of new clients over the past two years..." Viewed another way, what the study really says is that while nearly half of advisors are "focusing" on referrals from existing clients to grow their businesses, the reality is that the most common source of new clients were passive referrals. These are referrals that show up without the advisor doing any particular active outreach. They're basically clients who walked up to the door, knocked, invited themselves in, and offered to pay the advisor for his/her services. In other words, advisors are basically saying that their most sought-after source of new business growth is to do nothing and wait for clients to knock on the door or make the phone ring!
This is a 'best practice' in marketing!? As the study notes, getting new clients through referrals still more-than-doubles the next most important source of new clients. So if doing nothing and having passive client referrals just show up is the most significant planned source of growth for most advisors by a 2:1 margin, what does this really? To me, it says that as advisors, we are some spectacularly bad marketers.
Referrals - Best Practice or Best Of What's Left?
Because what the results are really saying is not that marketing by referrals - especially passive referrals - is a best practice. What it essentially shows is that we're so ineffective at any other form of marketing, that the primary way we end out with any new clients at all is because we're lucky enough to just have a few of them show up out of thin air! In other words, we're so ineffective at marketing that virtually every other strategy generates almost no new clients whatsoever, and thus by comparison, just sitting around and waiting for the phone to ring with passive client referrals looks like a brilliant strategy. Except I suspect the reality for many firms is that while (passive) referrals may have been the best source of new clients they had, it didn't necessarily generate much actual growth.
The truth seems to be that growing a practice by referrals is simply all that's left for most advisors when they don't otherwise have any marketing strategy at all. And given the dominance of passive referrals as a growth driver for advisors, it appears to be that most advisors really don't have any marketing strategy at all! In fact, anecdotally I've found that most advisors couldn't even name three marketing strategies besides getting referrals if they tried!
Generating More Client Referrals
Yet given this perception that referral marketing is a best practice - instead of simply being the only practice that's left in the absence of any other genuine marketing strategy - advisors feel the pressure is on to generate more referrals. This in turn has led to various marketing 'consultants' suggesting that if you want more referrals, you just need to ask your clients more often. As true referral marketing consultant Stephen Wershing has pointed out, though, this isn't even a best practice for people who do focus on referral marketing! As Wershing notes, hoping to get more referrals from your clients by just asking them more often is kind of like men hoping to get more sex by just asking women more often. I suppose you might get lucky once in a blue moon, but to say the least, most of the time it's not likely to win you many friends or advance your cause.
This is not to say that referral marketing is an ineffective means of marketing. As Wershing and others have shown, when it's truly done right, by getting a clear focus on your target client, making yourself more referrable to that client, and getting your clients truly engaged into your practice with high contact, a holistic offering, and a strong personal relationship, referral marketing can in fact generate significant new business growth over time.
But that's not how most advisors have utilized referral marketing. As the Rydex | SGI study notes, a lot of referral 'marketing' is just taking the passive referral growth that happens on its own! This emphasizes the fact that most advisors are not generating business growth through a proactive referral strategy. They're simply letting business growth show up on their doorstep - if it happens to at all - and this passive-growth-without-a-strategy is showing up as the primary source for many advisors under the broad label of "referrals". Not because the advisor generated the referral, but simply because the referral found its way to the advisor anyway.
Bottom Line On Generating More Referrals
The bottom line is that I think we need to stop confusing growth-by-passive-referrals as a "best practice" with a genuine proactive referral marketing strategy. The latter represents a real strategy for growth. The former simply represents what happens in the absence of any strategy at all.
But expecting that good growth by referrals will happen without the efforts involved in implementing a proactive referral marketing strategy is just a setup for failure. If you don't want to do what it takes to build a real referral marketing program, then feel free to go with another marketing strategy, or just rely on a slow passive-growth approach. But don't point to passive referrals that show up as a justification for the effectiveness of a referral marketing strategy, because it's not. On the other hand, if you want to grow your practice with referral marketing for real, go for it. There are some great people out there who can help, too.
So what do you think? Are referrals your primary source of growth? Are they active referrals that you proactively cultivated and developed? Or simply passive referrals that came in the absence of any other strategy? Are advisors counting too much on referral strategies that are passive instead of doing the real work of conducting a true referral marketing program?
Stephen Wershing says
Let me take make one objection to how you frame your point. And it may just be how I’m reading this – we may actually agree on it!
I think a lot of people will read this post and understand “passive” referrals to be ones they did not go out and get. And I disagree with that.
Since clients refer when it works for them, even a well designed and executed referral marketing strategy will result in referrals showing up seemingly out of the blue.
The objective of a referral marketing strategy should be to prompt people to talk about you at the right time. So, there will be no direct relationship to a particular referral conversation with a client and the generation of a referral. But, as with successful campaigns in the consumer products world to create “buzz” around a company, an effective strategy will have people talking about an advisor when the right situations arise.
The big difference between that and what most advisors do now, which is where I suspect we agree, is that most practitioners do not do this deliberately. The referrals they receive are more out of luck and design. And, even though you cannot trace a specific referral back to a specific conversation you had with a client, you can be deliberate about your plan for attracting them. And that plan would be a “best practice” in your marketing.
Thanks for promoting conversation on this topic!
Michael Kitces says
Indeed, you and I are in agreement on this.
The key distinction to me is whether the referrals are cultivated as a part of a deliberate, proactive process, versus simply being a purely reactive result of a ‘luck’ and good fortune. I didn’t mean to imply that any referral not generated by a direct ask “doesn’t count” – as I think you and I agree that pestering clients with continual asking is NOT a best practice for referral marketing in the first place.
My real point was simply to note that “most advisors generate growth from referrals” does not actually mean it’s a best practice when most advisors generate those referrals not by any proactive referral marketing strategy or effort, but get those referrals simply because a few show up most years despite not doing ANY effective marketing!
Steve Pascal says
Please email me your specific referral marketing strategies
Specifically who would be able to assist me in designing and implementing and actually doing referral marketing strategies
Your assistance here will allow your blog on referral to be solutions vs suggestions
Pascal Financial Options Inc.
Hi Michael. You make mention that there are great people out there that can help with referral marketing strategies. Can you list a few?
Susan Weiner, CFA says
You are always provocative. I like the way you see the world.
I started out in the passive way, but have gradually evolved to more active. Thank goodness for social media making life easier for introverts!
Julie Littlechild says
Great stuff Michael.
There is no doubt in my mind that most referral marketing is passive – the happy by-product of the fact that advisors who deliver great service will likely get some natural level of referrals whether they do anything or not. To that end, it’s hard to call referrals a best practice. Many advisors take pride in the fact that the majority of their new clients come from referrals, but the question is this – what percentage of clients are actually referring? Based on our research it’s as low as 2-4 percent of clients. Not great, given relatively high levels of satisfaction.
I’d suggest that referrals hold out the opportunity to be a best practice because we are barely scratching the surface on the true potential. Something to consider – in our Economics of Loyalty research we show that virtually all referrals come from engaged clients (about 24% of a typical client base). Those engaged clients provide just under 2 referrals each so if you have 200 clients its very likely that you are being “referred” nearly 100 times in a 12 month period. By our estimate, that means that advisors are only meeting/converting about 10% of the referrals that are being made. Clients think they are making referrals, however most never become introductions for a variety of reasons.
I guess I’m saying I think you are both right and wrong. Today, referrals are not a best practice based on what is happening in the industry. However, if an advisor could tap into a small percentage of the referrals already being made, he or she might double, triple or quadruple referral activity. Now that’s a best practice.
Thanks, as always, for your great work!
Dale Walters says
I agree 100%. I have been saying for years that growing by referrals only is not a good thing. For example, we receive about 1/3 of our new clients from referrals because we have a marketing plan that generates the other 2/3rds.
Additionally, a potential buyer would like to see multiple marketing efforts that are working to bring in new clients. Buyers are concerned that when the principals leave the referrals (and growth) will dry up.
So if you want to grow your business faster and make your business worth more, you need an effective marketing plan.