How to Solve the Referral Conundrum

July 29, 2014

by Dan Solin

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Whenever I ask advisory firms how they generate new business, the answer is the same: referrals. I get the same uniformity of responses to a series of referral-related questions:

“What percentage of new business comes from referrals?” (“50%-75%.”)

“How do you generate referrals?” (“It just happens naturally.”)

“Do you track referrals?” (“No.”)

“Is anyone accountable for generating referrals?” (“No.”)

“Is there a standard protocol you use to ask for referrals?” (“No.”)

I am struck by this disconnect. Referrals play a critical role in generating new business, yet little attention is paid to the process of getting them.

There is a considerable amount of sound data on how to acquire referrals. But the initial issue you must address is whether you should ask for them at all.

Reasons not to ask for referrals

There are sound arguments for not asking for referrals. Mark Hoaglin, a consultant to advisory firms, summarized some of them. He believes that asking for referrals only “cheapens” your practice. Instead, Hoaglin suggests referring business to your clients and organizing client events. He believes these activities will ultimately result in referrals, without the stigma of a direct request.

There is a sound psychological basis for Hoaglin’s views. It is called the “rule of reciprocity.” We have a deep-seated need to reciprocate when someone does something for us. If a neighbor invites you to dinner, you will feel a strong obligation to respond with your own invitation. If you receive a request for a charitable donation that includes a small “gift,” you will be more likely to donate.

You should consider ways you can use the rule of reciprocity to obtain more referrals.

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