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In my article, Why Top Performing Advisors are Exiting the Business, I outlined the fundamental changes taking place in every aspect of how financial advisors operate. Perhaps nowhere is the change we’re seeing greater than in how successful advisors are attracting new clients – and in particular the collapse in the role that referrals play in bringing new clients on board.
Historically, referrals were the primary way that advisors attracted new clients. And those referrals came relatively easily, as a reward for doing a good job for clients. But times have changed. When I talk to advisors today, I hear a different story, as many talk about referrals “drying up.” And industry data backs this up.
In his article, The Death of Referral Marketing for Financial Advisors, Michael Kitces wrote about a FPA research study on the source of AUM growth. The key chart is below, showing that in 2015 client referrals represented less than 2% of AUM and when it came to increasing assets were significantly less important than the combined assets from a variety of other business development techniques.
This raises three fundamental questions for advisors:
- What’s led to the slump in referrals – and is this change temporary or permanent?
- What are the implications for the approach that you should take in your approach to referrals?
- What does this mean in terms of the broader strategy on attracting clients?
Today, I’ll tackle the first two questions on referrals – and deal with the issue of your broader strategy on attracting clients in the New Year.
Why referrals are down
There are several reasons that referrals have dropped from historic levels.
- The risk of referring friends
Some clients are still scarred by the near-death experience of 2008. In one roundtable with investors that I hosted recently, several said that while they liked and trusted their advisors, they would be cautious about referring friends. The reason came down to the responsibility that would come with making those introductions and the risk of jeopardizing friendships should we see another sharp drop in markets. Added to this is that some clients who referred friends and family to advisors in the past reported that they felt pressured to meet; even if that was a different advisor, that memory may still make some clients cautious.
Read the full article here by Dan Richards, Advisor Perspectives