Referrals are the lifeblood of a thriving financial advisory business. Our proprietary research has shown that 71 percent of new assets for top-performing financial advisors come from one of two referral sources: clients and other members of your professional wealth management network, including commercial lenders, business evaluation experts, CPAs, attorneys and others.
So…if financial advisor referrals are so desirable and provide the bulk of new relationships anyway, here's a question. Does it make sense to go "all in" and build a wealth management practice entirely based on referrals, i.e. a 100 percent referral-based practice?
Because such a referral-based practice would gain all new relationships organically through referrals, such practices could potentially eliminate the budget for traditional business development activities. These include cold calling, prospect lists, direct mail campaigns, public relations and social media marketing campaigns.
On the other hand, a practice solely based on referrals may not make sense for some advisors and may be difficult to achieve. Here’s a look at the pros and the cons.
Here are four reasons why it makes sense to build a practice completely around referrals, including:
- Shortening the sales cycle: ClientWise research reveals that the number of touches and contacts in a referral-based sales cycle is about 50 percent less than in a cold prospect sales cycle. This is due to the carry-over of trust that is indirectly transmitted by the referral source.
- Saving money: “Inorganic” business development is generally more expensive, time consuming and stressful. By eliminating marketing to “cold” prospects, you also eliminate of a lot of hassle and headache.
- Better qualifed clients: Referred clients are more likely to be qualified than cold prospects. Because referral networks usually have a clear sense of your business and who you like to work with, the potential clients they refer to you are more qualified than cold prospects. They are more likely to meet your definition of an ideal client type.
- Increasing focus on the most productive type of business development: By concentrating wholly on referrals, you become even more client-centric and actively focus on the most productive source of new business, and building the supporting processes and structures that foster better, qualified referrals.
That being said, there are sound reasons not to commit to a 100 percent referral-based business, which include:
- Relishing the chase: If you excel and are energized by the entire business development process of meeting and landing new clients, moving to a 100 percent referral-based practice could remove a significant motivator for you.
- Finding external business opportunities: You see a business opportunity that exists outside your current network of contacts. You don’t want to limit your opportunities. You enjoy finding, and working with, clients with new sources of wealth.
- Lacking the ability to capitalize on referral-based opportunities: Directly said, your business isn’t ready to transition to this model. You don't have the infrastructure in place to make such a move sustainable.
The Take Away
Whether your practice ultimately moves to a 100 percent referral model or not isn’t the direct issue. What is more important is to consider how you acquire business and the processes surrounding client acquisition and your connection with your referral sources. Any wealth management practice that develops and sustains sound client acquisition processes, especially around Loyal Client Advocates™ and Professional Advocates™ (see below) will find it easier to move to whatever mix of referrals and external business opportunities are optimal at any given moment.
In part 2 of this blog post, we’ll expand on the qualities that will make it easier for your practice to move to a larger mix of referrals versus external business opportunities and how this might be beneficial.