Successful financial advisors are, most likely, very familiar with the Pareto Principle as it applies to their business. The Pareto Principle -- aka the 80:20 Rule -- is named after the Italian economist Vilfredo Pareto [see pictured], who postulated that 80 percent of the results come from 20 percent of the causes.
As a financial advisor, you see this principle most every day. It is rare to find the advisor who does not have the bulk of their business skewed toward the top 20 percent (or so) of their clients. Not in all cases, of course. Sometimes the business/client ratio is closer to 70:30, or even more skewed to the top end, e.g. 90:10. But, the Pareto Principle is widely understood and appreciated by financial advisors.
More Pareto Principle Validation
It’s really interesting to see confirmation that the Pareto Principle also applies to referrals. In a recent survey undertaken by Advisor Impact of 1200+ financial advisors, they discovered that just 28 percent of the client population provided 100 percent of the referrals for this study group. Moreover, the survey revealed that the bulk of the clients who provided referrals were “engaged” clients, who also provided multiple introductions.
[At ClientWise, we call the engaged clients who provide referrals Loyal Client Advocates. More on them in a minute.]
Back to the survey. The 28 percent number presents an interesting conundrum for the financial advisor. More to the point, as an advisor should you focus on the 28 percent who do, or the 72 percent who don’t?
We (heart) Referrals…Not
Traditional sales logic has been to focus on the 72 percent of clients who don’t provide referrals. This embraces the premise that salespersons should solicit all of their clients, all-of-the-time, for referrals. A natural outgrowth of this assumptive marketing truth is the “We love referrals” tagline, and other cheesy sales demeanors.
From our coaching vantage point, we are highly dubious of the all-referrals-all-the-time mentality. It doesn’t work very well, and annoys certain clients. From our observation, financial advisors are far better served focusing on the 28 percent of clients (or whatever that number is) who trust you most.
We call the clients who can articulate your value and who are actively engaged in delivering referrals, Loyal Client Advocates. Loyal Client Advocates are clients who know you so well and are so invested in the success of your practice that they will advocate on your behalf and partner with you to identify a meaningful number of quality clients each and every year. Identifying and converting the traditional client to becoming a Loyal Client Advocate gives your practice a significant advantage over your competitors.
Indeed, if you are interested in identifying, creating, and building your own Loyal Client Advocate network, please download the ClientWise Learning Tool that you'll find at the end of this post.
It’s All About Trust
Here’s the thing. The ultimate value that you create as a financial advisor is building trust. Over your entire career you have built a level of confidence with a certain number of people who trust you implicitly:
- Who are they?
- Who trusts you most?
The key to developing a vibrant client referral network is in knowing the answer to these two questions, and engaging your clients’ willingness to partner with you in the success of your business.