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The Monthly Best Practices Newsletter

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The Monthly Best Practices Newsletter

By Ramy Shaalan

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The New Face of Referrals

The single biggest source of new clients for most independent advisors is referrals. Often, referrals from existing clients come without any solicitation. According to, in the period between 1997 and 1999, unsolicited client referrals accounted for more than 74% of all new clients.

In the last three years, however, independent advisors have lessened their reliance on these passive referrals as a source of new clients. Even at a time when the average RIA firm is witnessing an influx of new clients (a total boost in clientele of 31.57% in the last two years alone, according to our research), the increasingly competitive marketplace of the recent past has forced advisors to employ more proactive measures to generate new business. As such, the dependency on unsolicited referrals has fallen in the last three years, with a notably steep decline in 2002, as shown in chart 1 below.

Source:, May 2003. All figures shown are averages.

Professional partnerships

The decline in the percentage of clients from passive referrals was the result of advisors’ increased use of other sources to generate clients. Most notably, 2002 marked a surge in new professional partnerships and referral arrangement activities with CPAs, attorneys, and other advisors. As shown in chart 2 below, 34.2% of RIA firms reported having a referral arrangement or a partnership in place with a CPA firm at year-end 2002, up from 19.4% in 2001. A smaller total of 28.4% reported having such an arrangement with an attorney. And 13.8% indicated having a referral arrangement with another advisory firm. In all, 69.56% of RIAs had at least one such partnership or arrangement in place.

Source:, May 2003. All figures shown are averages.

Is forging all these professional partnerships effective? Comparing the financial performance of the 455 firms (or 69.56% of firms in our database) with at least one professional referral arrangement against the firms without any such partnerships, we find the first group to lead in many fronts, as shown in chart 3 below.

Direct solicitation

Another impetus for the decline in passive referrals was the increase in proactive referrals, defined as direct solicitation of referrals from clients. Our research reveals that the most effective means for such a strategy is to encourage referrals in client correspondence. This includes mentioning it in newsletters, on the firm’s Web site, and in general correspondence with clients. In our latest year-end survey, nearly 70% of firms reported employing such a technique, up from 6o.5% in 2001. For the year 2002, direct solicitation generated more than 20% of new referrals, up from 13% in 2001.

One of the best practices observed in this area was the practice of extending fee discounts to clients who refer new business. Offering a 10-basis point discount to a client with a $1 million account who refers you an investor with a $500,000 account generates gross revenues of $5,000 for a fee discount of $1,000: a net revenue sum of $4,000.

The way you phrase your request for referrals is equally important. In our phone interviews, advisors revealed that the most commonly used angle in asking clients for referrals was to ask if friends or family members could also use the advisor’s help to manage their wealth.

Other effective referral-generation methods

Our research shows other means are widely used by advisors to generate referrals. Most popular in that list was membership in a professional association like NAPFA, custodian referral programs, community activities,

and client appreciation events.

As shown in chart 4 below, passive referrals still account for nearly half of new clients, followed by professional partnerships, then direct solicitation, and finally a slew of various methods that we grouped under the “other” category.

While passive referrals still generate the bulk of new clients, the good news is that many firms are moving toward more proactive referral-generation methods–increasing their chance of weathering rough storms in the marketplace.

To receive a customized benchmarking analysis report of your practice, visit the free online tool is a free online resource of research and analysis on the RIA marketplace. The service is aimed at helping advisors grow and enhance their practices. By participating in the online surveys, advisors can see how their businesses fare against other advisors, as well as learn best practices based on the most successful advisors in the business. The instant analysis they receive offers valuable insight that can help them take their practices to the next level and weather the challenging market conditions.

Ramy Shaalan is Vice President of, an affiliate of Rydex Global Advisors. He can be reached at [email protected]

(C) 2003 Wicks Business Information, LLC

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