Here’s a sobering statistic. Accord- ing to the consulting firm Moss Adams, the most successful fee-based advisors–the top 10%–generate approximately one-third of their new clients from referral networks–custodial firms, referrals from CPAs, law firms, and other financial professionals. Another third of these firms’ referrals come from existing clients.
How are these top firms able to achieve such a great referral flow? First you have to consider that the majority, if not all, of these firms have been entrenched in the advisory business for years–and their reputations precede them. They’re also likely stellar marketers (which, it’s safe to say, the majority of advisors aren’t). Based on various studies of advisory practices performed by Moss Adams, Philip Palaveev, a senior consultant at the Seattle-based consulting firm, says it takes 10 years for an independent advisor or firm to develop a reputation in any given geographic area. It takes that many years, he says, for “advisors to reach the point that their message is out there in the marketplace and clients are aware of their existence.”
During this developmental stage, if you will, of drawing in more business, one of the best places an advisor can turn to for help is their custodian. “The referral programs created by the custodians are an excellent way to perhaps accelerate the acquisition of new clients,” Palaveev says. Indeed, concedes one advisor who wishes to remain anonymous, despite the fact that some advisors balk at the cost of the Schwab Advisor Network referral program, many advisors “would be nowhere” without it. The program “made many advisors’ practices because it got them in front of enough people to build a client base,” this advisor says.
In its annual study of advisory firms that it performs for the Financial Planning Association, Moss Adams found that advisors generally close between 33% and 50% of their qualified leads, Palaveev says. But “the biggest problem advisors have is in generating leads,” he says, so “a referral program from their custodian provides just what they need.”
We took a look at the referral programs offered by Schwab, Fidelity, and TD Waterhouse to see how they’re faring and how they differ from one another.
Changes at Waterhouse
Waterhouse is in the process of revamping its referral program, AdvisorDirect, and is tight-lipped about how the new program will look. When asked why it’s overhauling AdvisorDirect, Jennifer Olegario, a Waterhouse spokesperson, said, “We continuously strive to improve the efficiency of our operations. We are revamping AdvisorDirect to enhance the service experience for our advisors and for investors.”
Advisors can likely count on paying to join Waterhouse’s new program, which wouldn’t be such a bad thing. The word on the street is that the 175 advisors participating in Waterhouse’s current program haven’t been satisfied with the quality of leads they’ve been getting from branch personnel (a problem that’s not exclusive to Waterhouse). Advisors say that a monetary reward may give custodians’ branch personnel the incentive they need to send more quality clients their way.
Schwab currently charges for its program, while Fidelity doesn’t. Gary Gallagher, senior VP of product management in the registered investment advisor unit at Fidelity Investments, says Fidelity “has no plans” to charge advisors to be part of its referral program, Advisor-Access. Fidelity believes the referral program “is an extension of our capabilities to serve the investors at Fidelity,” he says.
The word “quality” can be defined in many ways, says Palaveev. Advisors tend to rate clients on how many assets they have and how much revenue the advisor can generate from the client. But branch personnel also need to assess “what the client really needs” from an advisor–a wealth manager or financial planner, for instance–and if there is “a psychological compatibility between the advisor and the client,” he says. Unfortunately, the majority of branch personnel participating in the existing referral programs focus mostly on the “asset level” of clients, Palaveev contends, and “offer cold handoffs,” without considering advisor/client compatibility.
To avoid “cold handoffs,” branch reps must “have a strong definition of who should be referred, and when,” Palaveev says. The custodian has to set clear boundaries on which clients to keep and which to refer, then institute a “simple, but effective, diagnostic process that helps the branch rep understand in what kind of situations a particular advisor is good and not so good.”
It’s the advisor’s responsibility, too, to step up to the plate and develop a relationship with reps. The advisors who are most satisfied with referral programs are those who are “most effective in marketing to their referral source,” Palaveev says. Tom Meyer, CEO of Meyer Capital Group in Marlton, New Jersey–who has participated in Schwab’s referral program for years–agrees. “The bottom line is that advisors have to work it just like anyone else,” he says. “You have to market yourself to do well in the [referral] network.”
Schwab Advisor Network