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Portfolio > ETFs > Broad Market

Referrals Pay Off For Advisors

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Looking to attract more clients? The answer likely lies with referrals–both from clients and from relationships with other professionals such as CPAs and attorneys.

In 2003, advisors embraced a “cocoon” marketing strategy of working only with current clients and not seeking new ones. In contrast, 2004 looked more like a “butterfly” year, with advisors accelerating their use of virtually every marketing tool–with the exception of newsletters and Web sites–to bring in new clients. As in years past, most advisors continue to market themselves via referrals from existing clients. In 2004, this marketing method was even more dominant as the percentage of advisors who used referral strategies rose to 98% from 94% the year before (Chart 1). This has proven to be an effective method: 41% of new clients were landed as a result of referrals from existing clients.

In addition, many advisors realize that good marketing involves creating strong relationships with related professionals, such as CPAs and attorneys. Professional referral agreements skyrocketed nearly 40% from last year to tie as the number two marketing method used, increasing to 75% from 55% in 2003.

Investment advisors who concentrated on high net worth (HNW) individuals clearly see professional referral agreements as an effective marketing tool for expanding their business–31% of those advisors use these referrals to bring in new clients. In most cases the partner’s target market is identical or very similar to the advisor’s. Ranking only second to referrals from clients, advisors cite referral agreements with CPAs or attorneys as a top source of new clients for advisors.

X Marks the Spot

So we know which marketing methods advisors are using. And it’s not surprising to learn which investors they want to add to their client base: HNW individuals. This segment makes up 51% of the average RIA firm’s client base compared to 43.7% last year. But how much growth can be expected in the HNW segment? Has it “topped out”? According to the new Merrill Lynch/ Capgemini world wealth report, the wealth of individuals with at least $1 million (HNW individuals) of financial holdings should rise by a compounded rate of 6.5% between 2004 and 2009, bringing the total wealth of the world’s most affluent to a total of $42.2 trillion. Given this growth, it’s clear why this market segment has been seized upon by financial advisors eager to tap into this burgeoning market. Segmenting advisors’ client base by wealth range highlights that most advisors have a strong component of HNW clients in their client mix. (See chart 2.)

We dug a little deeper and found that the advisors who have the most HNW clients also are the ones who rely on referrals the most. This seems to support a common sense hypothesis that investors prefer to work with someone who has been recommended by a peer of a professional whose opinion they respect.

The important takeaway is the importance of defining the market segments you want to focus on and using the right market methods working with each segment. If it’s HNW, don’t underestimate the power of referrals.


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