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Practice Management > Building Your Business

Refer Madness

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Success breeds success; if you’re successful, clients will find you. That bit of wisdom, which has traditionally held true for the advisory industry, is losing currency as a solitary marketing approach. In the previous century, financial advisors would get licensed, build a book of business, and eventually die. Today, advisors are building business enterprises less dependent on themselves but with far more challenges. One of them is how to create a sustainable process for attracting new clients without relying solely on the dependable “drug” of referrals.

As a practice matures, its advisors tend to rely more on passively generated referrals than on any type of active marketing or sales process to attract new business. According to the 2006 Moss Adams Financial Performance Study of Advisory Firms, 65% of participants’ new clients in 2005 came from referrals alone.

Advisors tell us that their new business each year tends to come from a small cadre of clients and professional referral sources. They also tell us that now that they’ve achieved this critical mass, they have not made as much of an effort to expand their circles. But this is precisely the problem. To paraphrase Frank McNair, author of It’s OK to Ask ‘Em to Work: And Other Essential Maxims for Smart Managers (Amacom Books, 1999), the seeds of destruction are sown in good times.

McNair suggests that we identify our areas of weakness and surround ourselves with people who will shore them up: “We must press ourselves to grow so that our weaknesses become our competence.” The point as it relates to advisors is that if marketing and sales has become the weak link in an otherwise healthy practice, it is critical that practice leaders take inventory of their approach to growing their top line and consider how, why, and with whom you might bring this activity back to health. Obviously, for successful advisors it’s not a survival question so much as it is a question of how to maintain sustainable growth.

Being Passive May Not Work

The danger of relying solely on passive referrals is that you ultimately get defined in the market by others. When you come across as too busy to take on new clients or to be able to articulate your value proposition to prospects (and even to your own clients), the competition could eventually consume you. When your marketing muscle has atrophied, you will not have the strength to respond to the growing competitive threats.

We often hear advisors express fear of competition from the big guys who used to be their friends, including their custodians. While these may be the panicked expressions of practitioners who are less secure than they should be, this fear will become a realized threat for advisors who don’t begin thinking in business terms about how to differentiate themselves in the market, how to position themselves among their optimal clients and prospects, and how to better leverage their relationships to create new opportunities for their practices.

Another real threat to advisors comes from their existing clients, who too often assume that the advisory practice does not have the capability to meet their evolving needs. According to Coming of Age: Best Practices for Serving Affluent Pre-Retirees and Retirees, a study conducted by The VIP Forum, 18% of pre-retiree respondents said they would listen to proposals from other advisors, and 16% had switched assets to another provider in the preceding 12 months. The most common explanation for the switch was that the clients perceived their advisors could help them in the accumulation phase but not in the distribution phase. How is it possible that the clients you’ve worked with all these years do not know you can continue to serve them during retirement?


Know Your Marketing ROI

According to our data, firms are spending less on marketing and sales each year. We found that firms with revenues between $1 million and $2 million (median revenue for the group was $1.37M) spent an average of 2.2% of revenue on business development and marketing in 2005.

While certainly firms need to look at how much they are allocating for business development and marketing and whether that’s enough, the challenge for some practices is knowing whether they are getting adequate return on each marketing dollar spent.

Many of these marketing dollars appear to be spent in a disjointed fashion without a coherent strategy. Mild touches, soft messages, occasional blasts of news–these marketing activities consume resources. But are advisors even getting a return on this investment? Are the results of each of these efforts measured in some way?

Sometimes advisors encounter cultural challenges when it comes to marketing and sales. Actively selling services may feel unseemly for some who think that it’s not a dignified way for professionals to conduct themselves. But lawyers and accountants overcame their diffidence about self-promotion when they recognized how their competitors were retaining existing clients and drawing more business, and the best advisory practices have done the same. As advisors go through another phase in the maturation of the industry, many are sticking their heads out from their carapaces to get a better whiff of the opportunities that can arise from more active efforts.

The best firms spend their time, money, management, and energy in two key areas of marketing:

  1. 1. Cultivating existing clients
  2. 2. Attracting new clients

It might seem odd to include existing clients in your marketing approach, but there are several key reasons to do so:

  • Market intelligence–knowing what they want and need helps you to continue to improve your offering and to respond to needs as they evolve;
  • Retention–by reminding them of your value, you continue to minimize being commoditized;
  • Systematic harvesting of referrals–by reminding clients of your depth, breadth, and expertise, they may be more likely to think of you when their friends and colleagues need help.

Conventional wisdom holds that it is much easier to do business with existing clients than to create new ones. Most fee-based advisors are managing all of the financial affairs of their clients, so there may not be new business opportunities specifically with those clients. But the quality of their relationships could beget new relationships with friends, relatives, and business associates. What’s interesting is that advisors say that 70% to 90 % of their revenue each year is generated solely from existing clients rather than from new relationships. When we surveyed advisors, only 11% of their new assets were the result of new clients, which corresponds to the same revenue growth. Yet any marketing dollars they spend tend to be external.

Advisors may argue that they have client appreciation events and provide newsletters, so they are adequately addressing this segment. But the question remains, what is your return for this investment? Is it quantified? Do clients value the newsletter and party over all else? Would these be the reasons why clients would stay with you?

Marketing is an intuitive science, and selling is a real skill. The need to do both is obvious to anyone in financial services, but execution is difficult when one’s life revolves around putting out fires and dealing with the business at hand. However, creating a discipline around the effort, training others to learn the skills, and measuring the return can help to justify the renewed focus on investing in what has become a point of vulnerability for many practices. (For some tips from Tibergien on using internal marketing, see the Web extras section of this issue at


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