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Few topics get as much attention as the best way to increase referrals. Some of the ideas I’ve heard include coaching clients to better understand and communicate your value, becoming the safe choice in a targeted niche and creating “raving fans” by delivering an outstanding client experience. Depending on what you read and who you believe, each of these is the key to increased referrals.
None of these are what truly drives referrals.
New research shows that the variable that most influences referrals is something that almost never gets mentioned –the going-in predisposition and mindset by clients— what can be called a client’s ”referral DNA.”
In this column, I outline the research that identified referral DNA as a key variable and the implications for advisors.
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Taking an evidence-based approach
Historically, the evidence around creating satisfied clients and increasing referrals has been informal and anecdotal rather than rigorous and fact-based. To help address that, I worked with a faculty member in the MBA program at the University of Toronto (where I’ve taught for over 20 years) to design a research study to measure what drives client satisfaction and as part of that what leads to referrals.
Fifty advisors from a variety of firms volunteered to participate in this study. Over a six-week period in the spring of 2012, at the conclusion of face-to-face meetings, participating advisors asked clients to complete a confidential, in-depth written questionnaire about the meeting that had just occurred as well as an assessment of their advisor; a draw for a $5,000 among all respondents was the motivation to participate. To encourage candor, clients did not return the survey to their advisor but were given postage-paid envelopes in which to mail the completed questionnaire. While the clients were completing the written survey, the advisor went online and completed a parallel survey about their perceptions of the meeting.
More than 500 investors returned completed questionnaires. One of the questions in the survey related to the number of times that the client had recommended friends or family to their advisor in the past two years. Clients fell into three categories:
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Had recommended advisor two or more times
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26%
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Had recommended advisor once
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20%
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Had not recommended advisor
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54%
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A number of reasons explain why this cannot be extrapolated to suggest that half of all clients have referred friends and family:
- The 50 advisors who volunteered to participate were not intended to be representative of all advisors.
- The clients who advisors met with were typically of above average importance, so not representative of all clients.
- While we asked advisors to invite all clients to participate in the survey, it’s possible that if an advisor wasn’t confident about a client’s happiness or they felt that a meeting hadn’t gone well, they might not have made this offer.
- Finally, asking people to rely on their memory to report on the referrals they’d made over two years has limits in terms of accuracy.
Within these limitations, we now had three groups of clients when it came to referrals. About one in five said they’d recommended their advisor once over the previous two years. Another quarter reported recommending their advisor two or more times. The final group, just over half of respondents, said that they hadn’t recommended their advisor in that timeframe.
The next step was to examine what drove the differences between these three groups.
Does asking for referrals increase the odds of success?
Conventional wisdom is that to maximize referrals, advisors need to talk about this subject with clients. Most advisors long ago moved past the pressure-based approaches of the 1970s and 1980s (with stock lines like Who among the people you know should I talk to, who I can help in the same way I’ve helped you?) That being said, there is a cottage industry of referral coaches who expound the view that to maximize referrals, you need to have clear conversations about your value and about the benefits that clients have experienced in working with you.
A 2008 research study conducted by Advisor Impact and sponsored by Vanguard had already called into question the impact of talking to clients about referrals. That study had polled clients who had provided referrals and asked about the catalyst for the referrals. The surprising finding: Only 6% of referrals were triggered by a conversation with an advisor.
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Catalyst for referrals
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A friend told me about a financial challenge and I suggested my advisor might be able to help
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54%
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A friend asked if I knew about a good financial advisor and I made an introduction
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45%
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My advisor said he/she was interested in referrals and I provided a name
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6%
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Source: Economics of Loyalty, Vanguard
Along the same lines, our research showed very little connection between an advisor raising the issue of referrals and seeing recommendations as a result.
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Number of referrals over past two years
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Percentage of clients
who report that
advisor has explicitly
raised the topic of referrals
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Recommended advisor two or more times
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22%
|
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Recommended advisor once
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14%
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Did not recommend advisor
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19%
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The connection between satisfaction and referrals
So if asking for referrals doesn’t drive referrals, perhaps the key is to have highly satisfied clients. On a scale of 1 to 10, we asked clients to rate their advisors on key dimensions that drive satisfaction – satisfaction with performance over the past three years, volatility, frequency of meetings and feeling like a valued client. Again, there was little correlation between higher ratings and referrals.
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# of referrals
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Performance
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Volatility
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Frequency of meetings
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Feel like a valued client
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2 +
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7.8
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8.7
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9.3
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9.5
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1
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7.8
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8.8
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9.0
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9.3
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0
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7.7
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8.6
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9.3
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9.5
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The mystery solved: Referral DNA as a driver of referrals
So if asking for referrals and satisfied clients aren’t connected with more referrals, what is? Or are referrals simply a random event?
Fortunately, we had asked one other question that ultimately answered this question. We asked the clients who completed the surveys whether they’d made referrals to other professionals over the past two years, such as accountants, lawyers, bankers, doctors and dentists. Here’s what we found:
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Number of referrals over past two years
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% of clients
who referred
other professionals
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Recommended advisor two or more times
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76%
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Recommended advisor once
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67%
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Did not recommend advisor
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36%
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There is a very clear connection between clients who referred their financial advisors and who also referred other professionals. An advisor can have two clients with similar levels of satisfaction and with whom she’s talked about referrals, but one client provides multiple recommendations and the other provides no referrals at all.
There are two possible explanations: The client who provides recommendations has a broader network and so more opportunities to provide referrals, or that some clients are more comfortable with the “risk” of making referrals and give the issue of referrals higher priority. In both cases, what drives referrals is not any activity by the advisor, but rather the client’s referral DNA – their comfort level and opportunity to provide referrals.
The implications for referrals
There are at least four implications from our discovery of referral DNA in clients:
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Give referrals greater importance in client segmentation
Referrals are your most important form of non-financial compensation from a relationship. When you segment clients in terms of the communication they’ll receive, ensure that you give high-referral DNA clients who provide referrals the recognition that they deserve.
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Place greater priority on referral recognition
Most advisors acknowledge referrals, but the advisors with the most success at referrals go beyond this. These advisors put special effort at organizing smaller, more intimate dinners and other special events to recognize and thank their key referral sources.
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Reduce the risk of referrals
You need to ensure that clients feel good about their decision to make introductions. One advisor implements a 90-day welcoming process for all new clients during which he dramatically ramps up the level of contact. At the end of that, he meets with new clients to get their feedback and asks them to complete a short five-question survey of their satisfaction to date – when a client was referred, he asks for their permission to share it with the client who introduced them.
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Reduce your stress around referral conversations
Let’s be clear: There is certainly value in talking to clients about the fact that you’re open for business – but these conversations are much less important than a reading of our industry’s “referral literature” would have us believe. Yes, it does make sense to periodically remind clients that you’re happy to work with their friends, but once you’ve raised this a couple of times, don’t make these conversations a source of anxiety. Having low key conversations with high-referral DNA clients, those who’ve demonstrated openness to making introductions, is far and away the best way to increase referrals and reduce your stress in the process.
conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries, go to www.clientinsights.ca. Use A555A for the rep and dealer code to register for website access.
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