Updated Friday, July 25, 2014 as of 7:03 PM ET
Blogs - A Better Practice
Never Ask for a Referral (Here's Why)
Thursday, February 28, 2013

If you’ve built a productive advisory practice, you know that the single most important resource for prospective clients is your existing book of clients. For the vast majority of advisors, referrals from satisfied investors represent the primary source of growth and new revenue. In fact, an entire consulting industry has grown up in response to this question: how can I get more clients to refer friends, family members and acquaintances to my business?

Unfortunately, many books and consultants who advise on the best strategies to do this actually harm more than help. There are some very powerful psychological dynamics—mostly significantly misunderstood—that influence when and why a client makes a referral. There are many hidden issues potentially at stake when an advisor asks for a referral. Navigating these conversations well first and foremost means taking steps to preserve the existing relationship. In fact, it is my opinion from working with hundreds of successful advisors over the past 20 years that you should never ask an existing client for a referral.

Why Do Clients Refer?

Let’s start by considering why clients refer. Making a referral is a powerful act of one person connecting two other people. In most cases, the motivation is to take care of or “gift” both of the people being connected. Importantly, the new relationship is unevenly balanced; the intention is to get one person (the advisor) to take care of another person (the prospective client). Most often (but not always) your client hopes that you will benefit from the referral, but expects that his or her friend or family member will have a problem solved. Most advisors have received an inappropriate referral—that person who needed credit counseling more than asset management. That’s a classic example of an asymmetrical relationship; almost of all of the benefit is delivered to one side of the interaction. You have undoubtedly heard prospects say, “My friend John speaks highly of you. He said that you might be able to help me.”

Many advisors have an instinctive appreciation of the sense of “gifting” that is motivating the referral, and they try to create more referral activity by telling clients, “I get paid in two ways: by the fees I charge and by the referrals I receive.” There are important psychological reasons why this approach should be avoided. First, the statement is simply not true. An advisor is paid a fee to deliver services, which forms the basis of a contractual agreement between him and the client. Referrals are something that happens in addition to you getting paid and must be thought of as a gift or bonus in the relationship, not as an obligation.

What’s Wrong with Asking?

Smartest Takeaways From the Women Advisors Forum

This idea of “obligation” deserves a closer look, because if you manage it inappropriately, it can have a toxic impact on your client relationship management. An obligation is a requirement that limits freedom of choice. As an example, paying a fee is an obligation that you require of each of your clients so that they can continue to receive your services. If they stop paying, you stop delivering. In response, and in balance, it’s your obligation to deliver value for the fee you are paid. If you don’t fulfill this obligation, your clients will eventually fire you.

Importantly, the emotional dynamics within your relationships around fees and the delivery of value are highly charged. Clients don’t like the obligation to pay, and will often seek to receive a discount so that the services cost less. Many advisors feel uncomfortable about charging more for fear of stressing the relationships. But they also feel frustrated when they don’t earn as much as they want for the work they do. Behind all of these strong feelings lurks the issues of obligation and lack of choice.

This knowledge helps us understand why asking for a referral is fraught with potential risks.  Whenever you ask a client for a referral, you put that person in a social “double-bind” where her freedom of choice is constrained. This means you are forcing the client to make a choice, and there is no way she can avoid the position in which you have put her. She can either say “yes” and offer up a name or two, or she can say “no, I’d rather not do that” and risk disappointing you and stressing the relationship.

(4) Comments
Client LOVE to give referrals when asked in a way that is sincere, non-controlling, non-manipulative, non-stressful, with no pressure, and gives them options. The key is to ask in a respectful manner that leaves the integrity of all parties involved intact. Being specific in your request and being a professional not only shows you are not needy, but gets you true referrals (prospects who have a need for your service), as opposed to just obtaining a list of client acquaintances. Successful Advisors know exactly how to do this. That's one of the reasons why they are successful.
Posted by Max B | Thursday, February 28 2013 at 10:25AM ET
This is such an important topic to building a successful practice it should be a required course for every adviser. Anyone in this profession for more than a year knows that the only truly effective way to attract quality clients is through referrals. All the best practice studies confirm this. Yet, advisers are bombarded with conflicting information on whether to ask for referrals and how to do so from a variety of well known coaches and "gurus" virtually every day. No one convincingly demonstrates whether asking for referrals nets the desired result. Even more important, there is scant information to demonstrate whether asking in the wrong way, such as described in this blog, is destructive to the relationship with the client. For now, all we can do is use common sense and follow the lead of successful advisers whose style is closest to our own. For me, this blog appears to be an excellent place to begin.
Posted by Rich J | Thursday, February 28 2013 at 12:57PM ET

This is a great article! I agree that the old-fashioned approaches to referrals, like:

"I get paid in two ways..." or "If you want me to continue to stay in business..." or "I require my clients to..." or "Would you rather me spend my time working on your accounts..." etc.

do not work, and actually destroy the trust professionals need to build.

On the other hand, there's no harm taking the script you so generously provided and making it more powerful:

"Does anyone come to mind that you think could use my help that you've been holding off bringing up? Let's talk about him or her and see if there's a comfortable way to arrange an introduction." Follow this with "Who else should we talk about?" and you may have some immediate referrals. If not, ask your client not to "keep you a secret" and to remember that as busy as you are, you would never be to busy to help a friend or family member he wanted you to help.

When it's about THEM and their friends and families, asking for referrals works.

The advisor shouldn't even be having this discussion unless he's asked about the value his clients are receiving from him, and is certain they're happy with his services.

Posted by Sandy S | Sunday, March 03 2013 at 5:37PM ET
As a retired financial advisor, and now a business coach, referrals and marketing are topics much more complex than most of us realize.I agree with the general tone of the article, but . . .I know many agents/advisors who are tough as nails about demanding referrals. Others (myself included) are more low-keyed; I find most advisors fit into this category.

An issue I discovered only in my coaching career is this simple maxim: You don't choose your target market, your market chooses you. This is no small feat; most advisors only discover their natural market after many years in business, and even then it is usually an accidental discovery. A rigorous effort should be made to clearly and accurately define those clients who you love to work with - partly because they love to work with you.

If you do this, then you redefine how you obtain referrals. You should be asking for referrals who match your ideal client profile. The goal should be to work with your ideal client 100% of the time.

The challenge: develop a marketing plan which will ultimately have you working with your ideal clients at least 80% and preferably 100% of the time. Any referral program which will help you do this - on a sustainable basis - is the one you should use

Posted by Nick R | Wednesday, March 06 2013 at 10:30PM ET
Post a Comment
You must be registered to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
2014 Summer Reading List for Advisors

Current Issue

The June Issue is now online!


Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here