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?
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.
Human beings don’t like stressing relationships by saying “no”; in fact, we are hard-wired to agree with and cooperate with people we know or work with. This is how our species has survived and prospered—through a natural tendency to cooperate with those we are connected to. And this is the instinct that coaches and trainers try to activate when they tell you, “Clients who are satisfied with your services will be naturally inclined to make a referral to you if only you will ask.” What’s missing from this analysis is theimportant, two-person aspect of making a referral: there’s another person involved!
This other person is the friend or family member being referred. When you ask for a referral, you’re constraining the choices of two people—your client and the person the client is referring—because the other person didn’t ask to be referred! When you ask your client for a referral, you are trying to cause him to take an action he didn’t choose for himself. This constrains his freedom. In addition,you are trying to cause another person to take an action he didn’t choose for himself. You are constraining the freedom of two other people—and no one likes to have his freedom of choice taken away.
As confirmation, look at your own experience: most advisors who have asked for referrals have had a client offer a name or two and some phone numbers and then add, “Don’t tell them I told you to call.” In this way, the client avoids the double-bind: she can say “yes” to you without violating the trust of her friend or family member. Experience with such “cool” referrals over time has revealed that these types of referrals seldom turn into meaningful business.
Don’t Ask; Educate
Fortunately, there’s a strategy you can use that will inspire clients to make meaningful referrals to your practice without straining either relationship. Let’s review a key dynamic of the scenario I described above: the advisor asks for a referral, and the client feels obligated to provide a name of someone who did not ask to be referred. Essentially, the advisor is trying to control the behavior of the client in order to get something he wants—and no one likes to be controlled.
But what if the friend or family member of the client has a problem and needs to talk to an advisor? If the client has been conditioned to be aware that if a member of her social network has a problem, the advisor can solve it, she can respond effectively and connect the person in need to the advisor who can help. In this case, both the client and the person being referred enjoy freedom of choice, and no one feels any pressure of obligation.
An advisor can always feel free to clarify his position about referrals to clients and educate them on how to make appropriate referrals to the practice. So long as you don’t limit the freedom of choice of either party, you can talk about referrals without fear of stressing the relationship. The strategy is actually quite simple: educate your clients about the value you place on referrals and your willingness to be deployed as a resource to their friends and family members whenever there is a need. Remind them several times a year so that whenever they encounter such a friend, they immediately think of you and take action.
The most effective way to educate clients is at the end of a semiannual review. As the meeting is wrapping up and if the client is pleased with your services, you can safely say the following without any fear of stressing the relationship: “Historically, I’ve done a terrible job educating my clients about making personal referrals. As a result, many of the people I work with aren’t sure how to make a referral of a friend or family member. I am taking a few minutes with every client this year to remind you that if ever you have a concern about a friend or family member and you would like me to become involved, please don’t hesitate to use me as a resource. I consider a personal referral the greatest compliment you could ever pay me, and I would make it a priority to be available to your friend or family member.”
In this way, you haven’t just asked for a referral; you’ve preserved the client’s freedom of choice and defined your values. Instead of stressing the connection, you’ve deepened your client’s appreciation of you as a resource and the value of the services you have to offer.
Ken Haman is the Managing Director at the AllianceBernstein Advisor Institute, visit http://ria.alliancebernstein.com.