Inbound and outbound referrals feature prominently in the day-to-day running of every financial advice practice. Associated with referrals – even informal, word-of-mouth recommendations – are a complex array of compliance, ethical and client experience considerations. All practices, therefore, need a strategic, documented approach to referrals.
In this article, we examine the issues to be addressed when formalising an approach to inbound and outbound referrals, and provide a number of practical tips on how to build a client-centric, sustainable and compliant referral framework.
The lifeblood of professional services businesses
It is no exaggeration to say that referrals are the lifeblood of professional services firms, especially smaller ones. This is partly because smaller firms lack the size and resources to promote their businesses through expensive marketing campaigns, but also because trust is the single most important criterion clients apply when choosing a doctor/lawyer/accountant or financial adviser. Trust cannot be gleaned from your Google presence or your website, but it can be attached to a recommendation received from someone you already trust, such as a family member, friend, or professional with whom you already have a trusting relationship.
Various bodies of research illustrate the importance of referrals to financial planning practices.
UK research[1] suggests that close to 60 per cent of advice clients heard about their adviser through word of mouth or a referral.
Closer to home, Australian research[2] into the growth drivers of privately owned financial advice practices found the single biggest driver of revenue growth was client referrals, cited by 66 per cent of respondents. Business referrals (from an external business, rather than an individual client) were also important and identified by nearly a third of participants as contributing to revenue growth.
Understandably, strengthening the network of referral partners was identified as a key focus for many practices, with Business Health research[3] finding one-third of advice practices surveyed had made this a key priority for the year ahead.
It’s not just about inbound referrals
But while much of the literature associated with referrals is focused on their power as a business builder or marketing tool, outbound referrals – where you refer your clients to an external service provider – are equally important and deserving of attention. This is because when you refer your client to another professional, the experience your client receives from that professional will be associated with you as the referrer. Any poor experience will reflect as much on you as it will on them.
Macro factors are increasing the importance of outbound referrals
The ecosystem of financial products and professionals we rely on as individuals is vast and complex. Specialisation is as commonplace and necessary in financial advice as it is in other professions and very few advice practices are genuine one-stop shops. Areas that can frequently feature in a client’s overall financial plan, but which a small practice may need to ‘outsource’, include specialist advice areas such as estate planning, aged care, SMSFs and business insurance, as well as legal and tax advice, accounting services, mortgages, and property management.
Structural factors within the advice sector, as well as the economy more broadly, are increasing the frequency with which outbound referrals will need to be made.
With interest rates on the increase, the number of clients seeking to refinance their mortgages will be spiking, and referrals to mortgage brokers will undoubtedly be experiencing a similar spike.
And there are referrals to other financial advisers who specialise in particular areas.
According to Business Health[4], only 42 per cent of Australian practices offer estate planning and just over a third (35 per cent) offer aged care advice. Even life insurance advice is becoming more niche, with the 60/20 commission regime making it economically unviable for many generalist practices. According to Adviser Ratings, of roughly 16,000 financial advisers across Australia, 77 per cent are now writing little or no risk[5].
But clients still need help in many of these areas.
The FASEA code of ethics makes it hard for advisers to quarantine aspects of a client’s financial affairs and say, “I don’t hold a hose”, meaning a systemised approach to recommending external providers – and integrating their services into your overall advice – is a professional necessity.
To continue reading and receive CPD points, view the original article on AdviserVoice’s website.
[1] https://ifamagazine.com/article/what-are-the-key-drivers-in-client-acquisition/
[2] https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8454.12275
[3] https://www.midwinter.com.au/future-ready-ix/
[4] https://www.businesshealth.com.au/what-got-you-here-today-may-not-get-you-there-tomorrow/
[5] https://www.adviserratings.com.au/news/the-incredible-shrinking-risk-universe/
