Numbers Game

Most advisory firms don't have a strategy for landing client referrals

Only one out of every three firms have a formal referral process, despite referrals accounting for the lion's share of new business

Dec 15, 2014 @ 12:01 am

By Matt Sirinides

There are a lot of figures that get thrown around about attracting new clients in the advisory industry. One that we frequently hear at InvestmentNews Research is that approximately 70% of a typical advisory firm's new business is referral-driven. In a 2012 study we conducted, the typical firm had earned nearly 50% of their new revenue in the prior year from client referrals alone. If professional referrals are included, that figure jumps to 70%, positioning referrals as by far the number one source of new business.

In this year's InvestmentNews Financial Performance Study of Advisory Firms, we asked advisers: Do you have a formal, standardized process in place at your firm for asking for referrals from both third-party professionals and existing clients?

What we found surprised us. Only about one out of every three firms have a formal process, which tells us that firms often take a passive approach to a strategy that accounts for the lion's share of their new business.

Let's do some back-of-the-envelope math. The average firm in our 2014 study has $300 million in AUM. And the typical firm grew their AUM by approximately 11% from new clients alone (excluding market gains) over the prior year, equaling approximately $30 million when using $300 million as the typical firm's assets. If approximately 50% came from client referrals, that equals $15 million in new 2014 AUM. The average revenue yield in our recent study was 0.77%. On that $15 million, if we use the 0.77% rate, that would equal $115,000 in 2013 revenue.

That's $115,000 in new 2014 revenue from client referrals at the average firm. And two-thirds of those firms don't have a formal process in place for asking for client referrals. That revenue didn't exactly fall into the firm's lap, but they didn't take an active approach to harnessing it.

When it comes to referrals, the subset of top-performing firms in our study really stood out — 42% of them had a formal referral process with clients, and they also exceeded their peers in formalizing a process with third-party professionals as well (37%). Fifty-two percent of the top-performing Ensembles (firms with up to $5 million in annual revenue) and 68%, or nearly double the total study population, of top-performing Super Ensembles (firms with $10 million or more in annual revenue) have a formal process in place for initiating referrals from clients.

Thinking strategically about the referrals that make up such a large portion of new business can make a dramatic difference in revenue, and is an area where advisers should consider developing a more active strategy in an increasingly competitive industry.


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