What do advisory firms need to keep growing? A move beyond client referrals

Many successful advisory firms have achieved high rates of organic growth through an age-old method: client referrals. Here, it’s important to distinguish between retention and referral. Think of retention as a measure of a client’s satisfaction; while important, it’s also somewhat passive in nature. After all, it would take a lot of energy for someone to change advisors.

A referral, on the other hand, is an active sign of respect and reflects the deep bond you have with your client. Not only is the client satisfied, but they also want others to benefit from working with you. It’s also the highest compliment when someone recommends you to the people they love and care about. But if you’re looking for ways to keep growing your firm, is relying on client referrals enough?

A LOOK AT REFERRAL NUMBERS

Research shows the importance of referrals, too. According to the 2022 InvestmentNews Adviser Benchmarking Study, “Referrals from existing clients are a vital source of growth for advisory firms and account for more than half of the new clients of the typical firm.” The research also suggests that “for every 100 clients a firm serves, they tend to engage with five new clients via referrals.”

So, it’s worth taking a few minutes to look back at how your firm fared with referrals in 2021 and 2022 and see where you exceeded, matched or fell short of the average. Keep in mind that the full effect of a new client isn’t seen simply in the new assets and revenue they bring in a given year but also in the new pool of prospects who could be introduced to your services down the road.

But something interesting happens with referrals as firms increase in size and complexity. Let’s take a closer look at this trend through the lens of RIA firms.

THE POWER OF MARKETING

Making the investment. According to the Schwab Advisor Services 2022 RIA Benchmarking Study, client referrals represent a declining percentage of new assets as you move from the smallest firm to the largest. On the other hand, marketing is the opposite — it increases as a percentage of new assets and is the most significant growth factor for top-performing RIAs. It’s no wonder that RIAs consistently invest more in marketing activities than other advisors do. The average marketing and business development spend as a percentage of revenue for top RIA firms was 2.3%, contrasted with the average 1.6% for independent advisory firms detailed in the 2022 InvestmentNews Adviser Benchmarking Study.

Intrinsically, this makes sense. As firms grow larger and more complex, they often have dedicated business development or marketing teams that can help them achieve growth targets and goals. And when the staff has a clear focus, they develop expertise and gain greater results than people who occasionally try a marketing campaign. The key to RIA marketing growth is focusing on digital media (e.g., blogs, podcasts and webinars) and the ability to scale. All of these scalable activities allow advisors to reach large numbers of prospects and followers without requiring additional time, energy or an urgent need for referrals.

Creating the plan. While the Schwab research had many interesting highlights, I thought I’d share one more with you that might hit close to home. You’re likely well aware of the need to have a written plan to help your clients reach their financial goals. But the study also emphasized the importance of having a written marketing plan to help your firm reach its growth goals, too. In fact, firms with written marketing plans, ideal client personas and client value propositions gained 42%t more clients, representing 45% more new client assets, than firms that didn’t have them in place.

GET READY TO GROW

As you assess what your practice needs for the coming year, it’s important to understand the benefits of both referrals and marketing when it comes to firm growth. By doing your research, assessing your current referrals, and writing down your plan of action, you’ll be able to expand your reach, attract prospects, and empower clients to achieve their goals.

Kristine McManus serves as chief advisor growth officer at Commonwealth Financial Network.

Related Topics: Commonwealth Financial Network