Referrals matter less to younger potential clients, study finds

The recommendation of a financial advisor by a client to a prospective customer — a traditional goldmine for organic growth — is fading in importance compared to other sources of incoming business, a new study found.

Only 29% of financial advice consumers view referrals as a requirement before hiring an advisor, and planners are increasingly finding new clients through digital means such as Google searches and reviews, social media and websites, according to a survey released this month by marketing firm Ficomm Partners. Referrals remain a significant method of adding clients, especially among those aged 60 or above, but they "can not be the only lead source," the report said. Groups of advisors and other wealth management professionals display "a little bit of shock" when Ficomm CEO Meg Carpenter presents the data to them, she said in an interview. 

"If advisors continue to solely rely on referrals, they're going to run up against this cliff where there's no longer enough people," she said. "Every advisor has been impacted. Organic growth has been anemic. That's been consistent across the industry."

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Carpenter was referring to the often-overlooked fact that the bull market of the past decade and continuing record levels of consolidation in M&A deals have driven much of the industry's expansion over that span. Organic growth through additional incoming assets from existing clients or new customers represents a frequently discussed but rarely executed goal.

That makes leads and referrals a critical — and costly — area of practice management for any advisors pursuing new clients. An exclusive and shrinking group of 150 to 200 of the largest registered investment advisory firms pay significant recurring fees to Charles Schwab and Fidelity Investments for client referrals from their brokerage branches. For smaller firms, the endorsement of a friend or family member carries significant appeal to any prospect.

Regardless, advisors "who solely relied on referrals" are "going to have to look at adding in other digital marketing efforts to grow their practice," Rishi Bharathan, CEO of lead and referral generation service WiserAdvisor, said in an interview. "Advisors need to have active strategies, and most advisors are not great at asking for referrals to begin with."

Older clients certainly see the value of a referral. Among financial advice customers who are at least 60 years old, 60% said they needed another client's recommendation before hiring an advisor, according to Ficomm's survey. However, the share who said they wanted a referral prior to working with an advisor declined precipitously among younger age groups in the poll of 1,107 consumers surveyed in the first quarter by consulting firm Herbers & Company as part of Ficomm's study. Just 17% of clients 44 or younger, and only 31% of those with annual incomes of $150,000 or above, said they required a referral to work with an advisor.

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For advisors using referrals alone for their organic growth, the results should "serve as a wake-up call" that "what drove growth in the past won't be able to drive growth on its own in the very near future," the report said. "Social proof in the form of online reviews and testimonials replaces the need for referrals for many consumers. No one marketing tactic alone wins the lead gen game. An integrated, multitactic strategy is a requirement. Across multiple channels, an aligned message that connects with people matters more than ever."   

The traditional generators of business haven't faded completely. While 64% of marketing efforts that attracted new clients came through web searches, online ads, YouTube, industry organization websites or other digital means, referrals drove 29% of the effective outreach on their own. Other seemingly old-fashioned methods like free seminars, a quote in an article, or ads in the mail, on the radio or in a newspaper or magazine still drove new business as well. However, to Ficomm's point, the consumers finding their advisors online sought at least two "digital touchpoints" and sometimes as many as five or more, Carpenter noted.

Advisory firms "need to be thinking about the full journey of the consumer" in an era when people of all ages who are shopping for anything are "looking across channels, and they're making their own assessment based on all of the information they've seen online," she said. Advisors' digital strategies should reflect an effort to define their ideal clients "and then making it very easy for that consumer to take action," according to Carpenter.

Carpenter's advice to RIAs and other wealth management firms resembled that of planning entrepreneur, writer and podcaster Michael Kitces, who said at last month's Morningstar conference that the reason "it's getting so hard to get new clients today" is that potential clients "can't tell us apart." To stand out and gain more incoming accounts, advisors ought to identify their target niche and figure out how to rise to the top of Google searches among that base, he said.

"The question becomes, 'What are you going to spend the next 10 years becoming the best at?'" Kitces said. "When you get clear on that, it becomes easier to differentiate. … It all starts with the who."   

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To be fair, many advisors are embracing that message already. Bharathan's firm has been providing leads to advisory firms for 20 years, but it expanded into a new area last year with the purchase of compliant online client review and advisor matchmaking firm IndyFin. Currently, advisors' approaches run the spectrum. One firm, for example, had 1,500 clients post reviews to IndyFin, Bharathan said; Others have lingering worries about the pitfalls of using client testimonials only a few years after the Securities and Exchange Commission legalized the practice.

"What we have found out is that there are some advisors who are absolutely jumping in with both feet," he said. "Primarily they're concerned about compliance. They're concerned about their clients' privacy, and they're concerned about getting bad reviews. None of those have played out."

With so much discussion in the industry about the looming "great wealth transfer," such digital methods of getting noticed by new prospective clients upend the conventional wisdom about the primary source of growth in coming years, according to Carpenter.

"There's more than one access point. You can get access to those clients without having to go through your clients' children," she said. "There are theoretical ideas that are shared by the industry, and then there's what actually happens between consumers and advisors."