Do You Need To Improve Your Client Referral Process?

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone Welcome to Office Hours with Michael Kitces!

I wanted to take a little time today to talk about referrals, and the process of referrals. What's a good process? How do you know you're doing well?

So I had a question come in. [I'm reading the question here] Ari asks:

"I get a lot of referrals, but I find it hard to convert them to clients. So I'm working on improving the process, but I wanted to know: what's the average referral conversion rate?"

That was Ari's question. That proverbial question: how do you know what "good" is? What should you be shooting for in trying to figure out whether your client referral process works?

I'm curious any of you that are listening here [if you're on Periscope you can type and even share], do you know your own numbers? Of the people that you meet with, who get referred to you, how often do they typically become clients? Is it something like 20%? Is it 50%? Is it 80%? Is it 100%?

And you know, there's an interesting caveat in even trying to assess what client referral rate should be and what a good referral rate is. The first driver to it is recognizing the concept of what I'll call a "qualified lead".

What Is A "Qualified Lead"?

The idea of a qualified lead is that when we look at referrals, lots of people may get referred to us. Sometimes they're not actually a good fit. Sometimes they just literally can't do business with us; the classic example would be when you've got a $1,000,000 minimum and three clients get referred to you who all have $300,000. So they don't meet your minimums. They can't work with you.

The related question is: do I count this against my close rates or not? Right? If three of them come in, and the fourth person comes in who is qualified, and I close the fourth person, does that mean I close 100%, because that was all my qualified leads, or does that mean I close 25%, because that was the close rate on the total volume of leads?

And so that's the first key distinction. Already, some of you are sharing great numbers [on Periscope]. I think Mary Beth said over 50% close. I think Diane said over 80%. Someone else had said under 20%.

So the first thing I'd encourage, just to make sure we're all on the same page in what we're talking about, is when you look at your close ratio, calculate it based on how many people were qualified to do business with you in the first place. Could they afford whatever your minimums or fees or price structure is? Now, they might say no just because they decide they just don't want to pay the cost. But could they at least have afforded it? Would they have been capable of paying it? Or if you have a niche, did they actually fit your niche? Or were they so far off track that they wouldn't have been relevant in the first place?

It's an important distinction to make, because if your primary problem is "I've got a terrible close rate, because all the people I'm talking to aren't qualified leads" then it's a very different problem than if you're talking to people who are qualified clients and they meet all your criteria and they'd be a great fit, but they just don't choose to do business with you. They don't close. They don't turn into a client.

What's a "Good" Referral Conversion Rate?

So let's talk a little bit the numbers. I if we boil it down to qualified leads, what should your conversion rate for qualified leads be? So I don't think there's any good industry data on this in part because so few of us even do a good job of delineating qualified and non-qualified, but I'll throw some numbers out there.

I think if you're converting fewer than a third of your qualified leads, you've got an actual conversion problem. You should be over half of the people who are a good qualified fit to your services that are actually deciding to do business with you, and as one or two people noted here, a lot of advisors I know that have a really clear business differentiator, their conversion rate is over 80%. Now they may not see a ton of people, but they're converting 80% of who they talk to and that's kind of the point. That means you've clearly identified who you're working with.

So we can make this important distinction. If you're not happy with how many clients you're getting off of referrals, is it because there's just not enough people coming through the pipeline? Is it because the people who are coming through the pipeline are not qualified to work with you? Or is it because you're actually getting qualified leads and they're just not closing? So Ari at least implied that her problem is that they're just not closing. And so if that's truly your challenge, then I think you really need to look at your actual sales process.

Fiduciary Sales - It's A Reality, Not A Bad Thing!

I know for a lot of us advisors, sales is a dirty word, because we're trying to get people to pay us for advice and not just buy a product.

But recognize that even if you're the best fiduciary advisor out there, if you're getting clients, it's a sale. You're in the sales business when you're getting advisory clients. You're selling your advice and yourself and your service, not someone's third party product that you're going to get a commission for or something, but you're still selling and you need to treat it like a real sales process.

So do you have marketing materials that clearly explain what you do? That stuff matters. You're making an impression on someone. You're trying to convey why you're worth the price. So you got to actually show them what are you going to do? I know a few of you adopted the client service calendar that I've written about on the site in the past as just a way to show and convey to people what you're actually going to do for them over the year that will justify their price.

This is also where things like credentials matter. Do you have actually have CFP marks? Other social proof? Have you been published and featured in media publications? Has your firm been written about? Not that that necessarily gets the client, not that that necessarily brings the client in, but that kind of social proof is very powerful when someone's trying to figure out why to do business with you, because the fundamental challenge we all have as advisors we're selling an intangible service. It's not like a product, a widget. You can go and pick it up at the store, play with it, fiddle with it, buy it, take it home. If you don't like it bring it back in 30 days for your guaranteed refund.

Intangible services don't work that way. And a book I'll highly recommend on this is Selling the Invisible by Harry Beckwith, which I think gives a great framing around just the challenges that people have in buying an intangible service and why a lot of the other little things turn out to matter. Even down to how do you look? How are you dressed? What's the quality of your marketing materials? What impression are you leaving clients? The reality is when they can't try you out first, because we're selling an intangible service, not a physical product you can pick up and try, clients will take some cues off of some very surprising things that may not even be that related to your service, because they're trying to figure out how to evaluate you when you're basically an unknown.

Don't Forget to Ask For the Business!

So if you're really getting in front of qualified leads and your conversion rate is under a half or especially under a third, I think you need to take a hard look at your actual sales process. What are you doing? Do you actually just ask them for the business at the end? It's an incredibly simple thing, but I'm astonished still how many advisors I see out there, they'll meet with prospects that are referred to them.

They'll have a great meeting and then kind of at the end say, "Yeah, so it was cool to meet with you..." and there's an awkward pause.

And then the client says, "Yeah...."

And then everybody leaves and the advisor says, "Ah, that was a bummer. The client never did business."

And the problem is you didn't ask them to do business!

I see some of you saying [on Periscope] now "yeah, guilty."

You have to ask for the business at some point. You can do it in a nice way, but you have to ask for the business. For instance, you might say:

"Wow, I'm really enjoying this meeting with you [prospective client]. I feel like we have a good fit here. I think my services are a great match to your needs, so I'd love to work with you. Would you like to move forward?"

Now that's scary for us. Right? You're going to ask this question, and you're going to create some social tension, and they might say no, and no one really likes getting rejected. But if you never ask them, I guarantee you they're not just going to vault out of your chair and say, "My god, that was the most amazing financial planning pitch I've ever seen. You don't even have to ask me for the business. Here's my life savings. Please, take it."

That does not happen. At some point, you have to ask for the business, because the reality is that moment of social tension is what it takes to nudge someone over the line, even someone who's well-intentioned and likes you and wants to work with you. This isn't about making them awkward or uncomfortable or being mean about it. But you have to ask the question, or they're not going to do business with you. So if you're struggling with a low conversion rate on true qualified prospects, look at your sales process and whether you're even asking for the business in the first place.

When You Ask For The Business, Do They Just Say "I'll Think About It"?

Now from there, maybe you're asking for the business and it's still not working.

The next challenge that I find for a lot of advisors out there is that we're asking for the business, we've got a decent sales process, but the problem is we're not differentiated. Everyone else on this Periscope listening in are all basically saying the same thing. You can raise your virtual hand if this sounds familiar... how many of you differentiate yourselves with your prospects on your website by saying:

We provide customized, individualized financial planning solutions made specifically for each of your client's individual needs, and we do it based on our CFP marks and other credentials, and years of experience?

I'm going to bet I basically just described the differentiator that about 90% of us have on our website. And, of course, when 90% of us have it on our website, it's not differentiated by definition.

It is necessary. But I'd actually call it the table stakes. You know, it's the ante you got to bring to the table just to play the game. You have to do things in your clients' interest that are specific to their needs and you have to have the education and credentials and experience in order to do that. That stuff has to be there. But that's not a differentiator. That's the ante to play the game!

Your differentiator has to go something beyond that and of course, for any of you who listen to me regularly know this is why I pound the table so hard about the importance of niches, about the importance of specialization, because that's what ultimately drives conversions. And we can even see it in the [Periscope] comments from some people who were participating in the beginning [of this broadcast]. Those of you who have really high close rates, you have a clear specialization. You have a clear niche. You know exactly who your target clientele are. That's ultimately what people connect with as well as what Mary Beth's pointing out, you have to show who you are, too.

Recognize clients want to work with you, not just an automaton on a website. Not even intended as a dig of robo advisors, but just recognize they want to work with you. So if they go to your website, not only should they see your specialization, who you're best at serving, what you do, they also just need to see you. Who are you? Right? I'm always amazed at how many of us say we're in the people business. We're in the relationship business. If I go to your website, I can't even find a picture of you and I can't see what human being you are.

Recognize that disjoint! We're in the people business and people connect with people... so how are you featuring yourself on your website? And your team and all the people that are around you? If you want people to connect with people, you've got to be there to be seen on your website!

But again, for a lot of us I find it's the differentiation that's now becoming the challenge. You're meeting with qualified prospects. They're not closing. Right? They're meeting with you and four other people. You're one in five. You're winning 20% of the business which means you're basically winning their random one-in-five decision. Which kind of makes the point, right? Prospect interviews five people, has no idea who to choose, flips a coin. You're going to win 20% of the time. There's your 20% close rate.

The Generalist Marketing Trap

If you want to get your close rate higher, you have to go more focused. You have to go more specialized. Now I find for a lot of us we're terrified to do that, because we think that going more specific somehow gives up opportunity and the reality is it doesn't. Or at least, it gives up opportunity you weren't going to get anyways.

The analogy I like to tell: imagine like I'm holding a fishing net here. Fishing net's right here, so I can only catch all the fish that hit the net here. Now if I'm not happy with this and I want to catch more fish what can I do? I can grab the net, stretch it bigger. Now I can have more fish to hit my net. You know what the problem is when I stretch the net out this way? The holes get so big everything swims through. That's the marketing trap that most of us are stuck in right now. We're not getting as many referrals as we want so we take the net and we stretch it wider and we meet with more prospects, but none of them close and our close rates go down so we stretch the net wider. We meet with more people. None of them do business. The close rates go down more.

If you're trying to figure out why your referrals are not doing business with you, ask yourself is it because you stretched the net so wide trying to work with everybody that every prospect just swims through the giant hole you created in the net?

So how do you actually catch fish in that net? Bunch it up close together so the holes are really small and nothing swims through. You won't get everything, but you'll get everything that hits your net. That's the point of having a niche and a specialization. That kind of focus.

In fact, what we find from the limited research that's out there, is that clients do want to refer us. It just doesn't turn to business because we're so poorly differentiated.

What Happens When Clients Refer?

So Julie Littlechild did a great study a couple of years ago looking at this. Went out and surveyed actual clients and said, "As clients, are you referring your advisor?"

And what they found across all the board, about 25% of all advisors' clients were saying "we refer our advisor."

Now maybe that's true for some of you, but for most of us, we don't feel like 25% of our clients are sending us an active referral every year. Julie's research was have you referred your advisor in the past 12 months? Do all of you feel like your client, like a quarter of your clients are giving you a new client referral every year, year after year? Most advisors I know would say it's way lower than that. They've just got like a small handful of clients that drive most of their referrals.

Now the problem with this is that there's a gap. Clients say they're referring. The people they referred don't follow through. And this I think is actually the biggest gap for most advisors on referrals and we don't even realize it, because we don't see it. Right? If 20 of your clients sent you a referral and none of the referrals called you, would you know that you had a 0% close rate on those 20 people? You wouldn't even know, because they never hit your radar screen in the first place. That's actually the biggest referral gap and what's worse than that, when Julie did a follow-up and said how many clients would be willing to refer their advisor, 80% of the typical advisor's clients said they would refer! I think this rings true for most of us. It rings true for me. Most of our clients are pretty happy with us. I think they would refer. But they don't.

And why don't they refer? Because they don't know who to refer. Because we haven't been clear about our niches. We haven't been clear about our specialization.

We say things like, "I work with anybody who has at least $1,000,000." You know what happens when you've got a $1,000,000 minimum?

Your client referrals go to zero, because your clients are afraid to refer you. You know why they're afraid to refer you? Because they don't want the social embarrassment of referring a friend to you and then finding out that friend doesn't have a million bucks and having you turn them down. Right?

Just think about that social awkwardness, embarrassment. Someone asks you for a referral, you refer a close friend to a professional, and then the professional said, "Oh. I'm sorry. I can't work with you. You don't have enough money. I only work with your friend because he's got more money than you."

How awkward, how painful is that? But that's the situation we put our clients in! Not to say you shouldn't have minimums. You may need them for your business. But that's what happens when the only way you define your clients are "do they have enough money to work with me?"

By contrast, if I specialize in divorcees, this gets a lot easier. "Oh, you're going through a divorce? Talk to my friend, Michael." That's a clear situation your clients know how to refer. "Oh. You drive a nice car. You might have a million bucks. You should call my advisor." Doesn't work so well.

"Own a Spot On Your Client's Brain"

This is why having a clear target client matters so much. And it just it fits the way our brains think.

When I think of who studies client engagement, when this question came to me about advisor referrals, one name instantly came to mind. It's Julie Littlechild. She does research in this space. When someone asks me about advisor technology, Bill Winterberg, Joel Bruckenstein. These are the established experts. If I asked you who's a guru on all things IRAs, most of you are thinking Ed Slott right now. Ed Slott's the IRA guy.

And that's the point. Our brains like to make these connections. I asked about advisor technology, you're thinking about Bill Winterberg, Joel Bruckentsein. I request an IRA guru, you're thinking Ed Slott.

So what expertise, what specialization can someone mention where your name is the one that instantly comes to mind? How do you make that connection? You know, Steve Wershing calls it owning a spot on your client's brain. Where there's this one term, this one thing, this one trigger that's related to you and your business where if anyone mentions it, if it gets said, your clients instantly think of you and refer to you. And of course, what happens with those referrals? Those are the ones that have the 50%, 75%, 80% close rates, because now they're clear referrals that are a clear match for your clear and specific differentiated expertise. They're not going to do business with anyone else, because you're the only one that does this. You aren't going to close 100% of them, because sometimes just mismatches will happen, but you should see close rates that are 50, 60, 70, 80% as a couple people participating on the Periscope here talked about.

So if you want a little more food for thought for this, I would encourage checking out Steve Wershing's book. He aptly titles it, "Stop Asking for Referrals". I love the title, because it just makes that point that what really drives referral activity is not just asking people more and more and getting a higher flow of leads many of which will probably be non-qualified anyways, because the clients just gave you a name because it was so awkward and they wanted you to stop bugging them about a referral and they don't know who to refer because they can't figure out who your target client is and they don't want to refer random people that aren't qualified. So get away from that trap. Find what your expertise is, what your specialization is. Craft it. Move yourself from that direction and let the referrals come to you and you'll find the close rates begin to rise at that point, because you're so well differentiated and of course, you can still refine the sales process and get better from there.

So I hope that helps a little, and it's some food for thought around referrals, the ideas of referrals, some of the challenge of referrals that you can work on and try to get over.

Thanks for hanging out with us. Office Hours with Michael Kitces every 1:00 p.m. East coast time on Tuesdays. And have a great day. Take care, everyone!

So what do you think? Do you struggle to close a lot of the referrals you get? Is the problem that you have too many unqualified leads? Or that the qualified leads don't close? Is it your sales process, or that you might not be differentiated enough? What's worked for you? Please share your thoughts in the comments below!