Unfortunately, many books and consultants who advise on the best strategies to do this actually harm more than help. There are some very powerful psychological dynamics—mostly significantly misunderstood—that influence when and why a client makes a referral. There are many hidden issues potentially at stake when an advisor asks for a referral. Navigating these conversations well first and foremost means taking steps to preserve the existing relationship. In fact, it is my opinion from working with hundreds of successful advisors over the past 20 years that you should never ask an existing client for a referral.
Why Do Clients Refer?
Let’s start by considering why clients refer. Making a referral is a powerful act of one person connecting two other people. In most cases, the motivation is to take care of or “gift” both of the people being connected. Importantly, the new relationship is unevenly balanced; the intention is to get one person (the advisor) to take care of another person (the prospective client). Most often (but not always) your client hopes that you will benefit from the referral, but expects that his or her friend or family member will have a problem solved. Most advisors have received an inappropriate referral—that person who needed credit counseling more than asset management. That’s a classic example of an asymmetrical relationship; almost of all of the benefit is delivered to one side of the interaction. You have undoubtedly heard prospects say, “My friend John speaks highly of you. He said that you might be able to help me.”
Many advisors have an instinctive appreciation of the sense of “gifting” that is motivating the referral, and they try to create more referral activity by telling clients, “I get paid in two ways: by the fees I charge and by the referrals I receive.” There are important psychological reasons why this approach should be avoided. First, the statement is simply not true. An advisor is paid a fee to deliver services, which forms the basis of a contractual agreement between him and the client. Referrals are something that happens in addition to you getting paid and must be thought of as a gift or bonus in the relationship, not as an obligation.
What’s Wrong with Asking?
This idea of “obligation” deserves a closer look, because if you manage it inappropriately, it can have a toxic impact on your client relationship management. An obligation is a requirement that limits freedom of choice. As an example, paying a fee is an obligation that you require of each of your clients so that they can continue to receive your services. If they stop paying, you stop delivering. In response, and in balance, it’s your obligation to deliver value for the fee you are paid. If you don’t fulfill this obligation, your clients will eventually fire you.
Importantly, the emotional dynamics within your relationships around fees and the delivery of value are highly charged. Clients don’t like the obligation to pay, and will often seek to receive a discount so that the services cost less. Many advisors feel uncomfortable about charging more for fear of stressing the relationships. But they also feel frustrated when they don’t earn as much as they want for the work they do. Behind all of these strong feelings lurks the issues of obligation and lack of choice.
This knowledge helps us understand why asking for a referral is fraught with potential risks. Whenever you ask a client for a referral, you put that person in a social “double-bind” where her freedom of choice is constrained. This means you are forcing the client to make a choice, and there is no way she can avoid the position in which you have put her. She can either say “yes” and offer up a name or two, or she can say “no, I’d rather not do that” and risk disappointing you and stressing the relationship.