Referrals are an important part of many businesses, including the RIA and financial advising business. Whether a referral takes the form of someone naming you as the person to see for a particular service or is your suggestion to a client or prospect to contact another professional for services you do not provide, referrals can affect your business dramatically.
On the positive side, referrals can bring you valuable and desirable clients or perhaps a referral fee paid by a professional you recommended. But be aware that referrals can lead to unexpected difficulties and come back to haunt you. For example, where you refer a client to another professional – an attorney, accountant, insurance agent or the like – what that professional does or does not do for the client will reflect on YOU. If the client receives bad or overpriced service from that professional, the client won’t forget who recommended that person. This problem may be avoided if you always take the time to personally vet any firm or professional you intend to refer clients to for specific services. This includes not only reputation but ability and compatibility.
Where you are paid a referral fee by a professional you recommend, your best bet is to fully disclose that fact to the client you are providing the referral before their decision is made. That fee constitutes a potential conflict of interest, just as a commission you receive for recommending a specific product does.
Even with all the possible problems attached to referrals, it can be an even bigger problem to NOT have anyone to refer your clients to when necessary. This is particularly so if you recommend that a client pursue a specific course of action – beyond your expertise – and do not have any suggestion as to who might handle that work. Clients seeing you as the coach or leader of their advice team will expect you to have a viable suggestion or two.
When you think about the possible problems, it helps you to understand why sometimes it is hard to get folks to refer YOU to a potential client.