Claire Wivell Plater says word of mouth remains a powerful marketing tool, but there are pitfalls with different types of referrals that you should try to avoid.

Most financial advisers have arrangements with colleagues, friends and local businesses for referring clients. As we all know, it is hard to find new clients, and even harder to find clients that are worth having, and so the art of referrals is to choose your sources wisely.

Accountants and lawyers are an attractive source of referrals, as clients who have a need for their services are likely to have either significant assets or a clear and present need for financial planning services. Therefore, many successful planners actively cultivate referral relationships with accountants and other professionals. But despite the best will in the world, these relationships can turn sour, so it is important they are established to run smoothly; not just during the honeymoon period, but also in the divorce phase.

This article will explore the various types of referral arrangements as well as how to avoid the common pitfalls.

Types of referrals

There are three main types of referral arrangements:

1. Mere referrals;

2. Referrer authorised representative; and

3. Joint venture. 1. Mere referrals

A mere referral is the most basic of the above arrangements: the referrer simply provides the prospect with the planner’s contact details and some information about the services provided.

‘These can be wonderful sources of new clients but they are a little uncertain’

These can be wonderful sources of new clients but they are a little uncertain. If the referrer does no more than hand over information, there is no guarantee the prospect will contact the planner.

Case study

To illustrate, we will use an example of Julia (the lawyer), Noel (the prospect) and Jill (the financial adviser). Julia and Jill have developed a mutually beneficial referral arrangement. When Noel has an appointment with Julia, how might she provide Jill with a referral most effectively? Consider the following approaches:

• As Noel is leaving Julia’s office, she hands him Jill’s business card with the suggestion that he might benefit from an appointment with Jill; or

• As Noel is leaving Julia’s office, she suggests that he might benefit from an appointment with Jill and asks his permission for Jill to contact him directly. While the latter approach is more forward, if Jill is efficient and contacts Noel promptly, there is a greater chance of converting him into a client. It is then up to Jill to service and develop a professional relationship of trust with Noel. Even if Julia and Jill’s mutual referral arrangement comes to an end, there is a high likelihood that Noel will remain a client of Jill’s, due to the personal nature of the services provided.

2. Referrer authorised representative

One technique, which many find effective in increasing the success of referrals, is for referrers to badge their services with the adviser’s brand.

Case study

Returning to our example, this would require Julia’s law firm to represent itself as a provider of financial services. Naturally, this gives rise to compliance issues. Julia would need to be appointed as Jill’s authorised representative, which would be unusual in this instance. Instead, Jill may team up with Marita (the accountant).

As a licensee, Jill will be responsible for any financial services that Marita provides to clients, so she would need to carefully consider what, if any, financial services she wants Marita to provide. She also needs to be careful that she does not become liable for Marita’s other activities, which could include accounting, audit, and tax advice.

To protect against the complexities that arise with the use of referrer-authorised representatives, advisers should take the following cautionary measures:

• Carefully define which elements of the referrer’s business fall within what you have authorised them to do. In particular, with accountants, ensure that standard accounting services are outside this.

• Ensure that the referrer clearly explains to clients which of the advice and services that they provide are under your Australian Financial Services Licence (AFSL) and for which the referrer is personally responsible.

• Ensure that the referrer does not step over the line and provide financial product advice or services. The difficulty is that the referrer might already be providing “financial” as opposed to “financial product” advice and the temptation to blur the lines can be high. 3. Joint venture

Another common structure for a referral arrangement is a joint venture (JV). The rationale for this is that both the financial adviser and the referrer can share in the benefits brought by the client. These include not only up-front and trail commissions (or, alternatively, given the Government’s Future of Financial Advice reform proposals, a share in the fee for service), but also, if the referral arrangement is successful, the development of a valuable asset.

Case study

Generally, to establish a JV, a separate company will be incorporated in which the adviser and referrer hold shares. If we take our example of Jill (the adviser) and Marita (the accountant), we might see their JV entitled, “Holistic Financial Services Pty Ltd”. This company can either provide the financial planning services or, if it is an arm’s length entity to both Jill and Marita, it can be appointed as their corporate authorised representative.

Either way, as shareholders, Jill and Marita will be able to participate in the profits earned by “Holistic” and in the value of the business they are creating.

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