All practices need a strategic, documented framework when choosing referral partners and implementing an arrangement with those partners.
Introduction
Inbound and outbound referrals feature prominently in the day-to-day running of every financial advice practice. Associated with referrals – even informal, word-of-mouth recommendations – are a complex array of compliance, ethical and client experience considerations. All practices, therefore, need a strategic, documented approach to referrals.
In this article, we examine the issues to be addressed when formalising an approach to inbound and outbound referrals, and provide a number of practical tips on how to build a client-centric, sustainable and compliant referral framework.
The lifeblood of professional services businesses
It is no exaggeration to say that referrals are the lifeblood of professional services firms, especially smaller ones. This is partly because smaller firms lack the size and resources to promote their businesses through expensive marketing campaigns, but also because trust is the single most important criterion clients apply when choosing a doctor/lawyer/accountant or financial adviser. Trust cannot be gleaned from your Google presence or your website, but it can be attached to a recommendation received from someone you already trust, such as a family member, friend, or professional with whom you already have a trusting relationship.
Various bodies of research illustrate the importance of referrals to financial planning practices.
UK research[1] suggests that close to 60 per cent of advice clients heard about their adviser through word of mouth or a referral.
Closer to home, Australian research[2] into the growth drivers of privately owned financial advice practices found the single biggest driver of revenue growth was client referrals, cited by 66 per cent of respondents. Business referrals (from an external business, rather than an individual client) were also important and identified by nearly a third of participants as contributing to revenue growth.
Understandably, strengthening the network of referral partners was identified as a key focus for many practices, with Business Health research[3] finding one-third of advice practices surveyed had made this a key priority for the year ahead.
It’s not just about inbound referrals
But while much of the literature associated with referrals is focused on their power as a business builder or marketing tool, outbound referrals – where you refer your clients to an external service provider – are equally important and deserving of attention. This is because when you refer your client to another professional, the experience your client receives from that professional will be associated with you as the referrer. Any poor experience will reflect as much on you as it will on them.
Macro factors are increasing the importance of outbound referrals
The ecosystem of financial products and professionals we rely on as individuals is vast and complex. Specialisation is as commonplace and necessary in financial advice as it is in other professions and very few advice practices are genuine one-stop shops. Areas that can frequently feature in a client’s overall financial plan, but which a small practice may need to ‘outsource’, include specialist advice areas such as estate planning, aged care, SMSFs and business insurance, as well as legal and tax advice, accounting services, mortgages, and property management.
Structural factors within the advice sector, as well as the economy more broadly, are increasing the frequency with which outbound referrals will need to be made.
With interest rates on the increase, the number of clients seeking to refinance their mortgages will be spiking, and referrals to mortgage brokers will undoubtedly be experiencing a similar spike.
And there are referrals to other financial advisers who specialise in particular areas.
According to Business Health[4], only 42 per cent of Australian practices offer estate planning and just over a third (35 per cent) offer aged care advice. Even life insurance advice is becoming more niche, with the 60/20 commission regime making it economically unviable for many generalist practices. According to Adviser Ratings, of roughly 16,000 financial advisers across Australia, 77 per cent are now writing little or no risk[5].
But clients still need help in many of these areas.
The FASEA code of ethics makes it hard for advisers to quarantine aspects of a client’s financial affairs and say, “I don’t hold a hose”, meaning a systemised approach to recommending external providers – and integrating their services into your overall advice – is a professional necessity.
Different types of referrals
For the purposes of this article, it is useful to think of referrals as falling into two high-level categories, inbound and outbound.
Inbound referrals can include word-of-mouth referrals from your existing or former clients, and business referrals, from external businesses in your network and with whom you may or may not have a formal relationship.
Outbound referrals are where you recommend an external service provider.
There can also be different degrees of formality in referrals. For ease, we have identified 4 categories below.
- Mere referral
- Formalised mere referral
- Referrer Authorised Representative
- Joint Venture
Mere referrals
The least formal is a ‘mere’ referral, where either you provide your client with the contact details and a brief overview of an external expert you are recommending (or vice versa).
While such referrals can help in building a business, they come with a degree of uncertainty, and may not be suitable if you are taking a holistic view of your client’s affairs and require some sort of feedback loop. After all, if all the client is given some contact details, there is no guarantee they will actually even contact that external provider. In these circumstances, it can be more productive if the referrer seeks the client’s permission to put the external provider directly in touch with them.
Formalised mere referrals
If the external services you are recommending are integral to a client’s overall financial plan (for example, life insurance), then it may be appropriate to have a more systematic approach to outbound referrals. This can mean referring to someone with whom you feel aligned in terms of ideal clients, client experience and remuneration approach. The relationship is still informal to the extent that there are no contracts, service agreements or referral fees, but there may be agreed processes for contacting clients and providing feedback on outcomes. Both parties should have done due diligence on one another.
Referrer authorised representative
One technique more relevant to Centres of Influence arrangements – meaning referrals between different professions such as advisers and accountants or lawyers – is the badging of their services with the adviser’s brand.
While this can undoubtedly improve the effectiveness of referrer arrangements, it can also give range to a number of complex compliance issues and requires licensing that external provider as your authorised representative. You’ll also need to be careful that you don’t become liable for the referrer’s other activities, which, in the case of accountants, could include accounting, audit and tax advice.
Joint ventures
Another potential structure for a referral arrangement is a joint venture, where the adviser and referrer share in the benefits brought by the client, including remuneration. Such arrangements were traditionally common, especially involving advisers, accountants, and mortgage brokers, and have arguably become more relevant since the release of the FASEA Code of Ethics (as explained below).
Generally, a separate company will be incorporated in which the advice licensee and external referrer(s) hold shares. The joint venture company will typically provide the planning services under a Corporate Authorised Representative (CAR) arrangement.
The legality of referral fees
In the BF (before FASEA) era, the legality of referral fees was reasonably clear.
Under the Corporations Act, a financial adviser can receive from or pay to a third party any benefit, being either monetary or non-monetary, provided the necessary disclosures are made in the relevant documents such as the financial service guide (FSG) or statement of advice (SOA).
However, the 2019 release of the FASEA Code of Ethics initially threw a spanner in these works, in particular Standard 3 (‘You must not advise, refer or act in any other manner where you have a conflict of interest or duty’).
Initially interpreted to mean any form of referral fee arrangements were outlawed, subsequent clarifications from FASEA have alleviated this concern slightly (although not enough for everyone).
FASEA’s ‘clarified position’ essentially comes down to the best interests of the client. Specifically, clients should be referred to professionals where it is in the client’s best interest and not simply because a referral arrangement is in place.
To FASEA, the ‘referral fee’ is not the issue. The issue is whether the benefit associated with the referral induces the adviser to act in a way that creates a conflict.
While most observers[6] agree it is now clear that referral fees are allowed under Standard 3, there are some qualifications:
- advisers need to ‘professionally assess’ whether a conflict exists (whether it be a monetary or non-monetary benefit).
- the standard of professional judgement is a ‘common sense’ test approach based on the responses to the questions “would a disinterested or unbiased and reasonable person in possession of all the facts, reasonably conclude that an arrangement or benefit could induce the adviser to act other than in their client’s best interest?”
If the answer to either of these points is ‘yes’, then a conflict would exist for the purpose of Standard 3.
Advisers need to consider if any remuneration/benefit received will, or would likely, impact their ability to provide advice in line with the following criteria:
- in the best interests of the client (Standards 2 and 5)
- the fees and charges (regardless of type) are fair and reasonable, and represent value for the client (Standard 7)
- the client understands the fees/charges, benefits, costs and risks of the recommendations made (Standards 5 and 7)
- the advice and fee structures are appropriate for the client (Standards 5 and 7)
It needs to be noted that referral fees are not allowed to be paid directly to an adviser, rather they must be paid to a licensee. Fees can be paid through a licensee to an adviser, but they must be disclosed to the client, and they must provide their consent.
Running a real-life example through the above, it should be pretty clear that addressing a client’s life insurance needs is acting in their best interests (as well as being virtually compulsory under some interpretations of the FASEA code). Referring this out to the shrinking pool of risk specialists – and earning a referral fee for the licensee as a result – should be eminently defensible provided the various conditions above are satisfied.
Setting yourself up for success – client referrals
Referrals to you by your existing clients – word-of-mouth recommendations under another name – are gold, and many practices pride themselves on relying on this as their sole ‘marketing channel’. Implicit in this is that their existing clients are such strong advocates, and so satisfied, that they want to recommend their adviser to as many of their relatives, friend and colleagues as possible.
While at first this seems an ideal position to be in, it is not without its challenges, chief among those being that the type of client being referred may not align with your ideal target client. Turning referred prospects away, because you can’t help them, or they can’t afford your fees, can leave a bitter taste in their mouth, and can also reflect poorly on the client making the referral, potentially putting a strain on your relationship with them. At the very least, make sure you provide an alternative (“I can’t help you, but I can introduce to someone who is better placed to assist you right now”).
In this context, it is absolutely essential to be clear about what type of clients you are able to assist. Opportunities to provide this clarity can include the way you ask your clients for referrals, on your website, and in your broader marketing messaging.
If you are attracting suitable referrals without even asking (which can happen if you are truly good at what you do), and you lack the capacity to meet demand, this could be an opportunity to revisit your operations to see if capacity can be created through reallocating work or through the use of technology.
Client referrals generally do not involve remuneration, or ‘spotters fees’, but you may want to reinforce your relationship with the referring client by letting them know the outcome, and expressing your appreciation, potentially in the form of some small gift or reward (like a bottle of wine).
Steps for success – business referrals
Business referrals can be both to and from other professionals, whether they be other specialist advisers, or experts in other fields, such as accountants and mortgage brokers.
Your affiliations will help define you and your brand and will impact end-client outcomes.
Delivering a truly elevated, unique, and premium holistic wealth management experience requires partnering with other professionals who:
- fill an obvious gap in your offering
- are trusted and respected by you and your peers
- serve a similar client base and are aligned in terms of client experience, remuneration, business ethics etc.
- are prepared to work equally as a team (no passengers) for the benefit of your mutual clients.
It’s important to remember that this works as a two-way street. Your partners will also be looking for the same qualities among you and your team members.
Finding like-minded partners to work with, and positioning yourself as a potential partner can be done via several channels. Professional networking events and industry conferences are one opportunity. LinkedIn is another. Posting regular content is a way of building a reputation as a trusted and credible authority in a particular field. Client reviews (posted on platforms such as Google, Trust Pilot and Adviser Ratings) can also provide valuable insights.
Absolute clarity about the services each party provides is also essential and will help reduce any potential for conflict or confusion, as will clarity around the issue of ‘client sovereignty’.
Client sovereignty is about who ‘owns’ the client relationship. Do you want to act like a project manager for your client, in the middle, coordinating external resources to implement your holistic advice, or are you happy for your referral partner to foster their own relationship, in parallel?
While any formal referral arrangements, for example, joint ventures, will require legal documentation, there can be benefits in documenting even informal arrangements. Such documentation could include sections on ideal clients, services provided by each party, agreed service standards, visibility of client data, regular meetings, and reporting.
Opportunities for joint marketing, such as cross-promotion on each other’s websites and sharing of content, may also present themselves. Promoting your affiliations with other providers can make your business and offering look more substantial and professional.
Training affiliate firm staff on how to identify and refer an ideal client should also be a shared priority.
A final word of caution when referring a client to another provider is to make sure they are happy to be referred, and that any information about the client you share with the third party complies with your privacy obligations. Sharing sensitive information (for example health details) can fall foul of privacy legislation and attract large fines7.
The quarterback – bringing it all together with the client at the centre
Perhaps the best illustration of the hallmarks of effective referral partnerships can be found in the words of the managing director of one advice firm who partners extensively with a range of other professional firms and specialists:
“The overwhelming feedback we get from our clients is that they prefer a model where one person or one firm coordinates the activity, and everything is done in an organised matter.
Effectively, we are the ‘trusted adviser’, the quarterback, coordinating other services that clients might need and putting them at the centre of the relationship.
For example, if we’re introducing a client to an estate planner and they have complex needs, our adviser would always attend that meeting so that we maintain that coordination role even though we aren’t specifically providing that advice. That coordination role is seen by the client as being at the centre of the holistic advice.” James McGregor, Apt Wealth[8].
Conclusion
The evolving compliance, ethical and capability context within financial advice is increasing the frequency with which advisers need to form referral relationships with other trusted professionals, such as advice specialists, accountants, lawyers and mortgage brokers.
As valuable as referrals can be in growing a business and helping clients, these arrangements, even informal ones, are associated with a complex array of compliance, ethical and client experience considerations. All practices, therefore, need a strategic, documented approach to choosing referral partners and implementing an arrangement with those partners.
