Developing professional connections can be a complex business and takes real effort. You need to be smart in choosing which firms to court so you don’t end up wasting your valuable time on the wrong targets.
Finding potential professional connections with whom you have a similar set of values is very tricky. The reality is that close to 90% of the firms you come into contact with, won’t be suitable referrers for you. To assess your compatibility quickly and efficiently, there are a couple of questions you need to ask:
Question 1: Are they focused on working with you to deliver a great client service or are they more concerned about the money?
If they appear more interested in the amount of referral fees you can pay, it’s probably not a great fit. However with professional firms that have existing referral fee arrangements in place with other financial advisers, don’t assume that money is the driver in the relationship being discussed with you. Their existing arrangements may not be working too well, so probe further at your early meetings.
An easy way of discovering their motivation is to ask them straight out: “What is the key driver for you in any proposed relationship between our respective firms?”
Another good question to ask is how they disclose their existing referral fees (or any proposed referral fees) to their clients. The answer to this question will speak volumes about their approach. If they don’t appear to disclose adequately, or they have created a structure that avoids open disclosure to their clients, you’d have to question their ethics. Is this really a firm you want to do business with? My own experience when having the referral fee conversation with professional firms was that often they were simply fishing to see how you would respond.
With most good professionals, the minute they start thinking about having to disclose any referral fee to their clients they go off the idea pretty quickly. Some might say they will rebate it to their client, but that brings you to another meaningful conversation with your prospective partner firm; your margins.
For some reason, professional firms sometimes believe that you’re being paid extortionate amounts of money for the work you do. You need to have a clear understanding of your own numbers and then be able to explain them to others. The bottom line is, you can’t pay away more than 40% to the advisers who do the business within your firm as well as any introducers that you pay externally. If you do, you’ll struggle to make a profit. That doesn’t leave much margin to play with in referral fees if you want to be paid for your work as well. Explaining this clearly and simply will give any prospective partner a better understanding of your business and how to negotiate a mutually beneficial deal (which probably won’t involve a payment for referrals).
This rule also applies to ongoing fees. Good financial performance will see a financial advisory firm earning a 25% net profit margin. The facts are that very few advisory firms perform to that level, so if you pay a professional introducer 25% of your 1% ongoing fee, you will probably not make any profit in your business.
Personally, I hate the thought of paying away fees to accountants and solicitors.
If you can get them focused on the real issue, which is providing a great service to their clients, then you are able to have a much more productive and profitable relationship.
Think about your own situation; do you refer your clients to other professionals for the money? Or do you refer them because you believe that particular professional will do a good job for your client? I don’t think it’s possible to do good business with another firm that doesn’t see the world the same way as you.
Question 2: Will they be able to send you “on-target” clients?
This question, which should be asked very early in your discussions, will ensure the clients being referred to you are at your ‘A’ and ‘B’ standard, according to your client segmentation. For those that haven’t done the segmentation exercise before, think of the top 25% of your active client base. If the referring firm doesn’t have a high number of clients who meet that standard (or are better), why are you bothering talking to them? Don’t get over-excited and distracted because a firm can send you a bunch of clients you don’t currently work with. Sure, you might choose to create a new division to deal with a new type of client, but think very, very carefully before you do this. It’s often a really bad idea and you might be getting blind-sided by the lure of potential earnings.
You need to be objective and look at the big picture. As Milton Friedman said, there’s no such thing as a free lunch and you might find yourself having to learn a whole raft of new technical information and establishing a whole bunch of new back office processes, which is effectively just a distraction from your core business. You and your team have a huge amount of tacit knowledge (the knowledge you don’t even know you’ve got). To develop that knowledge in a new arena is often far more challenging than we give it credit for.
Seek out professional firms that already have loads of the type of clients you’re seeking.
Another key discussion you need to have involves explaining to the professional firm the clients that you are not able to work with (those lower level clients that don’t meet your minimum criteria).
You could choose to do the odd small job as a favour to them, but they need to understand that these clients are simply not in your space and should not be referred to you. If they have lower level work they wish to refer you can offer to help them find a suitable adviser to handle it, but be very clear that you won’t do it yourself. If you don’t set this boundary from the start, you’ll find yourself being referred the type of work that you’ve just spent the last two years letting go.
By spending some time very early in the ‘courtship phase’ getting to the bottom of these questions, you’ll find you save yourself months (or years) of time wasted chasing the wrong types of professional introducers.
The Last Word…
The final say on the topic of building professional connections comes from Brendan Reade of Signature Financial Planning in Dublin.
“I thought the money was important to some of them (and it was), but to others it wasn’t. I only found this out by probing them and finding out exactly what they were after and in some cases it wasn’t money at all. In the midst of it all, I’ve made a stark discovery. The guys who want a kickback are generally a greedy bunch (and maybe I’m being unfair), but in my experience they are sloppier. The guys who insist on not being paid are generally a much more professional group to deal with – they want to do the best for their clients and they recognise you do too. They have no interest in money, but a huge interest in looking after their clients. They have much better practices and are a pleasure to deal with.”
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