I love it when data surprises me and that's exactly what happened this week. As you may know, I’ve spent more than a few years researching the drivers of referrals, translating that into a referral model and sharing that information through this blog and the presentations I deliver. For the most part, the focus has been on the stunning missed referral opportunity that exists simply because:

• we don’t meet most of the people whom our clients believe they have referred,
• clients don’t know who to refer, and
• we don’t do a great job of helping clients refer.

For what it’s worth, I believe that there's still a massive untapped opportunity to increase referrals and it’s supported by our latest research. More to come on that in future posts.

A New Referral Connection

Today I wanted to put the spotlight on a different referral driver and it’s one that I haven’t examined in the past.

Based on our most recent investor research (barely out of field and still being analyzed) we can see a clear connection between how knowledgeable a client feels about investments and his or her propensity to refer.

The more comfortable and confident clients are in understanding their investments, the more likely they are to refer you to others.

It’s also the case that there’s a connection (although not quite as strong) between knowledge and satisfaction. I think these are two sides of the same coin.

The Research

Before I jump in on the findings, I want to tell you a little more about who we talked to for this study. If you've followed our investor research in the past, the sample is a little different, which will impact the findings. The data I’m going to share today focuses on 575 higher net worth clients in the United States, all of whom work with a financial advisor. Thirty-six percent have household assets between $500k - $999k, 47 percent between $1m - $4.9m and 17 percent have $5m plus.

Does Understanding Breed Referrals?

Here’s what we know about these clients, based on their self-reported level of investment knowledge.

• Forty-four percent of clients who referred their advisor in the last year, reported very high investment knowledge. That dropped to 14 percent for those who did not refer.
• Thirty-six percent of clients who provided a satisfaction rating of 5 out of 5, reported very high investment knowledge. That dropped to 13 percent for all others.

My metric of choice is engagement, which combines referrals and satisfaction into a single metric. Using that measure, you can see quite a startling connection between engagement and self-reported knowledge.

‍Q: How would you rate your current level of knowledge with respect to investing?

Note that clients rated themselves on a scale from 1 (not at all knowledgeable) to 5 (very knowledgeable). The first category is a 1-3 rating, the second is a 4 out of 5 and the last is a 5 out of 5. So the connections are strong, but we don’t know why (at least not yet). Does the connection exist because those who consider themselves more knowledgeable:

• talk about investments more (and to anyone who will listen) and that happens to lead to referrals?
• are more likely to value advice?
• work with an advisor who has invested more time in helping them understand their finances, creating a deeper connection?

Discuss.

It’s one thing to understand investments. However, another signal of deeper knowledge, for clients, is understanding how much they pay for the services provided by an advisor. I’ve long been perplexed that such a high percentage of investors report not knowing what they pay (and that many of the others are, quite frankly, wrong).Among this sample of high net worth investors, here’s what we know:

• Nine percent of clients who referred their advisor in the last year, said they didn’t know how much they paid their advisor, increasing to 33 percent for those who did not refer.
• Twenty percent of clients who provided a satisfaction rating of 5 out of 5, said they didn’t know how much they paid their advisor, increasing to 28 percent for all others.

Clearly there's a tighter connection between knowing what you paid and referrals than there is between knowing what you paid and satisfaction. If we bring those two things together and focus on engagement, here’s what we see.

‍Q: How much did you pay your primary financial advisor in fees, commissions or other forms of compensation in the last 12 months? Shows percentage of clients responding 'I don't know'.

What Does This All Mean?

While this topic likely demands some additional research, the data is very clear. There's a connection between self-reported investment knowledge and both referral activity and engagement. It’s dangerous to assume, however, how you should help clients improve their knowledge levels. For now, I think the data should lead us to asking more and better questions of our clients regarding their knowledge gaps. To that end, here is a set of questions you may want to ask of your clients, either in the form of a poll or as a follow-up to your next review meeting.

• How would you rate your level of understanding of investments/ finances/financial planning?
• How comfortable are you with your current level of understanding of investments/finances/financial planning?
• Which of the following topics would you be interested in learning more about? Create your own list, but here are some examples:
  
  Maintaining sufficient assets to meet lifetime income needs
  Dealing with the rising costs of health/long-term care
  Leaving a financial legacy for my children
  Leaving a financial legacy for a charity
  Coping with a significant market downturn
  Ensuring my partner/spouse is taken care of should I pass away first
  Helping my children make financially sound decisions

• How do you prefer to receive education?
  
  I prefer live events (e.g. group seminar or webinar)
  I prefer one-on-one discussions (e.g., during a review meeting)
  I like to read (e.g., articles)
  I like to listen (e.g., podcasts)

Sometimes data gives us all the information we need and other times it simply raises more questions, but more pointed questions. It's a start and it’s valuable.

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Thanks for stopping by,

Julie