Even if the referral is honest and true, it still may not deliver the right person for you. Think of it in terms of interior decorators. Your mother may have a lovely home, but it might not be your style and taste; when she refers you to her decorator, it’s entirely possible that you wind up with someone who does lovely work, as long as it’s for your mother.
When it comes to financial advisors, a referral should be a starting point, not a selling point.
A reference is someone who is in a position to recommend someone or vouch for his or her fitness for a job, because the reference knows the person well enough to comment on qualifications, character, and dependability.
A referral is a direction to a source for help or information.
The difference, for the purposes of hiring financial advisors, is that most references come from customers, while referrals come from other service providers.
Referrals can be paid, or given in trade — where an advisor suggests a friend who covers a different specialty — or they can simply be “Here’s someone I know who can handle that.”
With a reference, you will want to know the tenor of the relationship. With a referral, you will want to know how one professional selected and qualified another, whether it was from a working relationship, a personal friendship, or through any form of rigorous selection process.
Referrals tend to come early in the selection process — when you are finding candidates for the job — while references provide context after you have met with an advisor and are trying to decide if she is the one for you.
Let’s go back to the story of Al, one of those stockbrokers I was referred to during my early days in Allentown. When the newspaper held the stock-picking competition, everyone in the area was surprised that Al decided to participate; he was already THE broker in town, the one who handled the local money elite, the name routinely kicked around as the biggest big shot in the neighborhood. He was efficacious and personable, handsome, and well connected. He had the highest minimum in the area for establishing an account and the highest-profile clientele.
The rules of our year-long contest were a bit stilted — most money managers do not shoot for big short-term results, and we were running a competition to see who could achieve the most growth in 12 months — but all of the brokers accepted the situation, the same way you would hope they would handle the special needs of an individual client.
By the time the year was gone, so were most of Al’s clients. He lost nearly 40 percent, while three of his peers — Stan, Sean, and Ed, actually — earned 40 percent, and a fourth (yes, it was Matt) was up 20 percent.
Worse yet, Al lost the money with the exact same strategy he used for his real-life clients, a particularly dumb move since the vagaries of a one-year competition are a lot different than the long-term investment concerns of a wide-ranging clientele. Those customers started to realize over the course of the year that Al pigeonholed all of his customers into the same investments, regardless of their specific needs. Investment choices that were inappropriate for the contest’s imaginary client were mistakes for some of his real clients, too.
His one-strategy-fits-all style had never been apparent to customers until it was in the paper, and, by then, Al couldn’t sweet talk his clients into walking around wearing his poorly fitted portfolio. Al’s performance was so wretched that his firm — one of the national giants — hasn’t allowed brokers to take part in similar contests since then without written consent from headquarters.
When the whole episode was finished, Al told me his greatest mistake was not his strategy so much as participating in the first place. As he put it, “A whale only gets harpooned when it comes to the surface.”
But what stuck with me was not just that line or the losses, but rather a comment made to me over breakfast by a prominent local executive, one of the clients who left Al about nine months into the game. “What the game made me realize,” the executive said, “is that he’s been losing my money with a smile on his face for a long, long time.”
The last time I checked, Al was selling a lot of insurance and annuity products, mostly to the long-time customers who at least left some of their money with him.
The point of the story: Here was the guy with the best word of mouth in town, but everyone who kicked his name around was, essentially, justifying his or her own decision. The recommendation raised his good points, and reconfirmed the people’s decision, allowing them to brag about working with the “best broker around.” Al’s business had survived for years more on his ability to generate referrals than on his ability to generate profits.