Last week I talked to a group of advisors and suggested that this was the time to lay the foundation for referrals. No one said anything but I could see what they were thinking - something along the lines of "Are you nuts?" After all, given markets of late, most advisors are hoping to hang on to clients, forget getting referrals to new ones.

Indeed, this is not the time for a heavy-duty assault on the referral front. It is the right time, however, to begin planting some referral seeds - by letting clients know that you're open for business and available to talk to friends who might be looking to move or who are interested in a second opinion.

There are two kinds of referrals - proactive referrals and reactive referrals. Proactive referrals are initiated by the advisor - unless you were unusually prescient in how you positioned client portfolios last fall, this is not the right time for a full-scale proactive referral conversation. Reactive referrals are those which arise when your client is talking to a friend or colleague at work and their friend says "Are you working with an advisor you could recommend?"

As long as they're reasonably happy themselves, it's relatively easy and low risk for a client to refer you when they get that question - and their satisfaction threshold needs to be much lower when the referral request is initiated by a friend than when you raise the subject. Given the turbulent markets we've seen since November and the way some advisors have dropped the ball on communicating with clients, over the next while there almost certainly will be opportunities for your clients to provide reactive referrals.

Here's a three step process to capitalize on those opportunities:

1. When you set up a meeting with clients, say something along the lines of: "When we sit down, I'd like to get caught up on your situation and review your portfolio. I'd also like to take three minutes to share a profile which I've recently developed of the kinds of clients I've found I can help the most, just in case you're talking to someone who is considering making a change". Doing this takes away the awkward issue of how to bring up the topic of referrals - you've discussed it on the phone and it's one of the items on the meetingagenda.
2. After reviewing the client's portfolio and making any recommendations, check on your client's comfort level. Make it easy for them to express reservations. Rather than saying "Are you comfortable with this?" (do you really think clients will say no?), try something along these lines instead: "I'd like you to be absolutely honest on this - on a scale of 1 to 10, how comfortable are you with how we've positioned your portfolio?" Anything less than an 8 means that you need to spend more time talking through your advice with questions like "Lots of clients are uneasy these days. What are the things about the portfolio we've discussed which make you uncomfortable?"
3. Assuming your comfort score is 8 or higher, you move on to your referral conversation: "When we set today's meeting, I mentioned that I have recently taken a hard look at the qualities of the clients I work with the best and can help the most - you'd certainly be among them. The clients that I can help the most generally have three things in common ..." and at this point fill in the two to three qualities which apply for you.

There are lots of things that could go on that list. Possible candidates include a long-term conservative orientation, the willingness to go against conventional thinking, a focus on tax efficient income, a priority on minimizing risk, openness to an in depth relationship, someone who is looking not just for an investment advisor but a financial advisor, families that are in the early stages of planning for retirement, people that lead busy lives and are pressed for time and a particular client community such as real estate developers, professionals or corporate executives.

You might also include a target minimum in assets - if you do talk about an asset threshold, it should be the last item on your list. If you are going to talk about an asset level, try framing it by saying "In order to afford the level of communication and advice which I provide, clients normally have a minimum of $x". (Just be sure your client's assets are at that level).

Finish off by saying: "The markets over the last while mean that these days, many people are taking a hard look at their financial advisor. Should you be talking to a friend who seems like they might be a good fit and who is considering making a change or is unsure about their situation, I'd be happy to sit down and spend some time chatting with them. At a minimum, I'd be happy to give them some thoughts on their portfolio and provide an alternative point of view".

Make this three point approach to referral conversations a priority - put referrals on the meeting agenda, check to be sure for client comfort and initiate a short conversation about the kinds of clients you work with best. You might be pleasantly surprised by the referral dividends those conversations will yield, even in edgy times like these.