This week I want to talk to you about referrals.
This was prompted by an email I received earlier this week from Craig Young, an adviser just joining the group. I was speaking with him about two months ago, just as he was coming on board, and explaining that ACES will facilitate adviser to adviser referrals. The benefit here is that each adviser can offer a much broader range of services to their clients, by passing work that the adviser cannot or does not want to do personally to other advisers within the Dover group.
Craig’s client needed an accountant. I introduced him to another ‘Dover Dude’, Justin Cooper, who is also an accountant. Justin started with us years ago (in fact, he and I have known each other for 25 years). Here is what Craig had to say:
“On a separate note, the client I referred to Justin Cooper is going to use him so I wanted to thank you again for the referral – and for the aces program! I have just increased my annual income and helped a client! Even better, the accountant understands the relationship so there is no threat of the client being poached for FP by an in-house adviser.”
If I had to describe the program myself, that is how I would do it.
Craig’s client was using another accountant and paying a lot for little service. The client was unhappy and asked Craig to help out. Craig got in touch with Justin and, voila: Craig solved his client’s problem. He also added to his own revenue base as he gets paid each time the client needs accounting work done. Justin also grows his revenue base as he has taken on a reasonable-sized client and will not spend a cent in marketing until that client actually pays him a fee. Referral fees are the best type of marketing expense: you only pay them when the client pays you. 100% success on your marketing spend.
In this case, the client is in Western Victoria and Justin is in Eastern Victoria. But that does not matter as Craig will be the middle man. Indeed, the distance between client and accountant is probably a virtue: the client won’t want to drive five hours to see Justin. This is yet another reason that Craig is assured that he will not lose his client under this arrangement.
The value of both practices has also increased. Remember, financial planning and accounting practices tend to be valued on a multiple of revenue.
I did not ask Justin and Craig how much their client was paying – and it would be inappropriate for me to publish the amount even if I had. The way the money flows (ie who gets paid by the client and then passes money to the other adviser, and what the referral percentage is) is also up to them. I do not know how they are doing it.
But this was a sizeable business-owning client. So, let’s simply imagine the client was a $10,000 a year accounting client. There are two ways to go. The first is for Craig to bill the client $10,000 and then pay Justin (say) 75% of that. This means that Craig can show revenue of $10,000 and Justin can show revenue of $7,500. As these are accounting fees, which as a rule of thumb often sell for 100 cents in the dollar, Craig has likely added $10,000 to the sale value of his practice. Justin has likely added $7,500.
The other way would be for Justin to bill the client $10,000 and then pay Craig (say) a $2,500 fee. In this situation, Justin adds $10,000 of revenue. Craig might add $2,500 – or he might add more. This is because the fee paid to Craig under this arrangement is more like an ongoing commission, and these are valued at up to 300 cents in the dollar. Craig might be adding $7,500 to the value of his practice.
Either way, up to $17,500 of capital value has been added across the two practices. It is true that the capital value of a practice is actually negotiated in a market between the buyer and the seller. The above rules of thumb cannot be guaranteed. But you can see the point being made: referring work you cannot do yourself builds value in your practice. And accepting referred work does the same thing.
The taxation system helps as well. Goodwill is received largely tax-free when a practice is sold. What’s more, referral fees are generally treated as business income, rather than personal services income.
Work on the business, not in the business
I am sure you have heard this advice. So many advisers work in their business, and by doing so they miss opportunities to grow. It is only when other people do work and you get paid that you are evolving into a genuine business. When you make money on your days off, or in your sleep, etc.
Businesses generate revenue from their assets (such as the client base) rather than the owner’s time or personal effort.
ACES is all about building your practice as a business.
What to do
The ACES program will include a website that allows advisers to ‘shop’ for other advisers to whom they will make a referral (see ACES Update number 1. August 5 2018). Many of you have already sent through a bio and nominated a couple of areas where you can assist with other advisers. If you have not, please send me the following:
- A good quality photo;
- A short bio – designed to be read by other advisers who might want to refer to you (moreso than the general public);
- One or two services that you provide that other advisers are likely to want to refer. I really recommend you do not nominate super and risk insurance: few advisers need to refer that work out. Think about the things that you do that others do not; and
- Up to four groups that you have a particular capacity to help. It might be particular trade groups, divorced women, first home buyers, business owners, etc.
Friday September 30 is a public holiday here in Melbourne, in preparation for the Grand Final on Saturday. None of the staff here at Dover are actually playing in the Grand Final (although Peter Thompson has offered to pull on the Bulldogs Tricolour), but the office will be closed anyway. C’mon the Doggies.
[UPDATE JANUARY 2017: THE DOGGIES WON THEIR FIRST PREMIERSHIP IN 60 YEARS AND PETER IS STILL WEARING HIS FOOTSCRAY JUMPER!]