Clients and Prospects Must Have Skin in The Game
By Martin R. Baird

I wrote this column while flying home from an Investors Capital conference. At that time, Congress and the Bush administration were wrangling over the $700,000 billion rescue bill. At first, it seemed there was agreement on the bill. But by the time I sat down for dinner, everything had fallen apart. As the evening progressed, there was no word on a resolution of differences.
 
We all know the rescue legislation passed and was signed into law. What I want to bring to your attention in this column is comments that were made by presenters at the conference as our financial markets went into a tailspin. I heard a couple of consistent messages about what has caused some or most of this mess. They offer valuable lessons for financial advisors.
 
One economist placed blame on “no one having skin in the game.” He and others explained that mortgage underwriters had no personal risk in the mortgages they were approving. Loan officers got paid even if the mortgages were shaky, and the bank or brokerage didn’t care because the loans would be packaged and sold as investments to someone else within 45 days. These loans became investment grade financial instruments! They were backed by home mortgages and everyone assumed home values would rise forever. It all fell apart because mortgage originators had no risk – no skin in the game. That was the first message.
 
The second message came from a different speaker who shared a simple truth that I think we all often forget. If people get something for free, it has little or no value to them. The obvious connection to our economic problems is that a lot of people got mortgages with absolutely no money down. But this presenter was talking about fee-based advisors and suddenly his comments made a lot of sense as they related to having skin in the game. This speaker explained that having clients pay a fee keeps clients’ skin in the game. If they are paying for the advice, they see value in it. Please note that clients may not see the same value as you are charging them. But because of the fee, they will be committed to their investment program and its success. This sounds so simple and basic, but I think we often lose sight of the critical nature of having people’s actions closely connected to an ultimate outcome.
 
During the same conference, a couple of people mentioned that satisfied clients lead to more referrals. Recent research found that this is simply not true. Research shows that there is zero correlation between so-called "satisfaction" and referrals. I’ll try to make this simple. When a person is asked if they are satisfied, they have no skin in the game. When you ask a client if he or she is satisfied, the answer they give doesn't require them to risk anything of value. They can say anything and it will have little or no impact on them.
 
I’m sure you’ve been to a restaurant and were asked by the waiter if you were pleased with your meal. You likely smiled and said the food was good, even if you weren’t happy with it. You didn’t want to start a confrontation, so you told the waiter what you knew he wanted to hear. The restaurant then assumed you were a satisfied customer, even though you weren’t. However, if the waiter had asked if you would be willing to risk your reputation and recommend the restaurant to a friend, your answer probably would have been much different. But let’s say your meal was outstanding. Even in that situation, the risk-and-recommend question should give you pause for thought because answering it means you have skin in the game.
 
I wonder what would happen if you asked your clients if they would risk their reputation and give you a referral to a close friend? Whatever the answer, I assure you it will be an honest one that will reveal a great deal about your relationship with your clients.
 
Was lack of personal involvement the root cause of our country’s economic and financial mess that continues to unfold today? I'm not an expert in that area, but it sure is logical to me. The same simple logic is true in your business. You need to remember that requiring clients and prospects to be involved is not just a good idea, it's a necessity.
 
Look at your business and ask the tough question. Are your clients and prospects involved at such a level that they would be comfortable putting skin in the game for you? Would they risk their reputation and recommend you to others?

Martin R. Baird is chief executive officer of Robinson & Associates, Inc., a consulting company that helps financial professionals measure and manage the quality of client service and improvements to their internal operations to enhance business performance and increase revenues. He is a highly regarded speaker in the areas of marketing and client retention and development. Baird is author of “The 7 Deadly Sins of Advisor Marketing,” a book that offers easy-to-implement marketing ideas for financial professionals. He may be reached at 206-774-8856 or mbaird@raresults.com.