Wall Street Steward Blog

The Referral Spectrum of Risk


Just thought I would get that fact out there for all to see.  Referrals are the lifeblood of my practice.  Referrals are also VERY unique, interesting, and difficult to predict.  There is risk involved.  There is credibility involved. 

When someone gives a referral, they are putting their own credibility on the line, while also assigning a high level of trust to the person being recommended.

Lost yet?  Allow me to pontificate.  I’ll define that…I recently heard it and looked it up.

Pontificate: [v. pon-tif-i-keyt] to speak in a pompous or dogmatic manner.

Consider the Source!
The more you value the person giving you the referral, the more meaningful the referral is.  If Carl is a bozo that can barely put his pants on straight, then you will probably pay no attention as he goes on and on about how great his car salesman buddy is.  Right?

However, if McBride is a model citizen-salt of the Earth type of guy and he raves about the man that pressure washes his house, you are more likely to listen.  In fact, even if your house doesn’t need pressure washing for 6 more months, I bet you would consider having it done early because your intelligent neighbor swore by this service.  *I see you nodding yes*

Think about the great referrals you have gotten in your lifetime – who gave them to you?  In my case, it can be summarized by saying “people with integrity.”  What about the bad ones?  Did it change how you looked at the person that sent you the bad referral?  It always does for me.

Risk Factor
Not all referrals are created equally.  I am a risk manager…it is what I do, so I tend to assign levels of risk to EVERYTHING on this planet.  I do this so often, and have become so good at it, that I can think of some very bad “worst case scenarios.”  Seriously.  The next time you see me, ask me “what is the worst thing that can happen,” but make sure there are no sharp objects nearby. 

Sorry about the rabbit trail.  Back on task….

Referrals have levels of risk.  Come to think of it, a referral in the financial business might be the most risky type of referral to give.

Read on to find out why.

Low Risk Referral
I used to buy some clothing from a tailor that would hand make the clothes especially for me.  Don’t get carried away, I am not that big of a hot shot….he gave me the employee price.  Anyways, back to the story….the tailor was great.  He would come to my home, measure me, pick the fabric and pattern, and then bring me a custom made suit complete with my name sewn inside the coat flap.  His service was impeccable.  I gave him some referrals.

There was very little risk to me personally by referring him to my friends.  The reason being that my friends’ maximum risk would be about $600.  If he went to them, measured them, made them a suit, and they HATED it, they would be out about 600 bucks.  They would not be happy with me, but we would still be friends.  $600 is a lot of money, but it is not the end of the world, and hopefully my friendship is worth more than that.

Moderate Risk Referral
Now, let us raise the stakes slightly….if I really like the lady that sold me my car, I might tell you to go see her.  The worst that can happen is that you are out $20,000.  If she sells you a lemon, you own a P.O.S. that becomes a 20 thousand dollar paperweight.  You would be very upset with me, but still, I bet I could still save our friendship.  Ok, maybe not….but that is not the point.  The point is that your maximum risk is 20k.  A lot of money, absolutely, but not all of it…

High Risk Referral
If someone sends you to a financial advisor (like me), then I am going to ask you to allow me to manage every penny of money that you have ever earned in your lifetime.  Your whole retirement account, your kids’ 529 plans, your stash money, that pile of cash under your mattress….I am asking you for it all.

Now, if I screw it up, it is EVERY. PENNY. YOU. HAVE. SAVED. FOR. YOUR. ENTIRE.  LIFE.  You are finished.  If an advisor does a bad job, it can be devastating.  You follow?

Assuming that happened, how would you feel about the person that sent you to me?  NOW you are beginning to see why an investment referral is the riskiest referral in human existence.  If it goes wrong, you are not out $600 (the suit), or $20k (the car), but all of your money.

I told you – I am good at worst case scenarios.  It is a talent, really. 

The Close
The things I have shared above are the reasons that there is no bigger compliment someone can give me than to send me their friends, family, co-workers, etc.  I will always do my best to manage each clients’ assets as if they were my own…that is my promise.  I will be a good steward.  The fact that someone would take the risk to send someone they care about to me is both humbling and motivational. 

Thank you.  Thank You.  Thank You.  You are risking your credibility, and the downside is large because I manage money for a living.  These facts are not lost on me. 

Now, about that guy you play golf with, any chance you can introduce us?