Referral agreements with P&C producers make no sense

Selling is a difficult, scary job, which is why so few succeed. And most salespeople find prospecting to be the scariest, most difficult part of all.

Producers come up with countless excuses to not prospect and get pulled into activities that have nothing to do with selling, much less prospecting. They rationalize, “The best ROI on my time is to protect clients I already have.”

You must serve existing clients, but there is typically an entire team to help do that. Besides, it doesn’t take all your time.

Stop ignoring advice

Over the years, this column has often focused on strategies to make prospecting easier. But for many, advice and ideas don’t matter. They can’t shake their fear, so they pay someone else to do it.

I’m often asked if I can suggest a “good telemarketing service” to help fill their pipelines. My answer is always, “No.”

I don’t know of any producer or agency who has engaged an outside telemarketer and been satisfied with the quantity or quality of opportunities they receive.

Pricey referral fees

I also hear from producers or agencies that have entered into a referral agreement with a P&C producer or another center of influence.

On the surface, this makes sense; however, most never properly set up or manage these relationships. These “partnerships” come down to paying someone a referral fee. The fee isn’t the problem; it’s the amount/duration of the fee.

It is not uncommon to hear of referral fee payouts of 30% to 40% or more. You may even be able to justify this type of fee if it were a one-time payout. But, often, the fee is paid to the referring party year after year. This makes no sense!

First, fees are often as much (or more) than is typically paid to an internal producer who would help support the account. Second, the support and resources the client expects will be provided by the party receiving the referral. Third, these opportunities are often handed to an internal producer, who is then paid commissions on the remaining fee.

In an industry where many agencies struggle to have a 20% profit margin, this doesn’t make any financial sense.

If I were a referral partner, which scenario is more enticing?

Option 1: Prospect for my opportunities, invest in the resources necessary to support the client, and then spend time servicing those clients. For that, I retain all the revenue from the client.

Option 2: Make a referral to someone else and never do anything else, with no financial or time investment to support the account. For that, I get paid 40% forever. This is a no-brainer!

You got some ‘splaining to do

When I ask those who have entered these agreements how this makes sense, they have no logical explanation.

Related: Is your sales desperation driving clients away?

My understanding is that the new compensation disclosure requirement requires reporting referral fees. How will you justify paying someone 40% every year who does absolutely nothing to service the client? All because you were afraid to do your prospecting.