The benefits of good client segmentation

29 September 2015

Fraser Donaldson – Insight Analyst (Investments)

The benefits of good client segmentation is a thread running through the majority of the guidance that has come out of the FCA over the last five years or so. Often held up as good practice in the regulators documents it is worth reminding ourselves what some of these benefits are.

Very few advisers are lucky enough to only deal with a small number of wealthy clients that they know well. For the rest of us, some client analysis is required.

Arguably, good client segmentation is one of the key building blocks for a successful advisory business. Segmentation will help advisers understand exactly what the needs of their clients are and this knowledge will help shape the structure and approach of an advisory business

There are of course many ways in which clients can be segmented. While this exercise will give a guide to potential revenues and structure of the business, crucially it should also help in identifying what the needs of the client are and this should be the driver.

Segmenting by assets or wealth is the most obvious method, but arguably the least informative and we should all question how much this actually tells an adviser about their client, what their needs and future needs are. While knowing details of clients’ wealth will obviously give some indication as to their potential profitability, which is important from a business sense, more importantly, it only really scratches the surface as an indicator of the likely requirements of the client.

A closer look at the client bank, some potentially not active, may reveal some future potential. Perhaps the career path that a client is on may be rewarded financially at a later date as promotions and experience increase. The client may even be expecting a significant inheritance. These kinds of future prospects should be revealed by the fact find

Perhaps another angle to look at is the life-stage that the client is at. Clients are likely to be at their most profitable during the wealth accumulation stage, as assets are being built up. For some clients post-retirement means decumulation of wealth. As such, assets may gradually diminish which means a potential reduction of fees over time, particularly if based on assets under management.

We would suggest that robust business strategy planning for the future, perhaps over five years and beyond, is going to be very difficult to achieve without detailed knowledge of these factors, which can be discovered through good client segmentation.

These will give advisory firms a strong indication as to what investment solutions to consider, and what to have on a panel of alternatives. When it comes down to investment solution selection, chances are that the adviser will already have a suitable proposition in mind. We would suggest that more advisers consider this in their segmentation exercises.

There is always a temptation to try and deliver top quartile, or at least above average returns to the client. The make-up of the client’s feelings around appetite for risk and tolerance for loss will give a picture of what those clients’ needs are. Chances are, very few if any of a firms’ clients are looking to ‘shoot the lights out’ in terms of outcomes. This gives the adviser the opportunity to take a lot less risk and the client will thank you in the end.

While looking at these aspects of risk, you should also take in to account the age of the client and likely period to retirement (or decumulation). If the adviser knows that they have an ageing client bank, the emphasis can be put on investment solutions suited to a decumulation phase. A younger client bank may point to different solutions that have an emphasis on capital growth.

Just prior to RDR implementation on 1st Jan 2012, a survey by Defaqto indicated that only around 11% of advisers had segmented by platform suitability. We would see this as fairly fundamental to the services to be offered to clients, at least in the investment arena. This kind of analysis may well avoid the situation where clients are ‘shoe-horned’ onto a platform, and give the adviser firm the impetus to build an off-platform solution.

Other areas by which clients could be categorised by their needs rather than the advisory business’s needs may include:

  • Tax position
  • Income requirement

Finally, we should not forget the personality of the client. All the stats and fact-find analysis in the world may point to an ideal solution, but the client may just not fancy it! For instance, there is a temptation to assume that the wealthier the client, the more service elements are required (Perhaps bespoke DFM as opposed to multi-asset funds).

However, good client understanding through good client segmentation may reveal that despite significant wealth, the client feels they have spent their life taking risks and being involved closely in the day to day running of a business and they would much rather have the lightest of touch service, as few people bothering them as possible. This may point to funds rather than bespoke dfm.

A thorough understanding of client’s attitudes to investing should point to the kind and types of investment solutions required. Once this exercise is complete, it becomes easier to be able to articulate precisely what the service proposition will deliver. Also, advisers can be confident that they can set a fair and reasonable fee for those services. Again, there may well be more than one level of service on offer.

A certainty about what clients need, coupled with certainty about what the advisers service proposition will cost and how it is delivered will also have the benefit of resulting in a reasonably forecastable estimate of earnings. This will also mean that longer term strategies can be planned with some confidence.

It may sound simple, but if there is a mismatch between client needs and service deliverables, profitability and longevity becomes harder to predict and achieve. As stated earlier, we firmly believe that good segmentation analysis could be the key to operating a flourishing advisory business in the future.

 

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