Too many advisers are overlooking the benefits and those that are doing it aren’t in the most effective – and regulatory sound – way
A few years ago, we asked platforms to define their target markets. Several came back with vague, catch-all statements such as “any clients with portfolios between £25,000 and £10m”. Hardly helpful.
The picture today is very different. As the market has matured, platforms have established their niches, serving different segments of advisers and their clients.
Those clients with relatively simple needs (often with smaller portfolios) might be suited to a low-cost platform with limited functionality. Those with more complicated needs are likely to require more bells and whistles, so a more extensive platform service might be appropriate.
Platforms are also now far more aligned to advisers’ investment propositions. A firm running in-house model portfolios on an advisory basis will likely require a very different platform service than a firm that runs discretionary portfolios using a mixture of funds and exchange-traded funds.
Platforms with the most clearly-defined propositions and target markets have generally seen the strongest growth in recent years. Examples include: Aviva focusing on clients with smaller portfolios, James Hay with its strong pension heritage, and Parmenion, which has specialised in discretionary management.
In contrast, we still find many advisers perceive “segmentation” to be a dirty word. This goes well beyond a healthy disdain for management jargon. Our strong impression is that advisers consider segmentation to be somehow at odds with their traditional approach to treating each client as a separate individual and it would be wrong to place in a formal category.
We recently surveyed advisers to ask what their main method of client segmentation was (see chart). The largest single group – 32 per cent – said they do not segment clients.
Most of these were smaller firms where management practices tend to be rather informal. At a recent roundtable of advisers, one told us that he used just two segments: those he was prepared to serve and those he wasn’t.
But two-thirds of advisers say they do segment clients. The most common method of segmentation (27 per cent) is to categorise clients by their capital values. The clients with more money typically have more complicated needs and therefore require the more extensive service, although this is by no means always the case.
We know from FCA data that most advisers are still charging their fees – or at least the bulk of them – on the basis of a percentage of assets under advice. So, clients’ capital values are more or less a proxy for fees chargeable – or the monetary value of the client to the adviser firm.
In fact, one in 10 advisers tell us they segment directly on the metric of fees chargeable. So, in total, more than a third of advisers (37 per cent) segment their clients directly or indirectly according to the fees they charge.
Just under a 10th of advisers segment their clients based on each clients’ life stage and 21 per cent segment on the basis of demand for their services.
One key question is: are any of these satisfactory ways to segment clients? This is a particular worry in relation to the FCA’s PROD rules, where advisers are required to distribute products to clients in the target market for those products.
The FCA rulebook requires manufacturers to identify types of clients by their “needs, characteristics and objectives” (in PROD 3.2.8, since you ask) and distributors (that is advisers in non-FCA speak) must take each manufacturer’s identified target market into account (PROD 3.3.1).
So, characterising clients according to their fees charged or the value of their assets seems to constitute a significant mismatch.
We’ve heard a fair bit of adviser hostility to PROD, with many regarding it a box-ticking exercise on top of what they have always done at client level. So, most advisers seem to think they have got PROD covered on a client-by-client basis – but, at a collective level, perhaps not so much.
Aside from any regulatory issues, there are additional benefits for advisers from more sophisticated client segmentation. Producing much better management information could go a long way towards understanding what’s really going on in their business, who their clients are and what those clients need from their advisers.
It could also make monitoring of products and services more efficient. Many advisers already use models to manage portfolios of multiple clients with similar risk profiles. Segmentation brings a similar approach to advisers’ other services, offering a more efficient and consistent approach for clients with similar needs.
Richard Bradley is research director at Platforum