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Sounding out segmentation

Segmenting your client base is fine in theory but it is tough to tell clients who you have advised for many years that you can no longer work with them. Two advisers talk about how to handle the post-segmentation process

Phill Billingham
Phil Billingham Strategy consultant Threesixty Services LLP

Client segmentation has become one of those phrases that is the answer to all the questions posed. “How do I increase the value of my business/make more money/deliver a better client service?” And the answer is always, segment your clients.

To be fair, there is a great deal of truth in that assertion. But what happens then? What do you do after the clients are segmented? And that challenges our normal operating systems and challenges why we are segmenting clients in the first place.

So let’s take that question as our starting point. I agree with the statement in the book, The One Minute Manager Meets The Monkey, that says: ’There is nothing so unequal as the equal treatment of unequals.” What this tells me is that to treat everyone the same is actually unfair and that drives a lot of our TCF planning.

What this means is that the purpose of client segmentation is to deliver a service for clients that is appropriate and valuable to them while maintaining a commercial profit margin for us. Therefore, we have two competing pressures – delivering and maintaining high service standards while cutting the cost of delivering the services the client values. That means looking at the following:

1: What value do we deliver to clients? Financial planning? Expert technical advice? Access to valuations and information?
2: What do clients actually value? The relationship? Simplification of paperwork? Access to technical expertise?
3: Do 1 and 2 match? If not – can they be brought in line?
4: How much does it cost us to deliver these services? Our cost, staff cost, IT and technology, PI and risk?
5: How can we deliver that value at a lower cost? Systemise the process, using IT and technology, templates?
6: Does our monitoring and risk management regimes measure and monitor our delivery of service? Do our KPI’s measure the things that matter?Or just ’compliance’-type KPIs, persistency, product spread?

So, what we are seeing here is that client segmentation is not just a starting point but is probably an iterative process. It is partially driven by our client proposition but also challenges our client proposition. We need to ensure we can measure, monitor and manage key activities: Have clients had the right level of service delivery? In short, if we planned to complete 30 review meetings with A and B clients in May, have we got systems in place that tell us whether these took place and, if so, what the outcomes were?

Do we measure the cost of delivering the services? Has this changed? Do we measure the benefits of delivering this service? What client retention/additional income. can we attribute to this client proposition? A well thought through client segmentation process is always a good start. But it is what you do next that adds value to both your practice and your clients.

Martin Bamford
Martin Bamford Managing director Informed Choice

We do a number of things after segmenting our client base, depending on the profitability of the client. For those clients that are not profitable, we practice “eloquent disengagement”. This is a polite way of saying goodbye but aims to leave everyone feeling good. We say to clients that the advice sector is changing, we’ve had to assess our client base and we can no longer provide them with a service but if their circumstances change, we can, of course, help and we will continue to take responsibility for all the advice we have given them up to that point.

There is a layer of clients above this. These are people who may not be profitable but we may want to hold on to them for reasons of, say, personality or geography. They may be strong advocates of our business or produce excellent referrals or they may simply be nice people. It’s not just money, after all.

However, this layer does not tend to include those who may be rich in the future. You could always work on the basis that a client could win the
lottery or get a huge inheritance but they are long odds. We find that if we leave them feeling good about the relationship, the chances are that they will come back when they have inherited money or otherwise got a sum to invest.

With this second layer of clients, we look for ways to work with them on a profitable basis. This may be by getting them to pay a retainer or by reducing our service level. In any situation, a client has to know what they will receive for their money.

These are people who may not be profitable but we may want to hold on to them for reasons of say, personality, or geography

Equally, every client should receive the same service whether they are a “top” client or not. We pride ourselves on the fact that all our clients receive the same ongoing service.

Client segmentation needs to be an ongoing process and ideally it should be annual. Every year, we look at the fees we have received from each client and record the service level we have provided. At the outset, client segmentation is a scary prospect for many advisers.

It is likely to work on an 80/20 basis, whereby you can lose 80 per cent of your clients for only a 20 per cent fall in your revenue and it will free you up to work on more profitable clients. It is undoubtedly challenging.

We began to build this business 16 years ago and we built it on some of those clients that are now not profitable. We have to recognise the contribution that they have provided but this is a business. To serve clients well in future, we need to profitable. This is only fair for staff and clients.

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