Advisers are starting to adopt more sophisticated ways of segmenting their client banks in a bid to boost profitability, deliver more appropriate services and drive their businesses forward.
These changes are partly being driven by regulation. The new Mifid II rules will require advisers to demonstrate they are targeting services and investment solutions appropriately.
The question for advisers is how they can demonstrate they are providing appropriate services if they do not have an in-depth knowledge of who their clients are. Segmentation can help with this process by splitting client banks on a whole range of characteristics, from the client’s net worth, the products they own, their age and “life-stage”, to the type of service they require.
Recent research by Platforum shows the majority of advisers use at least some of these factors to segment their client base, and the proportion who do so is rising.
Platforum’s data shows around two-thirds of advisers (68 per cent) use segmentation. A year ago, the same research showed 60 per cent of advisers were segmenting clients.
How to cut the cake
The research goes further, though, and identifies how these advisers are currently segmenting their client banks.
Perhaps unsurprisingly, segmentation by capital value remains the most popular method and is used by 31 per cent of advisers. This is a significant increase on the 21 per cent that were segmenting their client base on this basis a year ago.
However, fewer advisers are now segmenting client banks based on the fees charged. Only 8 per cent of advisers use this today compared with 13 per cent a year ago. There has also been a marginal decline, from 23 to 21 per cent, in the number of advisers who segment on the service clients demand.
Where different customer types get the same service level at the same cost it suggests an element of cross-subsidy is taking place
Platforum’s research shows that advisers are starting to segment on other factors. Although still a small overall percentage, 4 per cent of advisers are now looking to segment on age or life-stage of the client.
Segmentation is an important part of running a successful advice business, says Informed Choice managing director Martin Bamford.
He says: “It’s commercially unviable to offer the same service to every customer unless each customer is very similar. Where different customer types get the same service level at the same cost it suggests an element of cross-subsidy is taking place, with the more profitable customers paying towards the cost of retaining those who would otherwise be unprofitable.”
Personal Finance Society director of policy Matt Connell notes that before the RDR there was no regulatory requirement to link income and services. He says segmentation has helped focus advisers’ minds “on how valuable their time is as a resource”. It can also inform decisions about marketing spend and events planning to ensure that growth is focused on the more profitable parts of the business.
Bamford says segmentation should start with the firm’s proposition, which ensures advisers attract the right type of client through their marketing activities.
He adds: “Within our business, client segmentation is based on the level of revenue we receive from different clients, which informs different frequency and intensity of service. There is a base line of service delivery which all clients receive, and for this reason we impose a minimum fee. What we have resisted is using trite marketing terms like gold, silver and bronze to describe client segments. All our clients receive a gold standard service, with slightly different delivery intensity depending on revenue.”
But segmentation is starting to shift from a system that is largely focused on the advisers’ fees and services to one that is more responsive to individual client needs.
Independent consultant Rory Percival welcomes this change. He says until now much adviser segmentation has been too “firm-focused”, with too much emphasis on the client’s net worth. Advisers typically use this to project the likely fee, then work out what services they can provide for this cost.
But Percival says some firms are turning this thinking on its head by segmenting on the services their clients require as a starting point. He says: “If you get this segmentation right, it follows that advisers will offer more targeted and appropriate services and investment solutions.”
Advisers will have to adopt this approach in future, he says. “For one thing, it is the right thing to do, and can lead to firms designing and delivering better services for clients. This means better outcomes for the client and the adviser.”
But he adds: “With the introduction of the Mifid II rules we are likely to see this become more of a focus for regulators.”
What does more “consumer-centric” segmentation look like? Percival gives the example of a firm that identified within its client base a significant number of clients who were senior executives, with a large single shareholding in their employer. He says: “Offering bespoke discretionary management services may be beneficial to manage and address this imbalance more effectively.”
If you get this segmentation right, it follows that advisers will offer more targeted and appropriate services and investment solutions
Other examples might include grouping together those working in certain sectors, for example, farming, to offer more tailored products and servicing. This servicing can include a range of options from selecting the most appropriate platform, looking at cashflow modelling options, deciding what type of investment service is offered, and setting an appropriate schedule for face-to-face meetings. Different clients can have very different needs in relation to all these service options.
Percival says even segmenting a client base into young accumulators, those approaching retirement and post-retirement customers can help target services more efficiently.
“Young accumulators, for example, may not need annual reviews or such regular face-to-face meetings,” he says.
Jacksons Wealth Management
Segmentation has a role to play when it comes to marketing. When it comes to servicing options it might work for some advisory firms, where they have lots of clients in one profession, or expertise in a specific area. But I am not sure I see the benefit for an ordinary generalist practice. I prefer to explain what services we offer, and what they cost and then it is up to potential clients whether they buy into this or not. I do not want to have different service levels: where some people get quarterly updates, and other annual ones. It seems a lot of additional work for no real benefit.
Chase de Vere says it primarily segments its client base by service requirement. Head of communications Patrick Connolly says: “The approach we take is to look at the level of service which the client requires. In other words, do they need face-to-face meetings, and, if so, how many times a year, for example. It does often work out that those with higher value portfolio need more service, but this isn’t always the case.”
The more modern segments
There are a whole range of additional sub-segments that advisers may want to consider, some of which may be based on more subjective factors. Connell says: “For example, advisers might identify clients where there is the possibility to offer advice to other family members, or they may want to look at clients who need an ongoing service, rather than a one-off solution.”
He also suggests advisers might identify those who “are more responsive” to the financial advice process and happier to take on board suggestions the adviser has made.
But some advisers warn there is a danger of “over-engineering” this process. Investment Quorum chief executive Lee Robertson says: “Segmentation certainly seemed to be all the rage following RDR. There were a lot of consultancies offering advice on how to do this. But it’s easy for systems and spreadsheets to get overly complicated. We found that it was hard to see the wood for the trees and clients were almost getting lost in the process.”
Rather than following the trend of greater segmentation, Robertson says Investment Quorum has been simplifying this process. As a result he says that can clearly identify key groups of customers and make sure services are targeted effectively.
He explains: “Our clients are fairly homogeneous. We basically segment them to identify those that want a full wealth management service, alongside the financial planning, and those that don’t need the investment service.”
He adds there is an argument for simple segmentation, along the lines of pre-retirement clients at the accumulation stage, and those post-retirement looking at de-accumulation strategies. But he says: “I don’t see the need to over-complicate this process.”