Segmenting by numbers

5 min read 5 May 20

The information contained in this page is for professional Financial Adviser use only.

Client segmentation as a strategy for improving business performance has been floating around the industry for a decade or more. With the introduction of MiFID II and PROD 3.3, segmentation gained a solid foothold in compliance strategies. Advisers were asked to be clear about the categories of clients they serve and the products and services that are suitable or not suitable for them.

NextWealth, in partnership with M&G Wealth, surveyed 200 advisers and published the findings last month. Our research found the most common basis for segmentation is the level of investible assets. Overall 46% of the firms we surveyed use this model, rising to 63% for firms with five or more client-facing advisers.

Our survey also revealed that just over a quarter of advisers don’t currently segment their client base at all. Many advisers challenge the requirement to segment, saying that they offer a personalised service to all clients. It’s a valid argument, and we’ve yet to meet an adviser who doesn’t in some way personalise their service to each individual client and their unique situation.

However, dividing the client bank purely by asset levels, or not dividing it at all, risks missing the point of segmentation, and therefore the real benefits for clients and the business.

At NextWealth we believe that the successful adviser business model of the future will have the client firmly at its heart. And, that the service design should be oriented around the needs of the clients. That can only be achieved from a deep understanding of who the firm currently serves and its defined target market. Other research we have conducted recently for the PFS has confirmed that client referrals are still the main source of new business enquiries, so the types of clients on the books is likely to perpetuate.

In 2020, advisers have at their fingertips a wealth of client data, and new technology is enabling much more sophisticated client bank analysis. We’ve spoken with advice firms who are engaging with brand new apps to segment clients based on behavioural characteristics, an area that we believe will see rapid development in coming years. Behavioural segmentation allows firms to tailor their approach to clients based on their likelihood to respond in certain ways, and therefore the firm can tailor its communications or product offerings to land with the right clients in the most effective ways.

Categorising the client bank according to demographic characteristics rather than pure assets will most likely identify niches of clients. It offers the firm an unmissable opportunity to become known in one or more specialist areas and to articulate its proposition in such a way that will attract more clients in that market.

Others have found a segmentation exercise useful as a way to bring consistency to the business and to ensure they are offering a comparable service to clients with similar needs.

Some advice firms are embracing segmentation models other than those based on assets. Over a third of firms (36%) we surveyed take complexity of needs into account, and a similar proportion say they segment based on life stage. For example, clients approaching retirement, phasing into retirement and so on.

We specifically asked whether firms take a different approach to segmentation for retired clients. However beyond the third of advisers who say they segment by life stage, most do not take a different approach to segmenting retirees.

As in many other areas of financial advice, firms can choose to meet the core regulatory requirements, or take a step back and look at how embracing the concept of client segmentation can deliver lasting benefits for the business and its clients.

Some firms we’ve been speaking to recently are using the current Coronavirus crisis and the resulting efficiency gained from those shorter, online meetings and the absence of office ‘background noise’ to implement some longer-term changes to their business operations. Advisers who have been busy reassuring their clients and perhaps stepping up their communications strategies during the crisis will also be gathering useful data to clean and update the database. Now might be the ideal time to take a deep look at who your firm is really working with to set the business on a course for future success.

You can download the full report on Centralised Retirement Propositions or take a look at our short summary of findings