Client Segmentation: An adviser's guide in the age of Consumer Duty

What is client segmentation?

Before Consumer Duty, segmentation largely involved dividing clients into different groups based on a set of criteria (typically assets) and providing a service that is aligned to their needs.

NextWealth research has shown that more than 50% of firms do not collect data on how clients engage with the firm.

Yet under Consumer Duty, firms need to consider the needs, characteristics and objectives of their customers. And as well as acting to deliver good customer outcomes, they will now need to understand and evidence whether those outcomes are being met.

As a result, it seems only a matter of course that as part of the client segmentation exercise, firms’ data collection and analysis processes should take into account the nuances of individual clients, by considering the impact of behavioural as well as financial needs.

We have developed this client segmentation guide for financial professionals to show you how to do this step by step.

Our research, conducted in partnership with NextWealth, has shown that 10% fewer advice firms say they are segmenting their client base than during previous years.

Subsequent conversations with advisers and consultants reveal that this may be because of what is considered ‘segmentation’.

“The problem with the word segmentation is people think it means ‘have we segmented our client bank into certain propositions.’ When advisers say, ‘no, we don't segment’, what they're really saying is ‘we have one main proposition’. For most firms, one or two propositions will do the job for most clients. But that doesn't mean your clients are in the same segments. They’re two different things.” Compliance Consultant

Understanding this difference is important so that the approach to client segmentation can offer benefits to both clients and the firm.

The benefits of developing a client segmentation strategy

Segmenting clients by understanding and defining characteristics can help the firm deliver a clear proposition, in turn instil confidence in clients and their investment journey.

It can also help crystallise the purpose of the firm: why it exists, the types of clients it wants to serve and the value it is trying to deliver. Segmentation is also an opportunity for firms to develop monitoring processes that can demonstrate how its ongoing services deliver against client needs and can justify the fee charged.

A firm which uses client segmentation may have better oversight of the distribution of client outcomes (whether more positive or negative, suitable or unsuitable) and be able to make adjustments to client portfolios or the method of service delivery that they receive, to enhance outcomes where needed.

How to develop a client segmentation strategy

To position the firm’s proposition effectively with clients, it’s important to recognise the Duty’s outcome focus – and in doing so - that no one size fits all clients.

Segmentation does not mean differentiating between developing a range of proposition variations (access to specific tools, investment options and level of adviser technical expertise) and segmenting the client bank into these propositions.

Instead, the focus of segmentation should be: identifying the range of characteristics that define the client bank, recognising how the range of clients who may be receiving the same proposition are differentiated and segmenting the client bank using these characteristics.

A good segmentation strategy will entail identifying gaps in client data - most likely beyond AUM and life-stage - and adjusting the fact-find and data collection accordingly.

“Before we built our segmentation model, we might have had a client with £150,000 pension, but we had no idea whether they had premium bonds or money in the bank or a DB pension. The first job is very thorough and rigorous to build a process and go through it with every client so that we know who they are, what they've got, where they're going, before now coming back to take a more data driven approach at looking at our clients.” Financial adviser

Our client segmentation guide for financial professionals is focussed on helping firms achieve two key objectives:

At the heart of the guide is an 8-step process structured around 4 key phases of developing an effective client segmentation:

Each step in the process is designed to help you think about how your firm may want to assign responsibilities and make the process more manageable as well as identify changes in the shape and needs of your client bank. This is crucial in enabling you to adapt your proposition accordingly and ensure that good client outcomes can be maintained.

Putting client segmentation into practice

Client segmentation is an efficient way to serve your clients well and in line with Consumer Duty. Beyond the regulatory aspect, client segmentation helps you support your business objectives while delivering the value and experience that truly matches your clients’ individual needs.

In this article we discussed three things:

Intelligent segmentation may be part of processes to help ensure you stay compliant. But, more than that, it offers an opportunity to optimise competitive strengths, keep clients engaged, justify fees and offer a clear and differentiated proposition in a crowded marketplace.

Download a copy of the financial professional’s guide to client segmentation under Consumer Duty now.

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