Understanding your client base and attracting appropriate clients is key to business growth and sustainability.  Adviser/client relationships should be mutually beneficial. As Seth Godin mentions in one of his books: “Everyone is not your customer.” Yet there are many advisers who spend little or no time segmenting their client bases and developing an ideal client profile.

Before delving into some of the practicalities of carrying out a segmentation exercise, it’s important to reflect on some of the potential benefits. While not an exhaustive list, the following are worth considering:

  • More enjoyable and focused client engagements
  • An emphasis on attracting appropriate clients
  • The development of an ideal client profile
  • Differentiated service levels per client segment
  • Greater business profitability
  • Operational efficiency
  • Happier clients
  • Referral generation

There are several factors to bear in mind when embarking on a client segmentation exercise. While there is no set rule, it should be repeated from time to time, perhaps every two or three years.

Profitability is a key component, therefore there is a need to understand how much it costs to both onboard and retain clients. The value of such an exercise should not be underestimated as it has benefits beyond segmentation.

The lifetime value (LTV) of a client should also be considered when analysing a client base i.e. what the future profitability of clients may be. By way of example, an 85-year old client with significant assets under management (AUM) would appear to have a low LTV. In contrast, a 35-year old professional with less significant AUM but good career prospects may have a high LTV.

Segmentation is in the first instance an objective exercise, but it does require a subjective overlay.

There are various methods that can be followed. Purely segmenting clients based on AUM doesn’t necessarily provide meaningful results so it’s worth considering monthly contributions, including life products, in addition to AUM.

Another technique would be to use profitability as the only criteria. As indicated above, this would require clarity about the costs associated with onboarding and retaining a client (a comprehensive exercise in its own right).

It is from the above analysis that one would develop an ideal client profile.

Here’s an example:

XYZ Wealth Managers is conducting a client segmentation exercise. They have decided to use bronze, silver, gold and platinum as classification categories.

Mr. Jones, a well-paid executive, has a strong relationship with his financial adviser, but doesn’t take up an excessive amount of the advisory firm’s time. Most of his significant investable assets are housed in his employer’s corporate retirement fund. The adviser would only ever manage these funds were Mr. Jones to leave his current employer and preserve the accumulated wealth or at retirement in 10 years’ time. Through the firm he makes ad hoc contributions to a smaller investment and pays for substantial risk cover. Mr. Jones passes on high quality referrals to the firm from time to time.

The firm undertakes to categorise Mr. Jones, with the following being a likely outcome:

Based on annual revenue, Mr. Jones is classified as a Silver client. However, it does not cost much to look after Mr. Jones and as a wealthy individual who is likely to remain a client of the firm well into retirement, significant revenue will be generated in future. Substantial revenue is also being generated from the ideal clients referred to XYZ Wealth Managers by Mr. Jones. The firm therefore decides to categorise and treat Mr. Jones as a Platinum client.

Client segmentation is a necessary first step in attempting to maximise resources and enhance business efficiencies. The result is improved client service, greater client loyalty and a business with more ideal clients. It may require some hard work, but the rewards make it worthwhile.

This article was first published in The Trade Press publication in August 2018.