How can you make client segmentation easier?

Despite evidence segmenting your client base is the gateway to profitability, some advisers are still unconvinced.

Three years ago – just as the FSA began talking of an RDR – IFA firm Brunning Newman Houghton (BNH) took the decision to segment its client base.

With face-to-face advice the main driver for director David Brunning, the company created four grades within its proposition: admin, core, standard and bespoke. The cheapest offering, admin, is purely reactive: clients pay a low charge and the firm keeps a file open for them. But as soon as they require advice, they move up to one of the other three levels and pay more fees.

Core provides remote advice but does not build in client facing meetings: it is more comprehensive than admin but is largely a reactive service. Standard means a package of services that can be replicated, while bespoke is the most expensive offering and gives clients an individually tailored service. Brunning’s clients reacted well to the firm’s new proposition and it has helped the company move towards becoming RDR-compliant, because fees will be an inevitable reality post-2012. However, arguably the most important outcome of segmentation is it has increased BNH’s profitability by reducing cross-subsidy, and allowing advisers to focus on the services they have agreed to offer, while maintaining an eye on the actual cost of delivery.

Losing loyalty?

Despite BNH’s success story, some industry commentators remain unconvinced about segmentation because of concerns about losing loyal clients, getting price points wrong and missing out on customers who may one day move up the wealth scale.

The fear of losing or abandoning clients is a “huge sticking point” among advisers, according to Brett Davidson, chief executive of FP Advance, a consultancy that helps IFAs move to a more effective business model. He says: “It’s definitely a fear thing. When advisers first started in the industry they all had no clients and they were commission-only sales people. When you had no clients it made perfect sense to catch and kill anything that moved. Now 25 years on it makes no sense whatsoever.”

To make sure clients are segmented accurately, Davidson recommends advisers create a list of all their customers by value, from highest to lowest, either by recurring income generated by the client or assets under management. He thinks cataloguing by assets under management is often a better choice. “A lot of advisers who have been around a while have a client or two with £1m in, say, an old bond, that pays no trail whatsoever. They don’t come up on the recurring revenue list, but they still have £1m, so they are an A class prospect.”

The next step, Davidson says, is to divide clients into categories. He suggests three active
categories for the people you want to work with: the top 5% are As, the next 20% Bs and the rest, the Cs, meet some criteria, so are worth servicing.

He then advises three further categories: D clients for people you cannot get rid of, such as a child of an A client or someone who has been with you for 30 years; X clients – those you do not know much about and do not get much money from (“These need to be sifted through or gotten rid of,” Davidson says). And finally, P clients for people who are prospects.

Davidson says: “Go through the X list and if there is a person in there who is a heart surgeon for instance, but that’s all you know about them, move them into the P category. Market to them a bit and keep them warm and maybe have a conversation with them in the future.”

At BNH, Brunning created four distinct grades. After initially categorising his clients, he bumped some up and down the scale depending on their individual circumstances. “There are people who need a regular cuddle, but from the size and sophistication of their assets, they don’t need a higher degree of service,” he says. “But because we didn’t want to lose them we could bump them up or down a scale.”

To provide the right level of advice for each grade, Davidson says the next stage in the process should be a secondary categorisation in which the top five issues for each sub-group are identified. He adds: “When you understand what the issues are for each group, you can design a service they might want, then start to think about how to price it.”

BNH distinguishes its grades markedly – from admin, which includes no advice but telling an insurance company if a client has moved house – to bespoke, which is tailored, specialist advice.

“It is imperative that you design a package of deliverables that support the external facing service packages you provide to clients,” Davidson says. “For your best clients, you should be aiming for 10 or more varied client ‘touches’ per annum.”

According to FP Advance research, 54% of firms contact their best clients fewer than 10 times each year. The chart (pictured right) is an example of how an internal service standard might look.

Accurate proposition pricing

Another sticking point for advisers is accurately pricing their new proposition.  Davidson says once you have defined the levels of service for each category, you can then determine price points. But the main thing is to make sure you differentiate your pricing because each segment has a different willingness and capacity to pay and different needs.

However, not all commentators agree with Davidson’s method. Simon Chamberlain, chief executive of Succession Advisory Services, thinks it is “hugely dangerous” to categorise clients as A, B, C or D because of the risk of mis-categorising people. Instead, he believes in a pared down version of segmentation. “From a wealth management perspective there are only two types of clients; those with money and those without,” he says. He adds aspirational clients are ones with no money but who are building up assets. They might be saving £500 or £1000 a month and some time in the future will accumulate pots of cash that need to be managed.

Then there are clients with money who want their wealth managed and preserved.

Restricted and independent licences

Chamberlain says there is nothing in the RDR to prohibit a single adviser holding both a restricted and an independent licence. “Aspirationals,” he says, should start out being advised on a restricted basis: “Unless the accumulation is going to be quick, they won’t need a whole of market option to achieve accumulation of assets. There is no need to charge a fee and advisers can continue to receive commission. Clients with money will receive a service-led, fee-based offering, as their portfolios will need to be continually monitored to make sure they fit the right risk profiles.”

By having two distinct categories, as Chamberlain suggests, advisers get around the problem of potentially upsetting existing clients who, despite being loyal with a reasonable amount of wealth, may fall into a lower level of service simply because they do not have as much money as some other clients.

Chamberlain says the labels advisers choose for each grade is important: “Put yourself in your clients’ shoes: how would you feel being classified as a D-list client?”