Skandia’s Jeremy Mugridge explains how segmenting your proposition can help you choose the most suitable platforms for your clients.

Where a platform solution is appropriate for a client, the process of selecting the solution that will best meet their needs is not easy. One way to overcome this is segmenting your proposition into a number of distinct service levels.

But first, let’s remind ourselves of what the FSA expects when selecting a platform:
‘We expect firms to undertake due diligence on the platform[s] they intend to use to help ensure the selection is suitable for clients. This may involve client segmentation and using more than one platform to deliver different services to different types of client.’ FSA Investment Advice and Platforms: Project Findings, March 2010.

We think you should start your segmentation process with a clean sheet of paper. To begin with, why not decide how you want to segment your proposition, regardless of your existing client bank? The propositions you might develop will, of course, be heavily influenced by your understanding of what clients want, and will also take into account the skills available within your firm and where you want to take your business in the future.

As an example of how this might work, we have outlined four sample service propositions, each accompanied by an example adviser remuneration model (see box, opposite).

Having defined your service propositions, you now need to select the platform that is best equipped to deliver each service level. It is important to remember there could be service levels where a platform is not required. Where a platform solution is appropriate, this could be a single platform, or most likely, you may need to partner with more than one platform. Recent FSA musings lead us to believe that although one platform per adviser business is possible, it will be difficult to justify in practice.

Once you have determined your service propositions and completed your platform due diligence, you will need to work closely with each of your clients to agree which service level best meets their needs. Too many advisers currently use the size of the client’s wallet to determine their service level. If you turned up to the airport to buy a ticket, you would not expect to be asked how much you earn to determine whether you fly economy, business class or first class. So why should a client’s service level be determined by the size of their investment? After all, it is what the client wants that is key.

It is also worth remembering that if a client does not require any of your newly defined service propositions, you may need to consider losing them as a client, rather than trying to offer an alternative service level that you are unable to deliver profitably.

Taking the time to segment your service proposition will give you greater control over the future of your business, and will help you deliver a level of service and a charging structure that meets the needs and expectations of your clients. It will also help to keep you on the right side of the regulator, which can’t be a bad thing.

Sample service propositions

Service level 1

This service level is aimed at a segment of clients that just want you to set up an investment for them but don’t require any ongoing advice. The client will be either happy to manage the portfolio themselves or they may choose to invest in risk controlled funds.

Initial fee:    up to 3%*
Annual fee:    0%

Service level 2

This meets the needs of those clients that have a need for ongoing financial advice but want to keep the overall costs to a minimum. Their portfolios could include lower cost tracker funds and although they require an annual review, this can be posted to them, rather than being face to face. Using pre-defined portfolios could be a good way of dealing with these clients.

Initial fee:    up to 3%*
Annual fee:    0.5% (0.35% portfolio management and 0.15% portfolio review)

Service level 3

These clients want to invest predominantly in actively managed funds but are still somewhat price conscious, so pre-defined portfolios constructed from a platform fund range could be a good way of managing their money. They have a need for ongoing communication and a face-to-face annual review will be required.

Initial fee:    up to 3%*
Annual fee:    0.75% annual fee (0.50% portfolio management and 0.25% portfolio review)

Service level 4

This offering is aimed at those clients requiring a tailored and highly personal level of service. They require access to a wide range of actively managed funds and may also want to include other wider investment assets outside of a platform fund range. The portfolio that you construct will be bespoke to them and they will require a face to face meeting at least twice a year to review their portfolio(s).

Initial fee:    up to 3%*
Annual fee:    1.00% annual fee (0.65% portfolio management and 0.35% portfolio review)

*Initial fee menu

• 1% risk-profiling interpretation
  
• 0.5% strategic asset allocation
  
• 0.5% tactical asset allocation
  
• 1% fund selection
  

The initial fee that a client pays will depend on the level of initial advice that they require.