The significance of segmentation

Helen Morrissey talks to Jeremy Mugridge about the importance of client segmentation

A recent Skandia survey showed only 27% of advisers were segmenting their client base according to client need. Why do you think this is?

We are talking about the move from the old world of advice towards the new. In the old world, the providers did a lot for the advisers in terms of providing inbuilt commissions that effectively dictated what an adviser could charge a client. Many advisers have found this led to a degree of cross subsidisation whereby wealthier clients effectively subsidised less wealthy ones. In the new order of things, advisers cannot allow this to happen if they want to offer value for money and so they need to segment their client base.

The whole area of segmentation is still new but it is being driven by clients who want to be able to choose the service level that suits them best. Advisers should see this as a real opportunity to grow their business.

How should advisers look to go about segmenting their client base?

The adviser needs to look at their business model and ask themselves what they want from it. This will enable them to go to the client and say these are the different service levels we offer and this is how much they will cost to provide. This enables the adviser to work closely with their client to develop the best way of progressing.

You talk about segmenting client bases according to need. What other ways can advisers look to segment?

There are two main ways. The first way is to do it according to how much money a client has. This is a reasonable proxy for client need but it is very blunt and requires too many assumptions, especially as the way forward is very much about providing a tailored service.

The other way of segmenting is according to investment need. What is it that the client requires? Is it a low cost tracker portfolio or a bespoke portfolio of actively managed funds?

However, while this is important it is just one part of what the client is expecting. Advisers should be offering a range of service propositions and letting the client choose what is best for them. You should never presume you know what the client wants.

How far down the road do you think advisers are when it comes to preparing for RDR?

We work closely with advisers to help them prepare for the RDR and the answer is that it depends very much on the adviser. Some are already there and offer a fully segmented proposition and fee structure. Others are at different points further down the road. According to our research 27% of advisers were segmenting according to client need but a further 30% were segmenting according to wealth so it is good to see that advisers are looking at this area. 85% of those who took part in the survey said it was something they would be doing more of and this is both good for them and their clients.

It is very easy to talk about segmentation but it is not so easy to do it. The key challenge for advisers is to look hard at their business and think about what it is they are best at. They then need to make sure they price their service in a way that enables them to build a sustainable business that offers the client value for money.

What should advisers do once they have segmented their client base?

Once segmentation is complete it is important the adviser chooses a platform that enables them to meet their needs. If advisers do thorough due diligence on the platform market they will find some platforms suit one section of clients but not another. The FSA’s recent paper on platforms and investment advice said firms are expected to ensure they choose the most suitable platform for their clients so it is something all advisers need to take on board.

Jeremy Mugridge is platform marketing manager at Skandia