It might seem natural that financial advisors would give different kinds of clients different kinds of service. But that’s simply not the case.
“Advisors tend to give many of their clients the same level of attention,” says Abby Salameh, chief marketing officer at CAIS, an alternative investments platform for financial advisors. “It’s a strain on bandwidth. You need to spend the right amount of time on the right type of client for efficiency and profitability using client segmentation. But it’s an underused tool.”
Client...
It might seem natural that financial advisors would give different kinds of clients different kinds of service. But that’s simply not the case.
Abby Salameh
Photo Illustration by Staff; courtesy of CAIS
“Advisors tend to give many of their clients the same level of attention,” says Abby Salameh, chief marketing officer at CAIS, an alternative investments platform for financial advisors. “It’s a strain on bandwidth. You need to spend the right amount of time on the right type of client for efficiency and profitability using client segmentation. But it’s an underused tool.”
Client segmentation divides clients into different tiers based on a set of criteria that best matches the extent of services that are offered with the client’s value to the firm.
More firms need to segment clients to boost their bottom line, agrees industry consultant Eliza DePardo.
“Understanding how client type contributes to your firm’s financial performance is a critical factor in helping to shape a client base over the years ahead,” says DePardo, co-founder and former director of research firm FA Insight, which was acquired by TD Ameritrade. “It’s also a foundational step to support the right mix of services and pricing by segment to ensure profitability.”
“Segment for Success,” a Fidelity Investments research study, found that firms that segment their client base had more assets under management, more growth in AUM, and more clients with at least $1 million than firms that didn’t segment. (For a primer on how to segment, see the Fidelity study titled “Four Steps to Successful Client Segmentation.”)
“Segmenting provides an objective measure of how to profitably serve clients, regardless of size or revenue model,” says Lisa Crafford, head of business consulting at BNY Mellon Pershing. “It also allows firms to stay ahead of talent needs, such as when and who to hire, by tracking growth and understanding how many hours it takes to serve each segment.”
Advisors need to define their ideal clients and spend time and resources on finding those who fit that profile and match services with their needs to align with the value these clients provide the firm.
New York-based wealth management firm Wealthspire Advisors, for example, divides its clients into three segments: “Pathways,” for younger clients who might be described as Henrys (high earners, not rich yet) with investible assets between approximately $100,000 and $1 million; a standard service tier for clients with between $1 million and $20 million in investible assets; and an upper-end segment for wealthy family office clients that offers more customized services such as trust and estate planning, family governance, and intergenerational education and planning.
“You want the best alignment of delivery and services with client needs,” says Wealthspire Chief Operating Officer Eric Sontag. “You want to improve the client experience and also operate more efficiently and profitably.”
Eric Sontag
Photo Illustration by Staff; courtesy of Wealthspire Advisors
Setting up Pathways for younger clients allows Wealthspire to attract and service younger clients the firm otherwise would not consider a target market, Sontag explains. “These are clients who are in an accumulation phase of building wealth and are fee-sensitive.”
To service this segment profitably, Wealthspire combines Charles Schwab ’s
CAIS’ Salameh, who was chief marketing officer for RIAs Private Advisor Group and Hightower Advisors, says advisors should begin the segmentation process by doing a profit analysis on clients, using criteria such as how much revenue clients generate for the firm, their “connectivity” as referral sources for new clients, and how much assets clients hold outside the firm.
AUM is another commonly used criteria, although some firms, including The Colony Group, choose to segment by matching service to the complexity of a client’s needs.
“Segmenting by client size is outdated,” says Michael Nathanson, CEO of Boston-based Colony. “You only achieve optimal results with comprehensive financial planning. Segmenting should be about the specific needs of the client.”
Michael Nathanson
Photo Illustration by Staff; courtesy of The Colony Group
Colony segments groups of clients “that have common needs because of their shared circumstances,” Nathanson says. Those cohorts include current and former business executives, business owners and entrepreneurs, professional athletes, entertainers, and private-equity and venture capital investors.
These segments receive specifically focused advice on issues of interest to them, such as concentrated equity positions, employment agreements, equity incentives, and planning for liquidity events.
Nathanson says this approach has helped Colony attract and retain clients: “It makes a meaningful difference to them, and they tell their friends and colleagues.”
No matter how firms segment, they should create a “service matrix,” Pershing’s Crafford says, to understand what they are going to do, who is going to do it, and how often they are going to do it. That, in turn, will help RIAs “determine capacity, profitability, costs, and which clients belong in which segment.”
Like most initiatives, segmenting is easier said than done.
“It’s not that simple, especially when you’ve had some mergers,” says Brett Bernstein, CEO of XML Financial Group in Rockville, Md. “Different firms have different cultures, and advisors from the acquired firm may be used to giving a different level of service for the same type of client than what the acquirer is giving.”
Bernstein also notes that advisors who have painstakingly built a book of business may resent being told to cut back on providing services to longtime clients.
“There’s a psychological component for advisors and also a financial one because they may be afraid of losing business,” he explains. “But RIAs tend to over-service, and at the end of the day you have to establish that the service level for each client is aligned with profitability.”
Wealthspire’s Sontag also notes that advisors may be reluctant to fully endorse segmentation.
“It’s a mixture of art and science,” he says. “It can be a struggle to create a hard and fast set of rules. Limiting the interactions of an advisor with a client can be very challenging. One of the reasons advisors are in this business is to help people. Setting a maximum number of meetings with a client is not in their DNA.”
Nonetheless, to make the most effective use of advisors’ time, it’s “really important” for RIAs to establish a client segmentation discipline, CAIS’s Salameh says.
Firms embarking on the process should consider investing in a high-quality customer relationship management system to optimize data analytics for clients. Advisors should make sure they know their best clients well enough to offer perks, such as birthday presents, they will enjoy. And don’t be afraid to reduce services or time spent with unprofitable clients: Segmentation is often less about which clients receive more services than about which clients advisors must spend less resources on.
Segmentation doesn’t have to be complicated, Pershing’s Crafford says. “Start simple, build on what you have,” she counsels. “If it’s too complicated, you won’t be able to implement.”
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