How to subsegment your clients

Client segmentation has been pushed up the regulatory agenda by Product Intervention and Product Governance Sourcebook (Prod) rules, which came into force on 3 January 2018. Here is what the experts think

Client segmentation has been pushed up the regulatory agenda by Product Intervention and Product Governance Sourcebook (Prod) rules, which came into force on 3 January last year.

These set out that all firms should ensure they offer good product governance. This applies to client segmentation, as products should meet the needs of target markets.

Most advisers have a process for client segmentation, but the detail of these processes can vary a lot from firm to firm. Indeed, some seemingly straightforward segmentation approaches, such as segmenting clients purely by assets, might now be frowned upon by the regulator as being too simplistic.

At the end of last year, regulatory consultant Rory Percival urged advisers to create segments within segments. For example, a firm that only has clients in retirement can still subsegment, by income for instance.

Below, two advisers explain how they subsegment: by engagement with investments, platform suitability and product needs.

Client segmentation has been pushed up the regulatory agenda by Product Intervention and Product Governance Sourcebook (Prod) rules, which came into force on 3 January last year.

These set out that all firms should ensure they offer good product governance. This applies to client segmentation, as products should meet the needs of target markets.

Most advisers have a process for client segmentation, but the detail of these processes can vary a lot from firm to firm. Indeed, some seemingly straightforward segmentation approaches, such as segmenting clients purely by assets, might now be frowned upon by the regulator as being too simplistic.

At the end of last year, regulatory consultant Rory Percival urged advisers to create segments within segments. For example, a firm that only has clients in retirement can still subsegment, by income for instance.

Below, two advisers explain how they subsegment: by engagement with investments, platform suitability and product needs.

Darren says...

A lot of our clients wanted regular updates, to know what was going on with their portfolios. They wanted us to basically make decisions but to still consult with them. That led us to design our proactive service.

Every quarter we run our own investment committee, assessing whether we believe the recommendations and the funds we are using remain correct for that particular target market, which fulfils Prod effectively.

We then have our bespoke reactive clients. They want to be a bit more hands on in terms of their investments. They might need slightly different products such as stakeholder pensions.

We have been running a pro-ethical category for two years. Again Prod comes through because we are checking on a quarterly basis whether we are comfortable the funds are right for our target market.

We charge 1% ongoing for proactive and pro-ethical services, but for that we actually do five reviews a year. Clients get four written quarterly reviews in their hand. That means doing the ethical screening all over again, checking all the policies and ensuring no protections have been removed.

Then there is the full financial planning annual review with the cashflow modelling, ISA wrapping, pension wrapping and capital gains tax calculations. We will take them to a lawyer if needs be; everything goes into that 1%. 

 

We survey our clients annually on what they want to see in their portfolios from an ethical point of view. Through basing our research over the next year around this technical situation, we are taking Prod even further; not just focusing on the product but actually looking at the underlying ethos of those products. This is where segmentation is so useful. You could not do that if you were not segmenting.

With platforms, we have our own set questions for which we ask clients to set the criteria. But we pay for the Adviser Asset due diligence tool, which scans the platforms it can access, which is nearly all of them, and gives a breakdown of a hypothetical cost scenario for a client.

Because we have clients segmented, we know exactly what products they are likely to hold and how much money they are likely to have. We also know how many switches we are likely to do throughout the year, so we have a quick and clear indication of what platforms are right for the client at any given time.

Darren Lloyd Thomas is managing director at Thomas & Thomas Finance.

Anna says...

We have always segmented, mostly around type of client. One group tends to be fully delegated, mostly retired. The other is entrepreneurial and prefers to sit with us going through their complex affairs and pulling it all together. They are more involved and hands on than the delegators. They have a clear goal and it is a collaborative approach.

We then sub-segment. We could have one delegator client who really does not like numbers, so almost by necessity they want to delegate. What they are looking for is a trusted home. They tend to be retired older clients or creatives.

The other type of delegators are very high net worth, and appoint us to take care of everything. This is not because they do not have the knowhow, but they do not need to look after it.

The regulator does not want us saying: ‘you’re super high net worth, which means you are on this service, so by default, you are suitable for this.’ We can fine-tune our service to make sure it dovetails into the client driving our decisions rather than a preconceived service proposition.

Platform selection comes down to the value the client gets from the overall cost. The regulator does not want you justifying a platform just because it has all-singing, all-dancing online access, when you have a client like one of our retired delegators who is never going to log on.

 

We have our core risk-rated portfolios and then non-core, which includes things like enterprise investment schemes, venture capital trusts or sector funds. We have clients at a higher end where we are doing angel investing. We had a client recently who wanted to invest in cannabis production, so we researched all of that for her.

We would not do that for one of our delegated, retired clients who is just looking to protect what they have. Through the non-core service, we can be bespoke, but with core we just go up and down the risk scale within mainstream, highly liquid funds on which we have done a lot of due diligence.

We are small enough to know all our clients. But as you scale up, you really need good customer relationship management and proper segmentation.

Anna Sofat is founding director at Addidi Wealth

We asked the profession and its experts to give us their views on this online.

Here is what they said:

Rory Percival:

'Prod is just the formalisation of good business practice (as is the case with much Financial Conduct Authority regulation). It is not bureaucratic nonsense to think about the clients you have and design investment propositions, platform selection and advisory services that work for your clients.'

Cromwellsbrain:

'Smaller firms tend to discuss with clients what they want, rather than put them in a box and provide a defined service. This meets the client-centric requirements, even if the service is not always neatly defined.'

Nicholas Pleasure:

I run a small practice. We chat to our clients, find out what they want, offer solutions, chat again and then agree what they want to do. I am not sure how these Prod rules fit into that.

Alan Lakey:

'No two firms operate in the same manner, advise in the same areas or have the same types of client. There are many types of firm where ‘full advice’ is a rarity and they service their clients’ requirements as opposed to the armchair theorist’s view of what the clients require.'

 

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