Do you segment your clients beyond asset amounts?

We have written many times in the past about the importance of client segmentation. In this latest of our “12 StepChanges to a Better Business” series, we are going to explain how we work with adviser firms to assist them in completing structured and effective client segmentation.

As recently as January 2019, we wrote here about why different people want (and deserve) different things. Segmentation enables you to identify groups of likeminded clients or clients of equal value, and to then deliver differentiated services that meet their needs. We have worked with a number of firms who had previously felt that they had this task completed already, having segmented their clients by assets under management only. We feel that this is only one aspect of a multi-dimensional view that is needed.

When StepChange works with advice firms on their segmentation approach, we follow four main steps as part of the process.


Identify the relevant factors

As mentioned above, assets under management are only one factor to be considered. There is a need to identify each of the other relevant factors to be considered, some of which may be subjective factors. These might include;

  • Asset amounts
  • Current recurring income levels
  • Current services used (cashflow planning, rebalancing etc.)
  • Future potential of client
  • Business introduction value (referrals)
  • Number of products held
  • Age
  • Whether you enjoy working with the client


Apply a weighting to each factor

Some factors are more valuable than others. To smooth this out and ensure that greater value is placed on the appropriate values, a weighting system for the different factors needs to be developed. This will help you ensure that the most valuable clients (as identified by the factors you deem most valuable) end up in your “gold” segment.


Score the clients

The next step is to score all of your clients based upon your chosen factors and their weightings. Some of this can be done with downloaded information from providers / your CRM system. Some of this has to be done by reviewing each individual client. Having a robust and easy to use system for this is probably the greatest benefit that we bring to advisers! Your clients can now be allocated to their correct segment, based upon this rigorous exercise as opposed to gut feel…


Deal with exceptions

There will always be exceptions. If lots of clients emerge as exceptions and clearly in the wrong segment, this suggests your factors and/or weightings are not quite right and need to be revisited. If you have a small number of exceptions, which is always to be expected, treat them as that – exceptions. You can of course manually re-allocate a client to a different segment based upon your own business judgement.


Structured and rigorous completion of your segmentation will result in you providing the most appropriate level of service to your different clients. At StepChange, we can help you to achieve this important result.

“So, can you tell me please how you charge”?

There’s a lot of work being done at the moment by financial planning firms in the Irish market in the broad area of charging for services delivered. Firms are reviewing the services delivered to clients and are working out how best to be paid for those services. This opens up a number of areas; fees v commission, how much to charge, how to charge, justifying charges etc etc.

We end up having lots of interesting and thoughtful conversations with financial planners that can be quite illuminating. When working with these firms on their Client Value Propositions, we spend quite a bit of time looking at the services delivered and how these are paid for. We are looking to develop the remuneration model of the future for the business. However as part of this, we want to understand the starting point – how the business is operating today in this area. To get clarity on this, we ask how the following question is replied to, when posed by a potential client,

“Can you tell me please how you charge?”

We get a quite a variety of responses!


We don’t charge

Yes, we have heard this one! This of course simply makes no sense. Nobody works for nothing, and clients have no expectation that you should work for nothing. Potential clients at best are simply confused by this answer and at worst are hugely suspicious of this answer. Where’s the catch? What am I missing? How can there be any value in what you are providing to me, if you are providing it for nothing?

Of all the potential responses, this one certainly takes the biscuit in terms of being the one to avoid…


You don’t pay us, we get paid commission

When advisers are being very candid, it’s apparent that this one is still trotted out quite frequently. For many of the reasons mentioned above, I have a real problem with this response. I also have a problem with it as it is simply not true. The customer always pays – fact. Without further explanation, this also positions the adviser as a price taker, and whose remuneration is solely dependent on the sale of a product. More suspicion for the customer – do I need this product? Why am I being sold this product etc.?

I am not for one minute decrying commission as a method of payment. It makes sense in so many situations. However that is the way it should be positioned – simply as a method of payment and not where the product is seen as the driver for you to be paid.


We charge 50bps on all monies invested

We’re moving into more positive territory now – at least with this response you have your own developed pricing approach. A thesis could be written on the differences and comparative benefits of AUM pricing v flat fees v retainers etc., but that is for another day.

The challenge I have with this approach is that it doesn’t make sense to me that all clients are charged the same amount. Because all clients are different and need and deserve different things and services.  Some clients need to meet you quarterly, some once a year. Many embrace cashflow, some don’t. Why are they all charged the same, when they place completely different levels of demand on your time and expertise?

I’m not proposing a unique charging structure for every client, but the approach below seems much more appropriate to me.


We charge based on value delivered

Can there really be any other approach? Clients seek the services of financial advisers today to help them address a very broad range of financial challenges. For some, they have a single, specific challenge. For others, they want to make better use of their financial resources or improve their relationship with their money. For others again, they want a very broad service around establishing life goals and then understanding what is needed to bring those goals within reach through careful planning.

All very different requirements and delivering different levels of value. How can you not charge differently for each of these?


How do you answer the questions “Can you tell me how you charge?”, and how will you answer it in future?

Money always moves when life is in transition

Credit to Stephen Browne, Voyant

At the Power of Financial Planning conference in the UK last year, Mitch Anthony said, “Money always moves when life is in transition”. This quote really hit home as a central theme of the life changing impact that you can have as a financial planner, and how you are so powerfully positioned in comparison to other professionals who are employed by your clients.


All our lives go through a series of “transitions”

While of course we can trace life events (or instead call them transitions) right back to birth, for the sake of financial planning we can start with transitioning from being a student to working. Transitions are those significant life events that cause a relatively significant change in your life. Each of these changes will have a fundamental impact on your client’s financial situation and include the likes of,

  • A new job: Usually this will result in an income increase (hopefully!) and probably a change in benefits.
  • Marriage: A very significant financial change where your client and their better half marry their fortunes together. Also now their financial goals and needs substantially change.
  • Moving House: A new home usually results in new debt and changed regular expenditure.
  • Children: Apart from the obvious immediate costs, your client’s thoughts will soon turn to increased living costs and future education costs etc.
  • Retirement: A significant financial event as the income tap turns off and it’s time to live off savings.
  • Death: This could be your client’s death or the death of their spouse or parent. Each of these events will have a significant financial impact.
  • Other events: And then there lots of other possible events – buying a holiday home, a significant gift for children, the world tour, winning the lotto or maybe a divorce! Whatever it might be, there will be a significant financial impact.

The point to remember is that every time there’s an event, money moves. Think about it. The question is, will you be the one assisting its transition?


Transitions deepen relationships and create opportunities

The good news for planners using cashflow planning software such as Voyant is that you are the key professional relationship for your clients before, at and after each of these transitions. That is because you are the person managing the client’s timeline, preparing for each of these life events and then helping them at the time of transition. No other professional enjoys this trusted position. Your client’s solicitor is consulted when the event is looming and they need legal advice. The same applies to the client’s accountant – their expertise is sought as the event draws near.

However using cashflow planning, the financial planner is the one that is helping to plan for these transitions. You are the one helping your clients to envision their future life, what they want and how they want their life to plan out. You are capturing all of these goals, desires and events in their timeline. You then help them draw up a financial battle plan to empower them to life the life they want. So, when they actually come to that major life event, their financial situation is an enabler rather than a problem. You are the person that is helping them develop a clear financial strategy for their life, giving them clarity and confidence to live a life free from financial anxiety.

Isn’t it funny that while products will be needed as a result of many of these events, these are simply vehicles to drive the plan. The value that you have provided is helping your client to live their life, to move their money wisely in preparation for and during each of the transitions throughout their lives. Is it the product that your clients will be thankful for or the realisation of the life they always wanted to live? I think you know the answer to that one… The added benefit is that you will also be plotting future business for yourself as your client plans for each of their life transitions. As the financial life planner, it’ll be you who will be there when the money moves.

What questions are you most often asked?

Financial planning is a fairly simple concept. There, I’ve said it! It is at least in the eyes of clients, who consider it broadly as sorting out their money stuff. Of course, effective financial planning is anything but simple. It takes a lot of expertise, talent and a really good process to transform the financial lives of your clients.

Towards the end of last year, FT Money carried out a piece of research among 300 UK clients of financial advisers, with the aim of uncovering their most common questions and the solutions that advisers are offering. The survey results were quite insightful and would likely be relatively similar if carried out in Ireland.

For a start, the top 10 issues that clients want to discuss with their advisers are in the following areas,

  • Retirement/pension planning
  • Tax planning
  • Brexit/political uncertainty
  • Inheritance tax
  • Future financial planning
  • Investment returns/dividends
  • Portfolio review/diversification
  • Global politics/likelihood of market crash
  • Pension drawdown
  • Pension transfer

Maybe no great surprises in the above? It is interesting though that there is nothing directly relating to protection of wealth in there – does financial security fade into the background during times of economic growth?

However, there were four questions that featured frequently in the concerns of clients – do they reflect the conversations that you are having with your clients?


Can I afford to retire?

This was the number one question that FT readers wanted to discuss with an adviser, with more than 20 per cent of respondents naming retirement and pension planning as their top concern. With state pensions providing only basic subsistence support to people, clients are rightly focused on how they will live when their income earning days are behind them. Retirement planning is a critical element of financial planning today through both the accumulation and decumulation phases of life. No surprises here!


How can I pay less tax?

Tax planning was cited by over 17 per cent of readers as a topic they wanted to discuss with a financial adviser. Many financial planners today are expert in tax matters and indeed many of you have additional taxation specific qualifications. This all makes a huge amount of sense as tax is a significant drag on wealth accumulation and good tax advice has a huge impact. Being a personal tax expert is a necessary requirement for advisers today.

This is an area of potential improvement for some advisers. Do you shy away from giving tax advice and guide your clients towards an accountant or tax adviser? Is this always the right approach? Can you really give expert financial planning advice without being a personal tax expert? I’m not so sure…


How can I reduce the impact of inheritance tax?

In addition to general concerns about tax, inheritance tax (IHT) was also a key, specific concern for readers. Although only 5 per cent of estates nationally (in UK) pay the tax, many readers nevertheless fear the impact of IHT — and need an adviser’s help to understand the system.

Of course you are all aware of how penal the Irish IHT system is, with thresholds slashed since the economic crash and IHT rates increased. When you layer increased wealth over the last decade and the recovery of property values, IHT can take a big chunk out of estates. There are ways of reducing these tax bills – you play a really valuable role in helping your clients to take advantage of them.


How will Brexit impact my finances?

Obviously this topic is not going to be of such concern to Irish clients. What it does demonstrate though is that clients rightly worry about significant external events beyond their control. One of the most important roles for you as a financial planner is to reassure clients and to keep them focused on the plan. You are all aware that irrational behaviour by investors is often the single biggest drag on growing wealth. You are the voice of reason, helping clients to keep a long-term perspective.


While these may be the most common questions that clients ask, one important point comes to the surface. The questions that clients have are about themselves and their money, not about the products that they hold. This further confirms the value that you add is as an expert financial guide… and not as someone who chooses the best products and times the markets.

Are you ready to answer the big questions of your clients?

How good are your review meetings?

As more and more advisers shift the focus in their client interactions away from products and more towards a broader and more valuable financial planning proposition, the profile of their income is also shifting from a reliance on initial commissions to a flatter and ultimately more valuable ongoing income stream. To justify this recurring income stream, regular review meetings with clients are becoming far more important events.

It’s not too long ago that I used to wince when hearing about the review meetings of some advisers, where the client opting not to have a meeting was seen as a victory. The review meetings of these advisers were haphazard and added little value to clients. Thankfully these are mostly in the past.

One of the challenges for advisers is that they hear so much about the importance of developing an engaging Client Value Proposition. As a result, a lot of time and effort has gone into identifying where clients are experiencing value, the advice process that is being used, the client services that are provided and indeed how all of this should be paid for by clients. This is great, but the focus tends to be around the initial (year 1) engagement with clients.

I can tell you as the client of a financial planner that I can’t at this stage remember our initial interaction. But I remember clearly our last review meeting, and I’m also very clear about what we will discuss at our next meeting. And that’s the way it should be. The initial advice stage set me off on the right path; the review meetings keep me on it.

With some advisers, the focus is heavily weighted on attracting new clients, at the expense of minding the existing ones.  However having a brilliant review meeting is the means by which you’ll lock in those clients year after year, and as a result enjoy an ongoing income stream from the clients.

As a core part of your initial engagement with a new client, it makes sense to explain to them in detail what will happen every year into the future. It’s not enough for review meetings to be positioned as a “by the way” 10-second conversation at the end of the initial product implementation.

What should a review meeting include? Of course the financial plan should be central to the meeting – have the client’s life goals changed, do they want to explore a different future? Have they the financial capacity to live the life they want? There is also the fairly standard (and necessary) tasks of reviewing a client’s portfolio, getting up to date values and potentially even writing a short review report. And you definitely should explore further protection needs based on changing circumstances etc.

However the real opportunity to demonstrate your value on an ongoing basis to clients rests outside of the traditional review meeting agenda. Why not take a little extra time and set out for your clients some financial benefits that you’ve delivered to them such as;

  • Their wealth growth.
  • Their improved future capability to live the life they want.
  • The growth in actual euros of their investment portfolio.
  • The tax saved as a result of their pension plan and any other tax efficient policies in actual euros.
  • The actual money saved in euros as a result of a protection review you carried out previously.

Now your ongoing fee / trail commission starts to look very small! However there’s still a lot more you can do at these review meetings to demonstrate further value to you clients.

  • Help your clients with their household budgeting. This is an area that many clients continue to struggle with. By getting clients on the right path here and reviewing it with them, you can add enormous value to them.
  • Reviewing future cashflow plans with your clients each year adds tremendous value. This can completely change the conversation, enable you to look at “what if” scenarios and approach the client’s financial affairs in a very engaging and collaborative way.
  • Talk to them about their broader financial needs where you don’t provide the solutions. You can add value by tapping them into your network of solicitors (for their will or enduring power of attorney), tax advisers (tax advice) or accountants. Now you’re the person centred right at the hub of their financial affairs.

Review meetings are also the opportunity to remind your clients of the work and interactions you’ve had with them throughout the year – the rebalancing of their portfolio that you carried out, the interim meetings you had, seminars you invited them to, the content you sent them etc. How can a client question your ongoing fees when they realise that you are actually providing value to them right throughout the year?

So place review meetings at the heart of your proposition. Make them memorable and ensure your clients come back to you year after year.