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Client segmentation: where do you draw the line?

I read this article yesterday which showed 38% of advisers were going to continue to service non-profitable clients in future, which is understandle – why get rid of a small number of clients who will become profitable clients in future – but dangerous if it gets out of control.

What’s the best business model for the post RDR world? Of course there’s more than one answer to that question but I bet they all include; a sound customer proposition; more efficiency; and a real understanding of profitability.

One strategy everyone seems to be adopting is client segmentation. From what I’m hearing, the market is fairly evenly split between advisers intending to focus only on profitable clients, and advisers intending to serve all their existing clients by matching different service levels to client needs.

Whichever road you go down, you’ll have some difficult decisions to make about where to draw the lines in your business model. Research suggests, on average, advisers are expecting to stop serving around one in four of their existing clients, with some aiming to reduce numbers by over half. This is pretty serious stuff.

Of course, focusing on profit sounds like good business sense, but actually determining client profitability is more complicated than it sounds.

You can start by considering some obvious factors such as a client’s income and wealth, and their requirements, but is that it? Is it that easy? Now, I’m no adviser, but I can see how it can get a bit tricky when you start considering some of the other factors.

What about family ties and the potential for inheritance? How about the possibility of future referrals through a client’s personal or professional connections? Are the potential opportunities you could get from a client in the future enough to persuade you to keep some sort of relationship with them now? Most advisers say their primary source of new clients is referrals – how do you make sure we keep that side of things going?

What about earning potential? Casting my mind back, I can just about remember my days as an undergraduate without a penny to my name. The banks bombarded me with offers for interest free overdrafts and a free railcard (remember them?! I hear they give out iPods these days!).

So, is it worth retaining clients who will lose you money in the short term because of their potential long-term value? If we look at other professions, many lawyers do pro bono work partly for this reason as well as the worthier one of acting for the greater good.

Then you’ve got to take into account the type of relationship and the history between you and your clients. Many advisers are close friends with their clients, with relationships going back over many years. I don’t know many advisers who want to even consider having that conversation with people they consider friends.

The list of things to think about goes on and on – and this is all before you’ve even determined if the client is willing to pay for the service you’re offering.

Looking at the cost side is perhaps the simpler place to start. With the help of technology, and a range of differently priced wealth propositions in the market, it’s now fairly straightforward to put together different service options based on your time and model these out to help put a few markers down. At its most basic level this will involve developing an understanding of each of their individual client’s servicing costs, both initially and on an on-going basis. Modelling this against potential future revenue stream provides a good starter for ten.

Quick, shameless plug – Aviva have developed a Fees-ability iPad app which is available for download now from the App store. It can help you see the impact on your business of changing a key service or charge, as well as modelling the effect of economic variables such as investment growth. It provides a pretty simple view of the world, but you have to start somewhere. If you have any feedback on how we could develop this I’d love to hear from you.

However you choose to segment, using technology can give you a solid basis for evaluating the future financial impact of each and every client on your business. From there, you just have to overlay that information with your own gut feeling and knowledge of your clients.

If you do that, I think you’ve got a solid foundation for a successful and profitable business in the years to come.

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