SUMMARY: Managing financial relationships takes a lot of planning. Figuring out how to serve both small and large clients requires careful thought. By focusing on client segmentation, you can strike a perfect balance of service that is right-sized for your clients — which can increase client satisfaction and long-term profitability.
As financial advisors, we work with people. We focus on fostering great relationships. Our goal is to enable all clients — both big and small — to scale up and grow.
But some clients clearly offer greater profitability than others. Most advisors can see an easy path to making a $5 million client profitable — but what about those whose net worth is just $500,000? Should you only focus on the more profitable relationships?
The idea of client segmentation speaks to that question and isn’t new. Yes, many advisors miss the mark in how they think about client segmentation and how they implement it in their own practices. We hope that these tips, which are based on my recent conversation with Jon Mauney, will help you move your book in the right direction for you. For a deeper dive into this topic (as well as other fun stuff, like Jon’s recent favorite books), head over to the podcast episode!
[2:38] Jon’s career arc, from being a consultant at IBM to working in a client-facing role at Betterment
[7:34] What client segmentation is and how it benefits financial advisors
[11:00] The 80/20 principle and how client segmentation determines touch points with clients
[16:27] The importance of considering lifetime value in evaluating your relationships with clients
[22:02] Five metrics with which you can segment your clients
[26:41] The value of automating the non-human components of your business
When forced into a choice between a $5 million client and a $500,000 one, most advisors would choose the larger client because a bigger account can generate higher revenue. However, looking at a client’s current account balance in a vacuum would do you a disservice. Done right, client segmentation goes beyond account numbers to help you capture high potential and younger clients (as well as clients who are just plain enjoyable).
Every large account was, at some point in the past, a small account. For many families, $500,000 can easily turn into much more money with enough time, sound strategy, and timely advice. To understand how smaller clients could fit into your portfolio, look at a client’s lifetime value instead of their short-term profitability. By taking a bird’s-eye view of clients, you see how certain smaller accounts can eventually turn a profit.
Undeniably, younger generations have tremendous upside when it comes to their future earning potential. It is true that today, many Millennials or Gen X’ers don’t have impressive investable assets. However, the Great Wealth Transfer will inevitably re-allocate resources from older generations to younger ones. You can build these relationships early through client segmentation.
Rather than wait for Millennials to acquire enough wealth to turn a profit, you can take them on now and keep your eye on their long-term potential. Even if some of the more “traditional” accounts may boast higher balances today, eventually clients with lower account balances may surpass them (especially as the retirees enter the decumulation phase of their lives).
When managing clients, intuition alone doesn’t always cut it, and current account balance is not enough to give you the full picture. To foster effective client segmentation, consider using these five categories as starting points.
From those categories, the segmentation method is straightforward. Input these categories into an Excel sheet alongside your clients. Score them from one to five in each category. Finally, add up the score by client and see how they rank.
Consider using the following scorecard as a reference:
By using this method, you can take a data-driven approach that combines tangible and intangible categories. Depending on the final score, you can determine how much attention each client receives. Keep in mind that this scoring should be revisited periodically as client circumstances change and your relationship with them evolves.
What happens if some of your current clients score a disappointing F?
One option is to simply end the working relationship. There are many ways to do that, and your worst-fit client could well be someone else’s dream. Making an introduction and approaching the “graduation” thoughtfully could leave both sides better off.
But what if you would rather keep the “F” client and simply modify the work you do for them?
That is a possibility, and the modification could involve either increasing revenues or decreasing costs. To raise revenues, you would need to charge higher rates. This may not be a viable option if the client is brand-new to you, or if they cannot afford a higher fee. Alternatively, you can reduce costs by changing what you do for the client. Consider providing fewer services, changing their platform to a lower-cost one, or implementing other cost-cutting strategies.
Either way, handle the conversation with care. You want to emphasize your continued commitment to their success while acknowledging necessary changes. For your favorite clients, there may be a viable way to define a new set of services and fees that satisfies both parties, but this path has its risks as well.
One-size-fits-all approaches seldom work for anything — especially in finance. High-paying clients often come with a level of complexity that calls for extra care. It doesn’t mean you must fire your smaller clients, but at some point you need to evaluate the anatomy of your practice.
By making client segmentation an integral part of your strategy, you can increase short-term and long-term profitability. After all, it sometimes makes perfect sense to serve clients on the lower end of the financial spectrum. You just have to remember to allocate your resources and systems efficiently to remain profitable. If you develop a scalable, cost-effective solution that keeps you serving your ideal audience, more power to you!
Want to learn more about client segmentation and relationship management? Check out our podcast episode with Jon Mauney, who heads the Betterment for Advisors team at Betterment, for detailed tips and advice.