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Old segmentation models 'archaic'

Segmenting clients solely on revenue is “archaic” because it fails to properly explain a client's profitability, says IRESS's Michael Kinens.

 Any discussion of a client's value should include the cost they impose on the adviser's business as well as the revenue they bring in, said Mr Kinens.

For example, a supposed $20,000 client may not be bringing in anywhere near that much after servicing costs are brought into consideration, he said.

The back-office servicing costs of a high-revenue client (ie, administration staff spending hours on the phone to a fund manager on their behalf each week) are not often apparent to the adviser – and even if they are, they may not be recorded, said Mr Kinens.

“I rarely come across businesses that could say to me, hand on heart, 'I know exactly what's going on in my business',” said Mr Kinens.

But fortunately for advisers, dealer groups have been forced to provide them with the tools they need to understand their clients' profitability as part of the FOFA reforms, says Mr Kinens.

The fee disclosure statement (FDS) regime will require advisers to itemise each service a client received in the last year.


“But that level of well-defined process really doesn't exist in too many businesses. And as a result they're having to go back after the event to identify 'What did we do for this guy?',” he said.

So the while the imposition of fee disclosure will benefit advisers over the long-term, they will have to “pay the penalty” for years of poor record-keeping in the short term, said Mr Kinens.