The new gold standard
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The new gold standard

Client segmentation is by no means a new concept in financial planning circles, but regulatory changes are transforming the way in which it is being implemented STORY / TIM STEWART


 Generally speaking, it makes good business sense to divide clients into categories (i.e. platinum, gold, silver or A, B, C) depending on how profitable they are to your practice.

You want to service your clients in line with their value to the business, the thinking goes.

But not everyone segments their clients, says Wayne Wilson, head of major financial advice software provider COIN.

“I would say that in all of the institutionally-owned licensees – or certainly in the vast majority of them – segmentation would be encouraged,” says Mr Wilson. However, there are likely to be many independent operators who haven’t yet adopted “that level of sophistication”, he adds.

Midwinter managing director Julian Plummer agrees that not all financial planners have a client segmentation model in place. Smaller practices are less likely to segment their client base because they tend to have fewer clients whom they know intimately, he says.

“But for larger practices with five or six advisers, it’s critical for them to know which clients are more important – particularly for administration staff,” says Mr Plummer.

Effective client segmentation can also mean a higher return on a practice’s market spend; higher customer retention; increased profit and business value; and (hopefully) less fluctuation in revenue, according to Mr Plummer.

But for Michael Kinens, senior business development executive at IRESS (the company behind XPLAN), dividing one’s practice up solely based on revenue or funds under management is a somewhat “archaic” process .

As far as Mr Kinens is concerned, the first thing a planner should ask is: ‘What constitutes a valuable client?’

Most advisers would answer the question in terms of the amount of revenue the client brings in. “But what’s the point of understanding the revenue that the client brings in unless you understand the cost that the client imposes on your business?” he asks.

For example, a client may well generate $20,000 in revenue, but if they call up every week and tie up administration staff for three hours then their value is diminished.

“Profitability means I know how much time I’m spending on that client and how much time my staff are spending on that client,” he says.

Mr Kinens has conducted analyses for dealer groups that use XPLAN and these often indicate that a ‘B’ or ‘C’ client is the most profitable in a practice – or, indeed, that an ‘A’ client sits at the bottom of the profitability list.

“I rarely come across businesses that can say to me, hand on heart, ‘I know exactly what’s going on in my business’,” he says.


The introduction of fee disclosure statements (FDSs) has given advisers the tools “to actually understand what client profitability looks like”, Mr Kinens continues.

In theory, practices can track the amount of revenue a client has provided, along with the services promised to them and the services that were actually delivered.

“That level of well-defined process really doesn’t exist in too many businesses. So they’re having to go back after the event to identify, ‘What did we do for this guy?’” he says.

Practices that are not prepared for the FDS regime will suffer as a result, Mr Kinens adds.
Modern practice segmentation will not be about pigeon-holing clients into an ‘A’ box that is based on them bringing in a “huge amount of revenue”, he says. Instead, clients will be divided up based on how they like to receive information – for example, whether they are numbers-oriented or more visual.

“The focus has moved away from segmentation based on revenue to segmenting clients based on how you want to service them,” says Mr Kinens.

Many planners have been working on developing client service packages since the release of the Ripoll report, according to My Adviser managing director Philippa Sheehan.

Now that advisers are a few years down the track with their service packages, there is a growing realisation that they need to segment their client bases by generation as well, says Ms Sheehan.

Older clients will want to receive their services in a different form from, say, Generation X clients.

Ms Sheehan points to recent research conducted by US consulting firm McKinsey & Company which found that only 27 per cent of consumers are communicating by voice, while 62 per cent are using email as well as social media.

“Older clients – for example, trustees of self-managed funds – probably want to see a paper-based newsletter, whereas your Gen Xs probably want it to be electronic,” she says.

But regardless of the generation being serviced, the key is to deliver what you promise. In fact, the introduction of the FDS regime could be an opportunity for advisers to demonstrate how they over-deliver, Ms Sheehan says.

“The FDS regime is going to change the financial planning industry for good. Clients will actually be able to see the great work that advisers are doing behind the scenes,” she says.
Similarly, FDSs will make it easier to shift a client ‘down’ a level in a practice’s service hierarchy.

Often it turns out the client is receiving far more in the way of service than they are paying for, she says.

“A lot of what a financial planner does is behind the scenes, and sometimes that means sitting on the phone to Centrelink for 50 minutes. It’s a good educational piece for the adviser and the client,” says Ms Sheehan.


According to Mr Plummer, one of the major challenges for advisers in the new regulatory environment will be aligning their client service agreement (CSA) with their client segmentation model.

In other words, advisers need to deliver clients the services they have been promised, or face the consequences down the track.

The CSA is the legal document clients are typically asked to sign when they agree to employ their adviser – and under the Future of Financial Advice (FOFA) reforms, the promises the CSA contains about the delivery of advice are now “baked in” to the Corporations Act, according to Mr Plummer.

This, he says, is “the biggest elephant in the room”.

“If an adviser has a disgruntled client, the first thing the client is going to go after is the advice. If your advice turns out to be sound, they will very quickly move on to your CSA,” says Mr Plummer.

“If you have not completed all the services outlined in your CSA, you’re going to have a bad time – because there may be a basis for litigation,” he adds.

Advisers have got to be realistic about the services they offer to each client segment, says Mr Plummer.

“It’s human nature to want to ‘over offer’,” he says, “but if you say you’re going to provide services in your CSA, you’ve got to make sure you deliver all of the services all of the time,” he says.

In the past it may have been possible to put clients in a ‘gold’ segment and then fail to deliver on the required services, says Mr Plummer.

However, because FOFA has shifted the emphasis towards the delivery of advice services, a failure to fulfil obligations “suddenly moves from a civil problem to an ASIC problem”, he says.

Advisers are also under pressure to produce a segmentation model that demonstrates continual value to the client in an era when clients are increasingly mobile.

While it may be relatively easy to sign up clients to an initial plan, it will be harder to get them to see the value of a continuing service with minor tweaks to the strategy, he says – especially in a fee-for-service environment.

Potential solutions might include an increased emphasis on research, performance updates, economic updates – solutions that are relevant to the client – and an emphasis on a lifestyle planning approach.

Finally, advisers may want to segment their clients depending on their educational needs.

“One of the things that has come in under FOFA that ASIC’s slipped through is the requirement that the adviser needs to ensure the client understands his advice,” says Mr Kinens.

“Segmentation could be about the clients who understand my advice, and the clients who need additional assistance with understanding it,” he says.

In the past, if a client was asked, ‘Why did you do that?’ an acceptable answer may have been, ‘I don’t know – my adviser told me to’, says Mr Kinens.

But that may be a problem now.

“Probably the best way to solve that is to make sure that you’re educating your clients,” Mr Kinens says. “Therefore, you need to segment on their level of understanding, which is all possible with the technology available.” «

The new gold standard
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