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The key to successful segmentation is a thoughtful analysis of your business, smart selection of clients, and a viable service platform to ensure clients who aren't on your A-list don't fall through the cracks. It used to be only a few firms had advisor report cards that outlined a book's profit and client details.

Today, more firms are making this information available to advisors. Yet many advisors do not request these reports, and many who receive them don't use them. A fundamental requirement of any business is a detailed understanding of current realities. You and your team should ask yourselves, How many clients do we have? Which ones are most profitable? How fast are we growing and in which areas? Are we particularly strong with a subset of clients? By doing basic analysis, you can answer these questions and thereby improve the profitability of your business.

Alternative segmentation

Too often, segmentation is done solely on the basis of AUM. But only revenue can help you make your mortgage payment or put food on the table. The top-revenue clients are your best clients. Russell Investments has found the following to be most important for advisors segmenting their business:


  • 1. 12-month revenue per client
  • 2. Client's profession/job
  • 3. Return on assets (ROA)
  • 4. Effort to serve

Most advisors can pinpoint their top 10 or 15 clients, but if you're going to segment your entire book, you need to understand exactly how much each client generates in revenue.

Many studies have quantified the cost to serve a HNW client, and the average is generally in the $4,000 to-$5,000 range. The numbers are slightly lower for non-HNW clients, but not significantly so. Any client paying you less than $5,000 is likely unprofitable.

ROA can give insight into how you're managing the overall business. For the majority of advisors, ROA declines as client assets fall. The common wisdom is the higher the client's AUM, the better the deal they get.

The reality is, top clients pay more on a percentage of assets than clients in the bottom half of the business. Too often, there are clients we do not pay enough attention to or are orphan accounts that make the business no money.

In our experience, if advisors can move their top fourth and fifth deciles of clients to an ROA of 1%, they can get rid of the bottom half and increase revenue at the
same time.

Your entire team should assess the amount of effort needed to serve each client, as there's often a significant disconnect between the perception of principal and junior advisors. This is often why principals are reluctant to disengage small, unprofitable clients. They never talk to these clients and assume they never call.
But this type of client often takes up a significant amount of a junior team member's time, which could be spent assisting the principal advisor with more profitable accounts.

Specialize to improve service

Another important data point is the client's profession. For the most part, the industry has done a poor job of specializing, even though most advisors agree that specialists make more money. However, most advisors don't direct their practice towards, for example, doctors or engineers.

The best businesses, regardless of industry, have a clear understanding of the clients they want to attract and the product and services they are going to deliver to those clients. Yet most advisors do not adopt this mindset.

Unfortunately, for many advisors, segmentation breaks down in practice. For example, D-list clients should only receive an hour of attention per year, and when they call, the response shouldn't be as prompt as it is for a C- or B-list client. But staff are wired to help clients, period. True, when a top client calls you may drop everything, but segmentation often doesn't work because there are too many segments to manage.

I suggest dividing your book into three segments:


  • Disengage
  • A-client
  • One-to-many

At minimum, the average mature book should disengage clients delivering less than $1,000 in revenue. Some clients with assets greater than $100,000 produce less than $1,000 in revenue — we even see clients with $500,000 or $750,000 falling into this category.

In many cases, after reviewing the clients' profiles, advisors will happily disengage them because they are clients who have held the same few stocks for years and never generate revenue.

The top group is the A-clients, the highest 20% who consistently generate 70%-to-80% of total revenue. Use the revenue generated by the last client within your top 20% as your definition of a HNW client. Deliver top-end service to these clients.

Selectively add to this group both high-potential clients and clients who are a part of a professional or other homogeneous segment you would like to focus on. The reasons are twofold: you want to gain more experience servicing these types of clients and develop a greater awareness of specialized markets.

For example, if your target market is partners and senior managers at accounting firms in downtown Toronto, the greater number of these clients you have in your book of business, the better you'll become at servicing their needs, and the more referrals you'll win.

Technology can help

The final segment is the one-to-many group. This refers to one advisor working with many clients in a leveraged fashion. They represent approximately 50% of your client base and approximately 20%-to-30% of revenue. They do not generate enough revenue to warrant a personalized approach.

With these clients, use a consolidated product that delivers a holistic performance statement and updated review addressing the whole portfolio.

At Russell Investments, we created a website specifically for these clients called LifePoints Connect. Each quarter, clients receive an email populated with a review of the markets, a review of their own portfolio, and a video or audio file from a manager to keep clients connected to their investment.

The body of the email includes a message to the client outlining what's included in the attachments and what they should pay special attention to. This type of communication can be sent to your clients automatically, freeing up time for top clients.

The practice of segmenting your client base has been with us for a long time, much like the automobile or telephone. But just like these technologies, it needs to be upgraded from time to time.

Originally published on Advisor.ca