Client segmentation for financial advisors: How to implement
Charles Paikert

By: Charles Paikert on April 13th, 2021

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Client segmentation for financial advisors: How to implement

Financial Advisors  |  Wealth Management  |  Investment Advisors  |  Client Segmentation

Advisory firms are moving beyond the traditional classification of clients by their assets and the revenue they generate.

In this second part of our AdvisorEngine Learning Center’s series, client segmentation for financial advisors, I’ll explore how clients can be segmented beyond assets under management. I will also look at how (or should) an RIA widen or ‘soften’ its target market to a younger, less affluent demographic, taking advantage of cost-efficient digital technology.

How should clients be segmented?

“Segmenting by client size is outdated,” says Michael Nathanson, CEO of the Boston-based RIA The Colony Group. “You only achieve optimal results with comprehensive financial planning. Segmenting should be about the specific needs of the client.”

The Colony Group strives to provide services tailored to specific needs, segmenting groups of clients “that have common needs because of their shared circumstances,” Nathanson says. Those segments include current and former business executives, business owners and entrepreneurs, professional athletes, entertainers, private equity, and venture capital investors.

This approach helps Colony attract and retain clients, according to Nathanson. Corporate executives, for example, receive specifically focused advice on a range of employment-related issues, including concentrated equity positions, employment agreements, equity incentives and planning for liquidity events.

Expertise in such specialized areas has paid off for Colony, according to Nathanson. “It makes a meaningful difference to clients,” he says. “And they tell their friends and colleagues.” Other metrics being used for segmentation include:

  • Demographics – Factors such as age, sex and family status impact a clients’ financial status and whether they are accumulating or decumulating assets, service requirements and revenue potential.

    Clients’ age can help a firm “identify opportunities to improve financial performance,” says industry consultant Eliza DePardo. According to The 2020 FA Insight Growth by Design study, firms with a majority of clients over 55 experienced slower revenue growth than firms with a younger client base. But firms with older clients were more profitable, reporting an average 20% operating profit margin, compared to a 13% margin for firms where most clients were under 55.

  • Ease of doing business/cost to serve/profitability – Some clients may simply take up so much time or want so much specialized attention that it is not cost-effective to maintain a previous level of service or retain them.

    Conversely, it’s critical to identify the clients who are easiest to serve and generate the most profit. The more satisfied those clients are, the better a firm is.

    “It’s easy to get lost with clients,” says Michael Forrester, principal of High Note Wealth in Minnesota. “They become very familiar and you think that a client who is actually the 65th most profitable is in the top ten because of all the time you spend with them. Segmenting has helped us find out who our ideal client is.”

  • Referral value – “One metric to consider using for segmentation is to ask how many referrals a client has given in the last 12 months,” says Lisa Crafford, vice president and advisor consultant at BNY Mellon’s Pershing.  Even if a client is not highly profitable themselves, their referral network can help spur growth. Someone well connected, in a lucrative target segment of professionals, may be worth extra attention if they become advocates for the firm.

How can advisors widen their client base — and should they?

The advent of digital technology and robo advisors has allowed financial advisory firms to widen, or ‘soften,’ their client segmentation to include younger clients with less investable assets than a firm requires typically.

“Like any strategic decision, the choice to broaden the addressable market to include clients with less investable assets should be considered in the context of the firm’s broader strategic plan,” says Pershing’s Crafford. “Does serving smaller clients help drive them towards their goals?” Firms weighing whether to adopt this strategy should consider three factors:

  1. What are the implications for the brand? – “If you’re known in the market for serving ultra-high-net-worth families and then suddenly also add low net worth clients, that can create brand confusion and potential reputational damage,” Crafford asserts.

  2. Is this business scalable? - Can a firm add additional revenue without increasing costs?

  3. How will the new services compare with competitors? -  A digital service shouldn’t be an afterthought. If competitors do it better, a second-rate service won’t help your firm. And oh, by the way, competitors include Charles Schwab and Vanguard.

Serving younger clients means that firms trade firm profitability for stronger revenue growth rates. But RIAs don’t have to accept this trade-off, says industry consultant Eliza DePardo

“By defining the advice needs of younger clients, such as cash flow management, savings plans, etc., it becomes easier to determine the best way to price services and demonstrate your value,” she says.

“Robo advice is a great example of how to drive efficiency and profitability in smaller relationships, but it might be just one component of the services offered,” she says. “It’s important to remember that these small clients will become your large clients of the future. So consider other ways that you can bring value to these relationships to ensure they are engaged with the firm as their needs grow.”

“Advisory firms who make a conscious decision to begin serving younger clients, who are not part of their core business, should be sure to build out an accompanying support structure,” says Megan Carpenter, CEO of FiComm Partners, a communication and consulting firm for RIAs.

“Have a tech stack in place to handle that segment and identify junior advisors to work with them,” Carpenter says. “You can have a white label digital brand targeted to a younger, less affluent segment to supplement your core business.”

New York-based RIA Weathspire Advisors has widened its target market with Wealthspire Pathways, a “digital advisor platform with integrated planning” that pairs lower-cost digital services with a human advisor.

The service aims at the HENRYs (high earners, not rich yet) who prefer “self-administration” to reduce fees and invest in low-cost index funds. The firm’s website explicitly states that Pathways is not for clients who want margin loans, immediate access to advisors and “customized investment options.”


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About Charles Paikert

Charles Paikert has been writing about the financial advisory industry since 2004. Paikert has been an editor for Investment News and Financial Planning and currently contributes to Family Wealth Report, RIABiz and Barron’s. He has also written about the industry for The New York Times and Reuters and has moderated panels at numerous industry conferences, including Schwab IMPACT and Invest. Paikert is the co-author of Madness: The Ten Most Memorable NCAA Basketball Finals.