Benefits and Methods of Client Segmentation

Charles Schwab issued a report today that examines how independent registered investment adviser (RIA) firms can benefit from segmenting their client base and offers strategies on how to going about doing so.   

The report, “Best-Managed Firms: Client Segmentation Strategies – Optimizing client experience and firm performance,” is part of the Schwab Market Knowledge Tools (MKT) series.  It gives reasons why client segmentation is a wise strategy to increase a firm’s profitability and scalability, as well as offering suggestions on how segmentation can be approached.

The main reason Schwab suggests RIAs segment their client base is to better manage the immense diversity between clients.  Plans that have $1 million assets under management (AUM) have greatly different needs than plans with $5 million or more in AUM.  Trying to handle these plans using the same strategy and giving them equal attention can be unproductive for both the RIA and the client.   

The report outlines benefits of client segmentation from both the client’s perspective and the firm’s.  Schwab says clients will benefit from:

  • Consistency in the client experience by setting clear definitions around the level and types of services offered to different sets of clients,
  • Deeper client relationships by providing specialized expertise to clients with specific needs (and not over delivering to clients who have more basic needs), and
  • Optimization of non-core client relationships that without segmentation tend to be managed on an ad hoc basis leading to inefficiency and inconsistency.

At the firm level, advisers are using segmentation to realize:

  • Improved team member efficiency and productivity through better resource allocation and development of standardized workflows for serving clients,
  • Better alignment of revenues and cost to serve clients by strategically matching time and staffing to each client’s level of need and the amount of revenue they generate for the firm, and
  • Strategic business development support by helping firms define an ideal client profile, articulate their firm’s unique value proposition, and put a more systematic framework around driving more targeted client referrals.

 The last part of the report outlines four steps to implement client segmentation within an advisory firm.  They are:

  1. Strategic planning - establish vision and goals, identify strengths, weaknesses, opportunities and threats, develop an ideal client profile and firm value proposition, and seek to understand the dynamics of the current client experience provided to clients.
  2. Segmentation strategy development - set clear goals for the program, articulate the components of what will be offered to different sets of clients and the staffing and resources decked against each offer.  Calculate the cost to serve different sets of clients and determine client-level profitability for each segment.
  3. Delivery planning and rollout - identify any existing gaps between current capabilities and the services advisers want to offer clients. Implement necessary processes and procedures, such as coding of clients and accounts and integrating any necessary systems, and clearly define client-facing and back-office roles and responsibilities. Most importantly, communicate clearly and effectively to clients to ensure they understand the changes and the benefits to them.
  4. Monitoring and refinement - develop a formal system for gathering client feedback and define specific success metrics for the program before it is rolled out to clients.

“Even if a firm does not implement a formal client segmentation strategy, just walking through the analytics behind segmentation can provide tremendous value,” said Scott Slater, managing director of business consulting with Schwab Advisor Services. “The process can improve firm performance by better aligning a firm’s profitability with the services it provides clients, and can enhance client experience by identifying the specific needs of different types of clients setting clear expectations around how the firm will meet those needs.”