Client Segmentation

Many financial professionals have traditionally taken great pride in treating all their clients equally, and providing the same excellent service, regardless of their value to the firm. However, in a modern, competitive business environment, is this approach realistic? Regardless of whether one is an advisor with a mature practice (often reflected by a large book of clients and struggling to keep up service levels while remaining profitable), or an adviser with a relatively young practice that is looking to grow over the coming years, a more pragmatic approach to managing your clients is highly beneficial. Properly segmenting your book of business, or reviewing your segmentation framework is an extremely important element of robust business model.

Client segmentation can provide an excellent way to serve each tier of client, leaving you room to develop your most valuable clients while avoiding burnout. Categorizing your existing client relationships and developing internal service models for each one allows you to prioritize how your team’s time is spent. While some segmenting methods focus on the dollar value of each client, there are multiple approaches (some very simple, some much more complex) financial advisers and other financial professionals can take to evaluate clients. An ideal segmentation model remains flexible enough to evaluate each client’s present and future potential while clearly quantifying the cost to serve.

In brief, the purpose of client segmentation is to:

• Divide your existing client base into smaller segments that allow more efficient service
• Determine which segment(s) to target your business development efforts towards

Most financial advisors can easily name their top clients, but in order to segment a whole book, a more formal approach is required. In order to segment effectively, one needs to develop an intimate understanding of how much each client generates in revenue as well as be able to quantify the time and effort it takes to serve each client in order to develop an accurate measure of profitability for each.

There have been numerous articles and studies aimed at estimating average cost to serve various client demographics, but the reality is, costs to serve is dependent on a number of practice specific elements, and as such, undertaking a genuine costing exercise is beneficial for all business owners.

To obtain the information one needs to begin (or review) the segmentation process, consider the following questions:

1. How much revenue does each client generate?
2. What is the cost-to-serve for each client?
3. Which clients are most profitable?
4. What are the practices growth areas?
5. What qualities does practice’s ‘ideal’ client have?

Once adequate information has been collated for analysis, one needs to determine what metrics will be used to guide the segmentation process. Many advisors have historically used simple calculations based on funds under management (FUM). In an old world of commission-based revenue models, this was often sufficient, however in a new world of fee based advice, there are alternatives that are better suited to the revenue models of the modern practice, which can capture more detail about the current and potential relationships with each client.

Whichever methodology one chooses to employ, it is important that one allows enough flexibility in the model for special cases or niche clients that may offer opportunities for future business. The following are a few of the most common metrics the author sees used in segmentation methodologies:

1. Segment by Revenue to the Practice – This methodology is very popular with practices that employ an asset based remuneration model. Under this method, clients are segmented by the total revenue the practice receives from the client, and it will often result in a similar client breakdown to segmentation by assets under management. Similar to the assets under management methodology, there is potential to push a wealthy client into a lower service bracket if one purely considers revenue received and overlooks wealth not under advice. Whether it is the sole driver of the segmentation model or an overly to other metric, the revenue metric is one that should definitely be considered.
2. Segment by Total Client Net Worth. Segmenting clients by their total net worth, including assets held elsewhere is a popular way to segment a book, particularly among advisors who charge fees based on total wealth. For example, many HNW clients hold significant wealth in real estate, but may ask the advice of a financial professional, even though the assets are held away from the firm. The advantage of this system is that it doesn’t privilege clients with more assets under management over wealthy clients with significant outside assets.
3. Segment by Total Client Investable Assets. Another popular metric is to segment clients by total financial assets, including those held in outside accounts. Many clients choose to spread their financial assets among multiple advisors and investment accounts. One reason some do so is to maintain direct control over some portion of their wealth. The benefit of this segmentation approach is that it allows you to include assets that you could bring over.
4. Segment by Assets Under Management. This is the simplest and most common approach used by advisors to segment their books. Under this method, clients are segmented by the financial assets directly held by your firm. The obvious downside of this metric is that you will not account for client assets held elsewhere, potentially pushing a wealthy client into a lower service bracket and risking the future of the client relationship.
5. Include other metrics. While the metrics listed above use various measures of client assets, there are many more that one can use. Here are a few more metrics one should keep in mind:
   • Complexity of client advice
   • Type of Advice
   • Client Life Stage
   • Advocacy (Number of referrals provided)
   • Professional or important affiliation
   • Cost to serve (be sure to get input from all client-facing members of your team)

A simple segmentation matrix is outlined below as an example:

A client segmentation project is an excellent way to determine a practices most profitable clients, evaluate where to focus marketing efforts, and quantify how much effort is required to serve the client. While many financial professionals spend most of their time and money on general business development efforts, a targeted approach can increase one’s return on marketing investments, and improve the overall profitability of the business.

 

How (and Why) to Build Employee Loyalty

For years companies have invested in customer loyalty through programs, incentives, customer service operations and more. Meanwhile, not nearly as much attention has been placed on a segment that has proven, direct correlations to customer retention: employee engagement and loyalty. In business you need people you can depend on to ‘have your back’, to commit to your business vision and make the journey to success with you. Your employees are your income protection. It doesn’t matter if you’re in a service or product/merchandise business, it’s important to have loyal employees that stand with you. Finding them may just turn out to be the easy part. Keeping them, on the other hand, is a totally different story and explains the importance of building employee loyalty. This article will refer to financial services businesses in particular due to the author’s affinity to this profession, however the key points are equally transferrable across other businesses within (and without of) the financial services profession.

Your ‘Front’- In any type of business, the boss is rarely the one to greet a customer at the door. It will, more than likely, be an employee.  A loyal employee will extend the same welcome to a client as you yourself would, because he/she understands the importance of keeping the client happy and the consequences if you don’t. How do you achieve this? The answer is quite simple: You lead by example. There are a number of great promoters of the service experience. Ron Kaufman is one who has a passion for service that is as strong as any the author has seen. Engaging your team in a process of identifying client contact points, and challenging them to contribute ideas for improving the service experience will reap benefits on several levels. It will increase their engagement, get their ‘buy-in’ to the concept and demonstrate that their ideas and input are valued. You have just created a win/win situation. The engaged and loyal employee will provide a far superior client experience both upfront and ongoing to that of a disengaged individual with lower loyalty.

Your ‘Engine Room’- No matter who the boss is, there will always be workers. In the case of the financial services business, the author often refers to these people as the ‘engine room’. While you are busy acquiring or reviewing clients, they are the ones taking care of production (it doesn’t matter if it’s chasing down outstanding information for an application or corresponding to set coming meetings) so you can have maximum time available for revenue producing work. Why is it important to have loyal employees for this? Because, you can rely on them to get the job done effectively and efficiently without major fallout. Furthermore, they love their job and they are well trained and know what they’re doing. If you have to keep training new people because you haven’t built loyalty with the veteran employees, you will only be hurting yourself. Not only is it time consuming, it’s expensive.  A study by Columbia University suggests that replacing a lost employee can cost up to 150% of that person’s annual salary. Not only do beginners work slower, because they’re unfamiliar with the business’ systems and processes, there is a higher likelihood they will make more mistakes, requiring more time  to be spent double checking work. This leads to inefficient operations, ergo less time to spend with clients on revenue producing activities. You can motivate your team by clearly articulating the business vision, getting their ‘buy-in’, setting goals and rewarding them for reaching them. It doesn’t have to be a huge thing, or even monetary; it’s about recognition and demonstrating that you are aware of the effort put forward by each of your employees. Regularly updating them as to how things are tracking is crucial. Have a function once a year to celebrate their accomplishments and the success of the business. This need not be an expensive exercise.

Your ‘Dependents’- You are responsible for your employees. Let them know that you understand this responsibility and that you have their best interest at heart. If you show your employees that you genuinely care about their welfare, there is nothing (within reason) they won’t do for you and your business. It’s your job to make sure there is plenty of work for them and it’s their job to make sure it gets done. Just as a well-oiled machine runs smoothly, an appreciated team works optimally. Above all, don’t forget to stop and say hello, ask how he/she is, pat a shoulder now and then.  Even when you get to the point where you have managers, don’t forget you are the boss, their team leader, and they want to know you still see them. The magic to loyalty is to be a true leader.

All in all, building loyalty is about being aware of what is going on in the business, and with your subordinates and subsequently acting upon it. Studies demonstrate that companies who make an effort to achieve committed and loyal employees will achieve significant increases in the earnings per employee (Bashaw & Grant, 1994; Konovsky & Cropanzano, 1991; Mayer & Schoorman, 1992; Moorman et al., 1993). A little creativity and a lot of common sense will get you to the point of optimizing your workforce and letting you build a solid foundation for a prospering business.