How Financial Advisors Should Segment Their Book

Clients are the centerpiece of any successful advisory business. But clients aren’t all alike in terms of their goals, needs and financial situations. This is where understanding client segmentation for financial advisors becomes valuable. Knowing how to segment your book can help you improve your efficiency and profitability. At the same time, it can allow you to serve your clients’ needs better and pursue their financial goals.

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How to Segment Your Book of Business as an Advisor

Segmenting a book of business is a multi-step process. Here’s what this typically looks like in action for advisors.

Step 1: Data Collection	To segment your book, you’ll first need to know some key details about your clients and the prospects you’re hoping to convert. Collecting and analyzing data about a client’s financial situation, including their net worth, assets held away and goals, is crucial to the segmentation process.
Step 2: Segment Creation	Once you have the data you need, you can begin to group clients by shared characteristics. For example, you might segment them based on their demographic similarities, service history or financial needs.
Step 3: Align Segments With Services	After you’ve segmented clients into groups, you can work on aligning the services offered to each one. That also extends to your marketing, as targeted campaigns may prove more effective for capturing a client or prospect’s attention.

Once you’ve created your segmentation framework, review it periodically. For example, you may conduct an annual review to track how much revenue each client has generated and how many referrals they’ve delivered. You can also monitor their net worth, AUM and goals to determine whether their current segment is still appropriate or if a change may be necessary.

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Importance of Client Segmentation for Financial Advisors

Segmenting clients simply means separating them into different categories or tiers. This segmentation can be based on different criteria, such as age, assets under management or net worth. So why go to the trouble of dividing up your book this way?

“Client segmentation is key to efficient and effective relationship management,” says Mary Sullivan, co-founder of Sweet But Fearless and former regional director at TD Ameritrade.

In other words, segmenting your client list can help you more effectively address your clients’ needs so you can deliver the type of results they’re expecting. This can lead to improved satisfaction for them and increased profitability for you.

“The mistake many advisors make is that they spend more time disagreeing with the company segmentation philosophy and end up product selling instead of relationship building,” Sullivan says. “Every product and service is not the best fit for every client.”

By segmenting relationships, you can ensure that you’re spending your time with clients who want to engage and have meaningful conversations through that engagement, Sullivan says. Client segmentation can also help you fine-tune your niche strategy and identify unaddressed gaps. By finding those opportunities, you could be better positioned to increase your market share within your niche.

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How Advisors Can Get Client Segmentation Wrong

Traditionally, many advisors are encouraged to segment their books by categories based on assets or revenue. For example, clients may be assigned to Platinum, Gold or Silver status, based on how much they have in assets or how profitable they are for an advisor. “Although this may seem logical, it’s actually a very big missed opportunity and a common mistake made among advisors,” says Dennis Schlegel, Jr., co-founder of Emeritus Wealth Group.

Schlegel offers an example of what he means. Say Client A has $1 million in assets under management and generates $10,000 in revenue annually for an advisor. Client B, on the other hand, has $300,000 in assets under management and generates $3,000 in revenue per year.

Most advisors would probably segment Client A into a higher tier than Client B, Schlegel says, given the difference in yearly revenue. This may result in the advisor being more attentive to Client A and investing more time into building that relationship. The problem, however, is that this segmentation method doesn’t consider a client’s entire financial picture or details that go beyond their net worth.

For instance, if Client B refers three new clients to the advisor each year with an average of $600,000 in assets each, that can double the amount of revenue they generate compared to Client A, who refers zero new clients. Even though this revenue generation occurs indirectly, knowing this about Client B presents a stronger case for moving them to a different segmentation tier and delivering a different level of service.

Once you have identified what segmentation works for you, it can also become easier to improve your overall marketing efforts. In fact, proper segmentation can make it easier to find ways to improve your success rate by bringing in help. Are you looking to expand the marketing of your financial advisor practice? Try SmartAsset AMP, our holistic client prospecting and marketing automation platform.

Client Segmentation Tips for Advisors

Sullivan says that effective client segmentation starts with a good client relationship management (CRM) system. Once you have that in place, you can utilize it to segment your client base in a way that aligns with your sales goals, marketing efforts and client life cycles.

“This means, if your company sales goals are emphasizing managed products, then segment your client book based on that: clients already in managed products, clients with large cash balances, clients who have expressed an interest,” Sullivan says.

Secondary to that is making sure you’re following up on your efforts to market to clients with personal calls and opportunities to educate them about your firm’s products and services. Because, as Sullivan says, “educated clients make better decisions.”

Schlegel says the key to successful client segmentation for financial advisors lies in getting to know the people they serve and determining their true value to the business.

“A small client that refers me to multiple people every year is invaluable,” he says. “They’re helping me grow my business year after year, not including secondary impacts like their referral who may refer me to others.”

Schlegel says there are no shortcuts to knowing your clients. While you can start by doing a cursory filter of your book to establish broad client tiers, you still need to dig in on a case-by-case basis. And if you’re unsure, you can always err on the side of delivering a higher level of service.

“A client is rarely upset by getting too much attention,” he says.

One thing Schlegel does advise watching out for is the “rented” client. This refers to a client who may have substantial assets with you but is in the process of transitioning them to other investments outside of the ones you currently manage for them.

“These individuals won’t be clients for long and may actually be best served by being fired,” he says.

If you’re not comfortable cutting ties directly, you could relegate them to a lower service tier. This can free up more time that you can then devote to nurturing relationships with clients who are likely to stick around for the long term.

Frequently Asked Questions

What are the primary ways to segment clients?

Advisors may segment clients based on profitability and value, demographics, behavior or financial planning needs. A typical advisory firm uses a tiered approach that features three to five segments. The number of segments you include in your book of business can depend on your firm’s size and the niche you serve.

What are the benefits of segmenting clients?

The benefits of segmenting your book of business include increased efficiency, a better client experience, scalability and improved profitability. A segmented book can help you understand which clients are most valuable and which ones may no longer align with the services your business offers.

How to transition clients that no longer fit your business model?

If you discover that some of your clients are no longer a good match for your business after segmenting your book, the transition requires some delicacy. Schedule a meeting with clients to discuss the relationship and explain why you feel it’s no longer a good fit. Offer help in transitioning them to an automated advisory platform if appropriate, or to another advisor in your network.

Bottom Line

Client segmentation is an important part of your strategy for scaling your advisory firm. The better you understand your client’s needs and backgrounds, the easier it is to segment your book efficiently. While it may take some effort to perfect your segmentation strategy, the end result may be happier clients and a thriving business.

Tips for Sourcing More Clients

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Consider tapping into your existing clients. Referrals from existing clients can be a powerful driver of new leads. If you aren’t asking clients for referrals on a regular or semi-regular basis, consider how doing so could help you to connect with a broader audience.
While investors who are closer to retirement often have more assets, investors from Generations X and Y are rapidly catching up. Getting ahead of the Great Wealth Transfer by expanding your client base and working with investors who are entering their prime earning years can help you build a sustainable business model.