How a cost driven solution becomes a differentiator for wealth managers…

… About the important role of digitisation in the segmentation strategy for wealth managers and their clients…


In the past I have written about the importance of the right segmentation strategy for wealth management firms and private banks. The segmentation subject sometimes has a negative undertone. Reading quite some angry comments on blogs that are discussing the impact of digitisation on levels of service from the negative side or what they call ‘reduced services’. I would like to use this blog to discuss the important role digitisation has in a segmentation strategy for the wealth manager and the added value to their clients.

Historically wealth managers (and banks in general) segment their clients primarily based on Assets Under Management. Advisers look into CRM systems and refer to conversations they previously have had (although this probably is captured in the CRM systems), to define the strategy how to approach the clients. Is the client an entrepreneur, a doctor or politician? This is how their segmentation is done. Of course I describe this very ‘black and white’, but Scorpio Partnership highlighted this recently as well. ‘Too rigid’? Oh Yes!


(Source: Scorpio Partnership 2013)

At the end, no matter which banking solution you choose and which ways of interaction you provide to your clients, it needs to fulfill (some of) their needs.  Not too long ago the online solutions were perceived as cheap solution for the smaller sized clients. Today, we see an increasing demand from clients towards wealth managers to provide these possibilities to interact, because of the adoption of digital (communication) tools in the HNWI segment. We are in the middle of a demographical change in the HNWI segment, referring to one of the key trends in the HNW market in a piece of Russ Alan Prince’s hand ‘The affluent are increasingly diverse’ . This is forcing the firms to catch up with some of the retail solutions that become in favor of the wealthier clients right now. This influences the way younger (potential) HNWI’s can be reached and want to interact with ‘their’ financial institutions. Younger (potential) HNWI do have different demands. Not only to products, but also in the way they want to interact and make their decisions. Or as April Rudin refers to this: “Young high net worth clients are not going to ask their parents or friends for a referral to a financial adviser and meekly pick up the phone and make an appointment.” Yes, HNWI do use Social Media!

This shortly describes some influences that wealth managers force to rethink their segmentation strategy as well. Clients need to know what they can expect (managing of their expectations) and against which price, because wealth management (of course) comes with a price.

Customer needs become leading in the segmentation strategy, not their assets

A Dutch friend once mentioned; “If an individual has EUR 2 million in deposits, without investing it (because he doesn’t want to), can we call this a private banking client”? Not really, although he is wealthy. He is not looking for advice, fancy offices or social events. We defined a private banking client as clients with a complex and consistent need that he wants to be serviced. The HNWI with EUR 2 million in deposits is interesting from an AUM perspective in the advisers portfolio, but because he doesn’t want to have a call or visit from a personal adviser there is no added value for the bank. This is just a wealthy client with retail characteristics and needs.

Think about the opposite; A client who does not meet the AUM requirement to be a wealth management or private banking client, but would like to use (and pay for) a product from that segment. Should he not just be able to buy that product? I agree this is easier said than done, because it forces the larger banks to break the ‘silo’s’ in which they (most of the times) operate.

By not using the AUM as single driver for segmentation, but using the needs of the client a firm’s segmentation strategy becomes more efficient. Ask questions that define the segments, like:

  • Which specific goals does the client want to achieve on the short and long term?
  • How active is my client with regards to charity?
  • How do they want to interact with the bank?
  • Which contact frequency do they want? (24/7 access to their financials or 9 to 5 branch services?)
  • What kind of risk are they willing to accept? (Not just on the intake form!)
  • Etc.

A client that prefers to do most of the interaction online or digital has a much lower cost to serve. These clients should pay a lower fee than the clients that prefer the face to face contact moments with the financial adviser, which is a very costly way of serving the clients. So the client has to pay for that.

Clients should pay for the way they are serviced and the type of products they are using. You understand it is up to the firms to tailor their pricing to their clients and use discounts to these clients that deserve these.

Advice comes with a price

Last week a blog on Adviser Lounge called ‘Clients want advice, so why won’t they pay for it?’ by Nick Johnson raised the point that clients apparently are not willing to pay for advice. Contrary to the blog I have the experience people are actually willing to pay for services. A small (non scientific) survey conducted in the The Netherlands in 2012 already confirmed this. I do not expect this to have moved downward to be honest.

The business models around financial advice increasingly become fee-based and less transaction based. Forced by regulations, the need for transparency in pricing and prohibiting kick-back fees, wealth managers had to change (or have to in case they haven’t done that yet) to keep their numbers out of red.

This relates easily to the new segmentation strategy which actually facilitates more fee-based services. Customers increasingly understand the fact that they have to pay for something they use. But they also expect the other side of the coin; If I choose to do more myself (against lower cost for the bank) I expect to pay a lower price.

The evolvement of digitisation of services is the key customer driver…

From Cost-driven to Customer Experience-driven solutions

Online or digital solutions have developed and so has the demand for it. From a (mostly) cost-driven solution pushed by banks the online solutions increasing become a customer experience driven solution on request of the wealthy. Firms should welcome this as a gift from the (potential) clients, because an increase in serving clients online will impact the cost to serve dramatically. Digitisation drives a new way of wealth management industry segmentation. So I would say: Get rid of the pyramid!

Firms that are able to differentiate on offering these digitised services best, are the industry leaders of the future!

2 thoughts on “How a cost driven solution becomes a differentiator for wealth managers…

  1. Boudewijn Chalmers Hoynck van Papendrecht Post author

    Pascal, I agree. The pyramid you are showing is describing the way of interaction, while the pyramid I am referring to relates to the traditional segmentation model of AUM.
    You should put all pyramids together, instead of 1 single driver (products, channels, AUM, etc) to come up with something new 😉



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