Wealth Management and the ‘The importance of a needs based segmentation strategy’

The Segmentation Discussion in Wealth Management (part 1/2)

In the traditional thinking of a wealth management firm or private bank there are certain products only available to a wealth management or private banking client that are not available to non-HNWI’s. As personal banking client (other definitions might be applicable as well) you are not able to buy it, because your assets size is not big enough. That is pretty strange right? A client wants to buy a product, but the ‘sales person’ says no. My point of view is clear:

“Every client should be able to buy the products they want, but everything comes with a price”

The segmentation discussion in the wealth management discussion is very actual, but also not easy to grasp. Last week I had a great conversation with two wealth management experts from our beloved Switzerland and there was clear consensus that the industry business model is going to change (because it needs to, due to regulatory pressure, need for transparency and changing client behavior), but we also agreed there is no a one-off solution. The industry is looking around.

In this first of my two blogs I will focus on the way to define the right segmentation that is different from the traditional AUM (Assets Under Management) based segmentation. In the second blog I will discuss the impact on products, services, channels and pricing!

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One of the examples given in that particular conversation I referred to is: “My client wants to call me at 11PM, because he has no time earlier during the day and I want to make him happy, as I try with all my clients”.  This particular client has very specific needs that he wants to be met – A possibility to contact his advisor whenever he wants, because he is a businessman travelling all over the world, in different time zones – , but there are also clients that don’t have this specific need and so don’t need this very expensive way of servicing. The case for change is almost given in this example – Two different clients that have a complete different demand to the way they are being serviced – .  For a relationship manager it should be a priority to focus his expensive advisor time on the clients that need and want that time from him.

Why wealth managers (but also retail banks) stay with the traditional segmentation?

The challenge is that wealth managers want to service their clients as good as they can. That is the way to demonstrate their added value and keep these relationships theirs. We also know that the cost to serve is very high and (honestly) unsustainable because of the increasing regulatory pressure on advice and income models, quest for transparency and increasing expectations from clients. But how do you answer this question?

Changing your segmentation strategy impacts the complete way a firm needs to think and should operate. It is not only operational (cross business unit thinking) it is also a cultural shift in the organizational thinking and the position of the client in the operating model. While the relationship manager was in the middle of the operating model for years, the HNWI client wants to be at the center of the operating model now and uses the different facilities around them (e.g. branch, advisor, call center, online, mobile, social media, …). The HNWI expects these facilities to be available, because these clients have personal preferences and want to make the decision themselves. -“I would like to use the channel I want to contact my bank, not the channel I have been asked to use”. – Not all clients want to be fully in control, because they like to have everything managed for them, but even this group seems to be increasingly involved in managing their own wealth. These examples, again, show the different clients and the different way of being serviced (with a different price tag that should be expected from a cost to serve perspective).

Wealth Managers would say they already have a needs based segmentation strategy by offering Execution OnlyAdviceDiscretionary Asset Management (NOTE: again these definitions might vary globally, but in essence they mean the same). These services, mainly investment products driven contain actually a bunch of clients that are completely opposite from each other when looking from a ‘needs’ perspective. The only need they have been looking at with this type of segmentation is the investment needs and not the channel preference, social media activity, values in life etc. There is a clear move in focus to a strategic relationship instead of a trade driven relationship.

The needs based segmentation model is not a one of exercise. We all know that a cultural change needs time to take place resulting in a transition state with the known ups and downs. The organisation really needs to believe in this change to get it done successfully. I also see that firms don’t know how to make the change of KPI’s, how to explain this new model to clients and what it means for their business model. Therefore to become a true customer centric organization wealth manager executives need to act as sponsors/champions of this cultural transformation. There is no way this change is likely to work bottom-up in the organisation. Bottom-line, firms don’t understand how to make the change, but they know they have to.

Direct impact on the Business Model

What we discussed, putting the client in the center of your segmentation strategy and the fact that there is a difference in e.g. the channel preference, directly impacts the cost to serve of your clients. This is important to understand in the process of explaining the change to your clients and advisors within your organisation that should be part of this change. I use three examples to show the impact on the business model.

  1. Other pricing around customer needs – Not every need can be valued the same, because needs are met in a different way. The need to renew the Platinum Credit Card is met in a different way from the need to support a wealth transfer plan. It isn’t sustainable to meet all these different needs against the same ‘price’ or ‘for free’.
  2. Cheaper channels should be priced that way – If a customer prefers to use the online or mobile channels instead of meeting advisors face to face it would not be fair to charge the same rates for the services offered.
  3. It is the Customers’ choice – The clients increasingly need to make decisions themselves on how they want to manage (or be managed) in the relationship with their wealth manager. Their preferences become part of the price they have to pay for being a client.

Based on the above mentioned, it becomes more clear that clients are deciding themselves what services they are willing to pay for.

The feeling of being engaged with your client

The current situation is that many advisors have the feeling to becoming dis-engaged with clients if the client increasingly prefers to use of non-face to face channels. This is exactly what it is not! In fact, it is about increasing your engagement, because something is offered in a way the client prefers. Therefore advisors need to understand the different channels, what these channels offer and why certain clients prefer the use of these channels.

As Jon Hughes recently wrote: “Every channel matters when engaging bank customers”. Although his article, where he referred to the fact that fully engaged customers are generating significantly more product penetration, revenue and wallet share, is not specifically focused on wealth management only, it is fairly true to say that today it isn’t anymore about product selling, but being bought by the client based on the experience you offer and the confidence the client has in you in meeting their needs. HNWI’s increasingly make their decisions for themselves or value their personal opinion higher than they did a few years ago. The role of Social trading, where investors rely on their peers for investment advice and market knowledge is increasing. Being bought is therefore closely related to the need for an enhanced customer experience. An experience that is aligned with the needs of the wealth management clients, based on the right segmentation strategy.

In his article ‘Private Banking in the Era of “Digital Wealth” ’ Peter Schramme relates to the importance of using business intelligence and data analytic tools with a “platform approach” where applications are managed centrally and coherently by a single point of contact. For me there is no doubt in the importance of using the intelligence and tools in serving clients, but what I don’t get is the need of this being managed by a single point of contact (where I assume he means the advisor/private banker). If an organisation is able to provide a single view of the client across the channels there is no need to for 1 person to manage all channels, because these views are managed automatically. The advisor should focus on providing advice, being the trusted connection between client and firm and not on managing the different channels.

Improving your customer experience starts with the right segmentation strategy

I discussed the different angles of looking at client segmentation and the need for needs based segmentation strategy, but how does it work?

Without knowing exactly who your clients are you are not able to offer the desired customer experience. A needs based segmentation strategy based on analysis of existing customer data and behavior, together with a research on the target group in the industry provides the data you need to start understanding your customers. The next step would be to use the analyzed data to build a profile of each of the segments you defined, providing a better understanding about the needs of this “homogeneous” group. These profiles contain insights in: Products this group buys, historical background, social media activity, hobbies, values, channel preferences, lifecycle stages etc. Based on this, you know what this group of clients wants and likes, instead of having all your relationship managers building their own understanding of the individual relationships within a CRM system.

It provides a better overview of the type of clients within the organisation, resulting in more targeted (read: needs based) services, more successful contact moments. an increased customer experience resulting in a higher valued relationship between firm and client.

To make it clear; After the analysis on the target segment (wealth management segment) you get several segments (It can turn out to be 5 or 12, whatever necessary to create homogeneous groups). Possibly in a few years the wealth management segment doesn’t exist anymore? Because why should a ‘retail banking client’ not be able to buy a wealth management product?

Service Concepts

As Scorpio’s Seb Dovey highlighted in a publication from his hand today: “The future HNW is actually clearly trending toward an interest in a more complete wealth relationship for better value. This is posing some questions in our mind around the efficacy of many operating models in wealth management.” I can highly recommend reading this article as it provides a very good overview of the industry shift as we experience it today!

In my next blog I will continue the segmentation discussion on the changing way of pricing services to your clients. Starting from the product driven model as we know it today! Because of the regulatory pressure on products offered (e.g. no kick-back fees allowed anymore) the sustainability of the current income model for the industry is under heavy pressure. Related to this segmentation discussion we also have to look at the future income model in line with the regulatory demands, need for transparency and understanding of products by customers. Understanding the pricing of service concepts makes the relationship of this new way of segmentation more clear, so don’t miss it.

I am looking forward to any comments to build on this discussion, because as mentioned earlier. There is no one off segmentation model, but it is clear we need a change!

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