Wealth Management ‘Everything comes with a price’

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

My previous blog ‘The importance of a needs based segmentation strategy’ mainly focused on the importance of putting the HNWI customer in the center of the service model of a wealth management firm. Fact of life is that today 99% of the wealth management firms put the relationship manager in the center of their service model. I tried to summarize it as shown below:

from selling to being bought

This article in Wealthbriefing, based on an interview with Celent, describes Segmentation: ‘Product and services based on an increasingly diverse client base’. Firms are addressing all types of customer segments, going outside their traditional investor segment, and therefore require scale and technology. Retail banks are moving to serve the HNW customers, while private banks have lowered their threshold to serve more of the lower-end of the market. They describe exactly the issue if the industry, because lowering a threshold is not the answer on the industry challenge. I would say: A needs’ based segmentation strategy, where segments are built around the needs of the clients, instead of the Assets size of the HNWI’s should drive this change.

Assuming you have read the previous blog (otherwise I would strongly advise you to do so first), the next step after segmentating your client base, would be to understand the change in the business model and the pricing strategy around these segments. I already told, it is not a one of exercise.

Why service concepts could change the income model of a wealth management firm

The industry needs new pricing models. Customers expect to know exactly what they are paying for, and regulators want customers to be able to compare prices across the industry. Transparency is key. This will fundamentally change how wealth management and private banking services are priced; pricing models may include standard fees for basic products and services, all-inclusive fees for advanced packages, and volume/transaction fees that are clearly linked to specific thresholds.

This thinking is 180 degrees the other way from how most of the industry income models look like. Transaction based, product driven, fees from product providers (kick back fees), most of it un-transparent. This industry change is driven by regulations (a ban on kick back fees) which means that clients have to pay directly for the investment advice they receive and the investment products they choose. This hasn’t been the case in the past because banks have been paid by the investment funds to offer certain products. But this makes advice more costly for HNWI clients than it was in the past.

But back to the alignment with customer segments You know their needs right now, is more easy, more fair and more transparent using service concepts.

How does a Service Concept looks like?

A wealth manager should develop several service concepts to meet the needs of the different customer segments. The wealth manager might end up with 5 or 15 service concepts depending on the level of variety it wants to offer. It might turn out that every customer segment is linked to 3 preferred service concepts.

A service concept is structured around several parameters which, as you will understand, are different across the different service concepts. These parameters are grouped in categories like:

  • Products (e.g. Standard investment products; Complex investment products; Mortgages; (Life) Insurance; Savings; …)
  • Services (e.g. Financial planning; Estate planning; Trading; …)
  • Channels (e.g. Branch; Face to Face advisory; Email; Online; Mobile Apps; Call Center; …)
  • Preferred Contact Frequency (e.g. Once a year; Quarterly; Monthly; Daily; 24/7 availability; Or the client calls when he needs a questions answered; …)
  • Financial Literacy (e.g. The level of understanding of managing wealth; …)

You understand that you can develop unlimited amounts of service concepts based on these categories. But the most interesting of these categories is… That we don’t refer to Asset size… Does asset size influence my channel preference? The drivers for certain products or services are my personal needs.  And there might be some people who say, ‘these needs are driven by my asset size’. I would say: No, not primarily and therefore it should not be one of the drivers of a service concept.

Buying a service concept, because that is what is going to happen, creates boundaries or limitations. But if a client chooses a certain service concept, it doesn’t mean he can’t buy other products, services or uses of other channels. He pays an additional fee for the additional use of such a product or service on top of his service concepts. This may happen when he needs a specific service, let’s say ‘estate planning’, which he didn’t expected to need for that particular year. Another example could be that he wants a service concept that only includes online and mobile interactions with the wealth managers, but at a certain point he would like to speak an advisor in person. For these additional, ‘out of service concept’, kind of services an extra fee needs to be paid (which of course is little a higher than if it was part of the chosen service concept).

So now you understand:‘Every client should be able to buy the products they want, but everything comes with a price’.

What does a service concept mean for my pricing?

‘That service concept thinking sounds pretty basic’, but how do you price this thinking? Without going into too much detail on my most recent client discussions, it is actually pretty easy and it can be different for every organisation. The service concepts that contain more expensive kind of services (e.g. face to face advisor time, complex financial planning, 24/7 availability of an advisor) are priced much higher than a service concept that is mainly built on the use of cheaper channels and basic products.

The service concepts as I described here didn’t particularly focused on the inclusion of transaction costs of investments in stocks, bonds or funds. These are costs or fees that can be added to a service concept (e.g. a certain amount of trades, or a fixed fee with unlimited trades, …), but they also can be priced separately.

At the end is pricing a company specific exercise, but I couldn’t of course ignore the commission/fees on investment transactions. The only driver here is that it needs to be transparent, which counts for all thinking around the service concepts of course.

If I have a Needs based segmentation strategy supported by service concepts, does that mean I am ready for the coming 25 years?

NO! As mentioned earlier, a segmentation strategy is not a one of exercise. This needs to be revisited over time. But what we do know, is that this segmentation strategy and service concept thinking is very transparent, fair and most importantly, driven on the needs of the HNWI clients.

Going forward the organisation therefore needs to be very much focused on delivering the desired customer experience to the different target groups. Asking questions like: ‘What are the key moments of truth in the different customer lifecycle stages?’, ‘What are the needs I fulfill with a specific customer journey?’ and ‘What are the most important customer journeys in my customer lifecycles?’.

A needs based segmentation strategy is definitely a critical starting point when you would like to deliver a customer experience that meets your customers’ desires. Delivering a customer experience that is not aligned to the needs of your (target) customers therefore is an approach I definitely recommend!

In these 2 blogs I haven’t used the word digital once (at least that what I think I did), which I did on purpose. Today all our thinking is driven about the digitization of the services and that is definitely with a reason. With these blogs I tried to explain the thinking of needs based segmentation around the needs of your (target) clients. Digital is not a need, it is an enabler to satisfy certain needs. I hope people didn’t become too worried about this, “He is not referring to digital, how could he miss that!”

But I promise, next time….

One thought on “Wealth Management ‘Everything comes with a price’

  1. Pingback: Resistance to change to a Needs Based Segmentation Strategy cannot be the advisor anymore… | SocialFS

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