A Dirty Little Practice Known as Client Segmentation

Financial advisors work for “for-profit” firms whose owners seek to maximize their profitability like any other business.  To maximize profit, these owners seek to maximize their revenues and minimize their costs.  One of the practices often used to achieve this end is known as “client segmentation.”

What is Client Segmentation

Client segmentation is the process of dividing up a firm’s client base along the lines of a particular basis.  Client segmentation can serve clients better if the segmentation is based on client needs, like retirement planning or family planning.  Segmenting clients based on their needs can allow an assigned financial advisor to build experiential expertise by focusing on a particular area of need, enabling the financial advisor to deliver more valuable advice and service.  (See our Insight entitled “Retirement Specialist or Financial Advisor” for more.)   

Unfortunately, however, the predominant practice utilized by most financial advisory firms is to segment clients based upon the amount of revenue they contribute to the firm.  Most financial advisors charge based on a percentage of the client’s portfolio (%AUM).  This pricing model often means the clients with the largest portfolios end up in the top tier(s) of segmentation.  In contrast, clients with smaller portfolios end up in the bottom tier(s) of segmentation.  While firms may segment differently (i.e., quarters, deciles, etc.), their logic all follows some form of the old “80/20” business rule.  The old 80/20 business rule states that 80% of a firm’s revenues generally stem from its top 20% of customers.   

Client segmentation impacts you as a client in two main ways:

1). Determines Which Financial Advisor You Are Assigned 

 Most financial advisory firms employ financial advisors with differing levels of experience and credentials.  Hiring only highly experienced and credentialed financial advisors is difficult and expensive, so most firms hire cheaper and more plentiful junior advisors as well.  Naturally, the highest revenue-generating clients will be assigned to the firm’s most senior financial advisors (or “A” team), while the lower revenue-generating clients will be assigned to the firm’s junior advisors (or “B” and “C” team).  I’ve even seen circumstances where ~20% of a firm’s clients were left unassigned and simply served by a Client Service Associates who leaned on a financial advisor when necessary. 

2). Determines the Quality of Service You Will Receive

 Revenue contribution is not only used to determine which financial advisor you are assigned to but also the level of service you receive.  Top-tier clients often receive the bulk of a firm’s time, attention, and priority in the form of more proactive service, access to other firm team members, additional service touchpoints, and additional services.  After all, if 80% of a firm's revenues come from the top 20% of clients, the firm cannot afford to risk losing a top client.  Unfortunately, the problem this practice creates is that the bottom 80% of clients often end up underserved. 

It is All Relative

As a client, it can be hard to determine where you fit in terms of importance within a financial advisory firm because it’s all relative.  A client with a $3 million portfolio may be in the top 20% if that firm mainly served clients with portfolios between $250,000 to $1,000,000.  If that same client were at a firm that mainly served clients with portfolios between $1,000,000 and $10,000,000, they would most certainly not be among the firm’s top clients.  When I worked as a Vice President within J.P. Morgan’s Private Bank, we served clients with portfolios well over $10,000,000 and would have to make a strong case to even bring on a client with a portfolio of less than $5,000,000.  

How to Figure Out Where You Fit

While it can be hard to figure out where you fit in terms of importance to a firm, there are some tell-tale signs:

1). Financial Advisor's Experience Level

Suppose you look at the firm’s website under the “team” section and find you are assigned to one of the more senior financial advisors with many years of applicable experience and the proper educational credentials (CFP®, CFA, MBA, etc..).  In that case, you are probably among the firm’s top clientele.  If you find your assigned financial advisor is more junior and/or lacking the proper educational credentials, you are probably not among the firm’s top clientele.

2). Financial Advisor's Client Count 

If your financial advisor serves more than 100 clients, it is highly unlikely that the financial advisor can give all clients equal time, attention, and priority.  Being assigned to an advisor having more than 100 clients means one of two things.  First, the financial advisor has had to segment their own clients, and you will need to figure out where you fit within that financial advisor’s client base.  Second, you are not among the firm’s top clientele and have been relegated to a lower-tier advisor not expected to deliver the same high-quality service as the firm’s top clientele.

3). Service You Receive

Suppose the firm is proactively rebalancing, tax-loss harvesting, investing cash, reaching out with estate planning ideas or tax strategy ideas, keeping you abreast of what is happening in financial markets and what they are doing to serve you.  In that case, you are probably among the firm’s top clientele.  If you feel the only time you speak with your financial advisor is when you reach out to them or find very little being done on your behalf, you are likely not among the firm’s top clientele.

How to Protect Against Client Segmentation

If you would rather not play this client segmentation game, the solution is to seek a financial advisory firm that charges the same flat fee to all clients regardless of portfolio size, income level, complexity, etc.  A single flat fee advisor who only hires experienced senior financial advisors and does not overload them with clients ensures that every client receives the same great service and advisory expertise.  At Thrive Retirement Specialists, we serve clients with portfolios ranging from $1,000,000 to more than $10,000,000, yet every client is charged the exact same flat fee and receives the same great service, advice, and retirement planning and guidance.  (See our Insight entitled “Why a Flat-Fee Advisor is Best for Retirees” for more.) 

[As a side note, it is ironic the industry charges based on a percentage of a client's portfolio as if it is the management of the portfolio that adds value.  While you can certainly help people not destroy value in the investment management process (by shunning the high cost of active management, correcting inefficient portfolio construction, and managing behavioral issues), the real value creation for a retiree comes in the form of active tax management, the application of dynamic withdrawal rules, and the consideration of assets and tools outside of the investment portfolio during the retirement planning process.  These other three elements add material value regardless of the size of the portfolio.]

If you would like help with retirement planning and investment management, but would rather not play the client segmentation game, we stand by ready to help.  To learn more, you can schedule a friendly, informal call for a date and time that is convenient for you here at this link: https://calendly.com/thriveretire/thriveretire-call or contact us here at any time.

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ABOUT THRIVE RETIREMENT SPECIALISTS

Thrive Retirement Specialists is a retirement planning specialist dedicated to delivering a more thoughtful and strategic approach to retirement planning for those nearing or in retirement. We are a fee-only Registered Investment Advisor (RIA) offering a single, flat-fee service entitled ThriveRetire™ that goes far beyond what has traditionally been known as retirement planning.  ThriveRetire™ is an engaging ongoing 8-step retirement planning process and investment management service that seeks to identify all risks, assets, tools, and tactics to develop an optimal retirement plan designed to support your ideal retirement lifestyle and goals to the fullest extent possible.  With every interaction, we seek to inform and serve, so our clients can safely trust their ThriveRetire™ plan and process, leaving each client with the confidence and peace of mind to live a vibrant and full life through retirement.

ABOUT ANTHONY WATSON, CFA, CFP®

Prior to founding Thrive Retirement Specialists, Tony spent eight years serving as the Chief Investment Officer of a firm where he provided advice and investment management services to over 600 individuals representing at the time over $1.5 billion of investments. Before this, Tony served as Vice President at J.P. Morgan Private Bank, where he advised high- and ultra-high net worth individuals on all matters of wealth, including investments, portfolio construction, portfolio management, and retirement planning.

Tony lives in Dearborn, Michigan, with his wife Dawn and daughters Emma and Anna.

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