The process by which advisers focus on certain clients groups based on their profitability is called client segmentation.
Experts say the Retail Distribution Review that came into effect in 2012 has made client segmentation a more common occurrence in the industry.
So what is it client segmentation and how did it come about?
Retail distribution review
Graeme Jones, regulatory policy and technical consultant at Bankhall, says: “The change from commission-based to client agreed remuneration (adviser charging) as a result of the RDR prompted many investment advisers to think for the first time about segmenting their client banks in order to review and develop their service propositions.”
He adds: “RDR brought a shift from models weighted towards ‘transactional’ business to the development of ongoing service propositions.”
Since RDR, many advisers have divided their clients into three or four levels, providing more services and charging more to some, but charging less and providing fewer services to others, say experts.
Several others in the industry note an uptick in client segmentation following RDR.
Chris Davies, founder of Model Office says RDR put a whole spotlight on advice suitability and made sure that advisers weren’t “shoehorning or retrofitting clients” by applying products that are not suitable for those clients.
RDR removed commission bias from the system so that recommendations made by advisers are not influenced by product providers, resulting in greater transparency for retail investors.
A consequence of RDR was that advisers had to allocate more time and resources to each client.
Mr Davies adds: “Advisers have to play around and juggle to make sure your client’s needs are met [as a result of RDR].”
Gold, Silver, Bronze
Mr Jones says: “Firms looked to categorise clients by a variety of methods including assets under management, client revenue, through to the type of services they were able to offer and how they were priced.”
Platforms have acted as enablers for investment advisers to implement their propositions following any segmentation exercise, he adds.
Mr Davies says: "The traditional way advice has been segmented is through the ‘gold, bronze and silver’ method.”
He says many advice firms segment their clients based on the amount of assets under management that they hold.
“How do you set your minimum, what happens to those that fall below the minimum?” he questions.
He cautions that there are dangers around advice firms using the “gold, bronze, silver” method of client segmentation.
They need to blend this with client behaviour, emotional attachment with technology as this will help clients understand their attitude to risk and different fund types,” he adds.
The need for segmentation
Rory Percival, regulatory expert at Rory Percival Training and Consultancy says while the Financial Conduct Authority has not made client segmentation mandatory, “it is a logical step that firms should take as part of this assessment of their client bank in designing investment solutions and platform selections”.