How advisers are segmenting clients

This article is part of
Guide to segmenting clients

How advisers are segmenting clients

Segmenting clients into bands and groups is an invaluable method for advisers because it ensures tailored advice, products and services, to each segment and, therefore, to each client.

It also leads to correct charging structures and enables advisers and their companies to evidence and track clients’ financial journeys, were they to come under scrutiny.

“For example, if the client files a complaint and says they have been given the wrong service or that they are being overcharged, that can then point straight back to the fact that the advisory firm has not segmented properly,” explains Chris Davies, founder of Model Office.

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He continues: “The benefit to the firm in segmenting clients is they streamline which means services become far more efficient, effective and profitable.”

With the Senior Managers and Certification Regime only months away, it is more important than ever for advisers and their businesses to recognise and understand the importance of segmentation and ensure it is done right.

But whether or not an advice company segments its clients depends on the size of the firm, according to Mr Davies.

He says: “There are still some firms not doing it or paying lip service to it and that has got to stop because they will be found out particularly with SMCR coming through.”

He adds: “Not segmenting is dangerous; you have to segment to ensure the right clients are getting the right service.”

Mifid II: a Prod in the right direction

The Financial Conduct Authority received 1,335 notifications of inaccurate transaction reporting last year. The figures, published by regulatory consultancy Bovill, provide a snapshot into how companies adjusted under the weight of Mifid II in its first year.

In fact, since the directive took effect in January 2018, advisers have been warned the client segmentation they carried out directly after the Retail Distribution Review in December 2012 would not be sufficient under the new rules.

Jamie Farquhar, business development director at Square Mile, explains: “When commission was killed and fees were introduced it was obvious that IFAs would have to segment their client base and define a service proposition to the different segments, in order to justify the fees that they were charging for that service for each segment.”

To understand how advisers are currently segmenting their clients and how it works more generally, it is important to take a step back and look at what the current rules say.

The FCA’s Product Intervention and Product Governance Sourcebook defines product oversight and governance as “the systems and controls advice companies have in place to design, approve, market and manage products throughout the products’ lifecycle to ensure they meet legal and regulatory requirements.''

It also states that good product governance results in products that meet the needs of one or more identifiable target market and are sold to clients through appropriate distribution channels to deliver appropriate client outcomes.

The aim of the Prod was to improve the industry’s product oversight and governance processes and it sets out the FCA’s statement of policy on making temporary product intervention rules.