While segmentation undoubtedly benefits advice firms by streamlining their businesses offerings and helps clients gain suitable advice, it is important to consider whether or not there are any risks.
Some might see an inherent conflict between advisers banding clients together – often by wealth – with the need to sustain businesses, especially as the industry grapples with cost and margin pressures and a tougher investment environment.
“There is nothing wrong with segmenting clients by asset size in terms of your own business management information,” says Mark Polson, principal at the Lang Cat.
“But it should not leak out to clients themselves,” he warns.
So what exactly are the dangers and how can advisers ensure they are working to viable business propositions whilst ensuring clients' needs are met, regardless of their wealth?
What the Retail Distribution Review did was focus on whether clients were being shoehorned into investment propositions that may not have been suitable, according to Chris Davies, founder of Model Office.
The danger now, however, stems from not following the Financial Conduct Authority’s Product Intervention and Product Governance Sourcebook – which came out with MiFid II – and not recognising the necessity to segment based on client outcomes, according to Jamie Farquhar, business development director at Square Mile.
He explains: “Advisers [today] have to do the segmentation for RDR but they also have to do segmentation for Prod – these are two separate processes.”
The Prod is entirely centred on investment products, surrounding their manufacture and distribution, and requires them to be based on client outcomes.
Mr Farquhar explains: “In essence, the FCA is looking for manufacturers, fund managers and life companies, to clearly define what they believe the target market is for their product and for the IFA to do the same thing for their client database.
“What the FCA then want is for there to be a match between what the manufacturer is saying and the segmentation process that the IFA has been through which will then help define suitability.”
That is why IFAs now also need to do a second piece of segmentation around client need requirements and outcomes from an investment perspective because the whole point behind segmentation is to help you identify the right products to meet each clients needs.
He reiterates: “You have to segment your client base first to define your service structure and, therefore, the fee base that you are going to implement for all of your clients – that is the way you work out the commercial nature of your business.
“But you then also have to ask questions based upon outcome such as: is my client looking for income or are they looking for capital growth? Are they looking for preservation? What age are they? How long are they going to be looking for this service for?”
While there is the risk that an adviser could go through the segmentation process incorrectly, which would result in clients being put into the wrong sorts of investments, Mr Farquhar suggests that is a very minimal risk, if at all, because "IFAs are generally very good at segmenting their client".