A look at client segmentation steps for advisory firms

Segmentation efforts should help an advisory firm better understand its clients' needs and should not be a one-time effort, Brian Kostick, a senior business consultant at Charles Schwab, said at the Schwab IMPACT 2018 conference in Washington, D.C., on Tuesday.

Kostick said several “myths” exists around segmentation, including the idea that it is a “one-time exercise.” Segmentation should be “embedded in the DNA of your business,” he said.

It also doesn't mean that firms will need to “fire” or discriminate against clients, he said, adding that the only time a firm shouldn't work with a client is when the firm's and client's values do not align or if the firm can't meet the client's needs and expectations.

Firms often start from zero, where “all business is good business,” but eventually must accept that clients have different needs, expectations and levels of complexity, Kostick said. “Winning firms” have written business plans that are crafted deliberately for the sake of being proactive, they don't “wing it,” and they use data to make informed decisions, he said.

Kostic said the three key forces firms must address while growing are:

  • Deeper business insight
  • Situation analysis
  • Action-oriented planning

Gaining deeper insight begins with an inventory of clients to gain a stronger understanding of who the firm's clients are in terms of such factors as stages of life and wealth, along with a better knowledge of what the firm must do to serve them effectively, Kostick said.

Segmentation that is done correctly means “right-sizing” what the firm does for each client and how those services are priced, meaning that the inventory should determine which clients are overserved, which are underserved and which are already served at the appropriate level, he said.

In one case study, a firm was able to better serve its “wealth builders” – clients with less than $1 million – by letting them work with junior relationship managers, Kostick said. This led to better service than these clients would receive if the principal had remained heavily involved in every relationship, he said.

A firm segmenting its clients for the first time should have two or three segments, or maybe four in some cases, he said.