Understanding client segmentation within a practice is critical for planners. But while planners may know what different client segments they serve, too often they aren’t using that information to change their practices accordingly, says Matt Matrisian, director of practice management for Genworth Financial Wealth Management. Financial Planning spoke to Matrisian about ways advisors can understand the profitability of different client segments and also how they can approach pricing for the smallest client segments.

Q: How can advisors understand and analyze their different client segments and whether or not they’re serving those different types of clients profitably?

A: Advisors today don’t spend the time they should in terms of looking at their entire practice and specifically their client relationships. When we do our Mastery Program events [two-day practice management seminars] we work with hundreds of advisors throughout the country to implement best practice disciplines within their businesses. When we consult with them regarding client profitability we find a large percentage of advisors, roughly 70%-80%, have completed some type of segmentation analysis on their client base but it is mostly an academic exercise.


Very few advisors actually go and make changes within their practices as a result of this exercise. Even if advisors do segmentation, they don’t necessarily really understand the profitability of their client segments or what type of service model to use for each segment. I might ask them, ‘If I had $300,000 to invest. Do you know if you can deliver the type of service I need and if you could do it in a profitable way?’ The vast majority of advisors don’t know.

Q: How should advisors figure out the profitability of the different client segments?

A: Do a time analysis. Where are they spending their time? How is their staff spending their time? What clients are they spending time with? Just set up a basic grid by individual client. Give the grid to all of their staff members. Each advisor should write down the amount of time he or she spends with that individual client, including breaking down all the different ways of engaging with that client, including meetings, meeting preparation, processing operational issues, answering questions, and then how much time for each activity. Advisors should do that for about a month. Then it’s possible to see how much time they’re really spending with each individual client. Compare that with your individual analysis. Are you spending a lot of time with what you think are your most profitable clients — let’s call them “A” clients — or with C and D clients?

From there advisors can start to break down, based on their overhead, what the profitability of that relationship actually is.

 Once they start to analyze their businesses from a profitability perspective, they start to see their larger relationships are subsidizing their smaller ones, to a large extent. That becomes a bit of a challenge. The smaller relationships are using a significant amount of capacity and resources within that business. These resources could be better spent on targeting their ideal clients or potentially increasing the revenue stream.

Q: How should advisors then determine pricing for the smallest client segment?

A: I think it’s a case-by-case scenario. If you look at the infrastructure a firm has put in place, and how it has set up its service model …. I think there is a way for advisors that are not ultrahigh-net-worth wealth management firms to serve smaller clients. That said, the term “smaller” is relative. A smaller client to regular RIA may be $50,000 in investable assets to one person but may be $500,000 to another. Let’s just say for the purposes of our discussion, $250,000 and below in investable assets.

There is a way to service these clients and do it profitably. When advisors look at their core offering…I try to bucket clients not into A, B and C but in terms of needs. Generally, you can think of clients in three tiers:


  • The first tier — the smallest clients — are core investment management clients. They don’t need a lot of estate or tax planning. Generally these clients can use a TurboTax. They don’t need a lot of high-end financial planning. But advisors should of course review risk tolerance, goals and objectives, and do a net worth analysis on the client and the client’s family, and some budgeting and cash flow analysis. It’s also necessary to make sure the client’s asset allocation is being properly rebalanced so there’s the best possible probability of meeting the client’s goals and objectives. A lot of these needs can be outsourced. Use a turnkey solution, from Genworth or another firm, for that core investment management function. From advisor perspective, the need here is really to engage with that client and manage the relationship.


  • The second tier of client — maybe between $250,000 and $1 million of investable assets — is more of a financial planning client, with a need for specific financial planning advice. Because the client has more investable assets, the complexity of their financial situation starts to increase.  They will probably have needs for retirement needs analysis, tax planning, estate planning and account aggregation. Advisors can start to look at those relationships a little differently, and perhaps charge a financial planning fee that is separate from investment management services or included in the asset management fee if the advisor can deliver this service package in a profitable way.


  • The last tier of clients is $1 million and over in investable assets. These clients will need comprehensive wealth management. Maybe they have gifting issues, or want to develop a trust. They will most likely need charitable giving and tax strategies. Usually what I tell advisors is try to think about charging in a way that makes that client relevant to your business in terms of profitability based on the service model and complexity of the solutions being provided.

For a smaller client, maybe determine if you can you increase your fees to those clients. Spend time with them on a regular basis, and then charge maybe 1% for the services you’re delivering. Another option is perhaps migrating those small client accounts to a junior advisor in your practice. Be cognizant of what one hour of your time is worth
If the smaller relationships go down to the junior advisor, that may allow them to work with those clients profitably. That also will allow a lead planner or advisor to free up some capacity and spend more time in revenue producing activities. But as a firm you’re still able to serve those clients appropriately.

--Danielle Reed writes for Financial Planning.

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