Some advice firms think doing a client segmentation exercise means designing at least the same number of propositions as they have types of clients. In this post I discuss why that’s not necessarily the case and consider why firms should think about reviewing and updating their client segmentation processes in order to answer whether they need one or more propositions to deliver the good client outcomes they strive for.

The influence of client needs over service design

Financial advice firms know their clients well. They have tried and tested methods to identify whether their clients are happy with the service provided. These might involve: a certain frequency of meetings (covering an in-person annual review and a mid-year shorter review video call); a charging structure (flat rate or tiered); a level of self-servicing so clients can update some of their own fact find information and retrieve documents via a portal, and so on. As a result, firms may have designed a client proposition that meets their best idea of what works for their clients.

Since Consumer Duty, firms are taking a closer look at the shape of their client bank in order to demonstrate a depth of understanding of what clients need and value. Client segmentation can be a really useful tool in meeting this requirement by providing a structure through which an assessment of client characteristics can be made.

But there can be a misconception that different client characteristics will require a different client proposition, and we’ve heard from some firms that that may act as a brake on implementing a full client segmentation exercise.

In fact, client segmentation post-Consumer Duty can often just look like identifying and reflecting on how different types of clients might experience the service differently.

This is why we partnered with M&G to produce a guide for advisers that looks at the process for segmentation in a post-Consumer Duty world and what they can do to ensure their firm is evidencing that they can collect and interpret the necessary data on clients.

Why firms should think about reviewing and updating their client segmentation processes

At its heart, the Consumer Duty rules mean that firms’ should design a client segmentation that takes account of the range or variability of outcomes that different clients who invest or use the same product or service, may receive. This enables firms to have oversight of the distribution of client outcomes (whether more positive or negative, suitable or unsuitable) and make adjustments to the client journey or the method of service delivery that they receive, to ensure consistent outcomes, including for vulnerable clients.

The Consumer Duty has placed more emphasis on how client needs may change (by developing a vulnerability, for example). This emphasises the importance of knowing how to truly embed understanding about clients – not just their needs at any given time – but how these needs may be driven by characteristics and how this understanding informs the service a client may receive on an ongoing basis. Firms need to assess outcomes, but also develop a process to assess where adjustments are needed to ensure clients are getting the best value.

It is important in the context of Consumer Duty rules to think of segmentation differently to what may have gone before. The practice of segmenting clients does not mean differentiating between developing a range of proposition variations (incorporating levels or access to specific tools, investment options and level of adviser technical expertise and skills) and segmenting the client bank into these propositions. Instead, the focus of segmentation should be: recognising how the range of characteristics of clients who may be receiving the same proposition are differentiated and how to go about segmenting the client bank using these characteristics on a needs-focussed basis.

This may sound like an obvious approach in thinking about client segmentation, but our discussions with firms and consultants in the industry has emphasised that there can often be a disconnect between what information firms collect on clients, how they record this, and for what purpose.

Whilst there is a need to collect data on clients to ensure the service they are receiving is suitable and offers value, the Consumer Duty means that firms must now also be cognisant of the fact they need to ‘evidence’ the most suitable, value driven approach that is taken.

The need for evidence places more emphasis than may have gone before on the process of segmenting clients. Defining client characteristics (such as the need for more active or passive management, openness to tech driven solutions and presence of vulnerabilities) and the impact that has on the outcome clients can expect, is one starting point that can position firms in the right way to think about how to segment client needs.

There are also a number of key reasons why firms might segment their client base – from refining proposition design to enhancing marketing effectiveness. Whatever the motivation, a robust understanding of who the firm serves can help identify the most appropriate tools and approaches to utilise and develop in order to engage on a more meaningful level with your client base.

For more details on our client segmentation research, please get in touch. Click here to download a copy.