Client Segmentation for Financial Advisors: What to Keep in Mind

Virtually every business segments their customers, no matter how large or small. Segmentation allows businesses and organizations to separate their mass of clients and customers into smaller, more manageable groups. This provides valuable opportunities for message tailoring and personalization of services.

Client segmentation works differently in each industry and practice, and yet there are common methods of segmenting to be found almost everywhere. For financial advisors, the most common segmentation is by clients' contribution to assets under management (AUM), but segments by age, profession, and other characteristics can also be valuable.

Let's dive into how financial advisors should segment their clients and what they should do with those segments after they've built them.

What Is Client Segmentation?

Segmenting clients is the process of grouping your client base into sets of individuals with similar characteristics relevant to your business activities. Financial advisors should think about what characteristics matter the most for their different service offerings, or what characteristics make one group of clients more suitable for marketing activities versus another.

Before we jump into segmenting clients by AUM, let's explore some common segmentation strategies.

Segmenting by Demographics

People are often grouped by their immutable qualities and other demonstrable attributes. Things like race and employment status fall within the realm of demographics, as well as data like:

• Age
• Ethnicity
• Gender
• Marital status
• Income

How does this intersect with financial advising? It's a good idea to keep track of which clients have children, so that you can know who to target when marketing to the younger generation of investors. Age is obviously important, as certain investors will be in need of retirement services, while others may need to start thinking about estate planning.

Segmenting by Psychographics

Another way to segment clients is to use data about their personalities and other "softer" characteristics. Beliefs and opinions cannot be proven, unlike demographic qualities, and so they're generally more difficult to determine. These kinds of attributes occupy the psychographic domain, along with:

• Lifestyles
• Attitudes
• Interests
• Values

Estimating which segments of your clients might have certain values, interests, and other psychographic attributes can be helpful when communicating about things like ESG investing.

If certain segments of your client base are totally uninterested in something like ESG investing, they might feel like you aren't paying attention to them if you send out broadband communications that don't speak specifically to their interest, hurting retention in the long run.

The Essential Client Segmentation for Financial Advisors

Although the above methods of client segmentation are useful for planning client communication strategy or for marketing to prospects based on your existing client base's characteristics, most advisors will find the greatest benefit by segmenting clients according to their contribution to AUM.

In fact, most advisors are likely already doing this—but they may not be acting on it.

The reason why advisors should segment their client base isn't just to keep track of who offers more AUM or less; it's to tailor your services based on that segmentation.

Some advisors feel uncomfortable excluding certain clients from certain services simply because they contribute less to their AUM, but this is a limited perspective on client segmentation. In fact, it is considerably more fair to tailor services based on how much revenue an individual client contributes.

Clients contributing a large amount to your AUM will require additional services—they have more wealth to manage, after all. As their financial advisor, it's essential that you make the time to manage that wealth. If you're providing all of your clients access to all of your services, then time is almost certainly something you're short on.

Some financial advisors worry that they're going to alienate the less wealthy portions of their client base by segmenting based on AUM, but this isn't true. Clients understand and expect to receive tiered service based on the value they contribute to your practice. The same principle applies to their music or streaming services, so it won't be a foreign concept.

The key thing for advisors to remember when segmenting their clients in this way is to be transparent. Ensure that your clients clearly understand where they fall in your tiering system, what level of AUM they need to contribute to reach the next tier, and what services are available at each. Many advisors implement a silver, gold, and platinum tiering system that accomplishes the above.

Moreover, make sure your investors understand that their segment is fluid. A young investor may be fully aware that they don't have as many assets to manage as somebody who has recently retired. You should explain that as their assets grow with you as their steward and guide, they'll tier up into different service categories.

Client Segmentation for Financial Advisors in a Nutshell

Client segmentation can yield major results for your practice so long as you follow certain best practices and actually act on the segments you create. Just remember:

• Transparency is critical
• Clearly communicate your service standards to each client and how they differ by segment or tier.
• It needs to be fair
• Your most valuable clients warrant the most value from you, which means providing the appropriate services and attention.
• Segments are fluid
• As your clients' assets grow, you can adjust their segmentation and overall experience.

By positioning your clients according to criteria such as assets, revenue, age, and profession, you can achieve a high level of personalization with your services.

Client segmentation for financial advisors can also factor in less tangible qualities, like psychographic and behavioral data. Through careful, precise segmentation of your client base, you can customize your message and service to specific clients. This level of client care can help set your practice apart from the rest by identifying you with outstanding customer service.

And if you're wondering how to craft a truly bespoke client segmentation strategy for your practice, why not get in touch with the team at AssetMark?