Please note: This blog was originally written for the Journal of Financial Planning.
Client segmentation is a process that financial advisors use to group their clients based on common characteristics. The goal of client segmentation is to provide more personalized and tailored services that meet the unique needs and preferences of each client.
Often, when a firm first launches, client segments are created with the best intentions to maintain them over time. However, as time goes on, the lines between client segments become blurry. Custom solutions are offered, service models evolve, and the introduction of new team members complicates how client segments are defined.
It’s critical for firm owners to maintain clear client segments in their business – even when it seems like boutique or custom services are offered, and each engagement is tailored to the client’s unique needs. Clarifying client segmentation allows teams to deliver exceptional services, and builds a path for firms to scale effectively. Let’s dive into what client segments are, and how they can help your firm give uplevel your services, increase profitability, and more this year.
Why is client segmentation a challenge for firm owners?
Client segmentation has been one of the most significant challenges we see financial advisors face. Many firms feel they have segmentation in place, but still are dealing with:
- A lack of meaningful client-facing action from their team
- Client service teams have no clarity on how different client segments receive different levels of service
- The firm has hit capacity, and don’t know how to scale back current client services to free up time
- Founders and executives are preparing to clean up their book of business to merge, sell, or increase rates and don’t know where to begin
- The firm is hiring, but they aren’t sure which client segment to delegate to an incoming associate
- They’re ready to phase out their clients who are at the lowest tier of service, but aren’t sure who they are
When firm owners come to Level Best for assistance in cleaning up their operation, they think that the above pain points are related to a team that isn’t proactive enough, or a lack of streamlining and automation in their service calendar. However, more often than not, many of the problems they’re facing can be solved by reevaluating their client segmentation and cleaning up their book of business to unlock a new level of growth.
What benefits does accurate client segmentation have for firm owners?
Client segmentation may feel like a “nice to have” instead of a “need to have” – but the tangible benefits of organizing your book of business are tough to deny.
Firms ensure consistent quality of services. Firms that segment their client lists can quickly clarify exactly who gets what service – and when. This makes it easy for their full team to implement their service calendar and ensures that each client group gets the same level of service.
Firm owners can allocate resources wisely. We’ve all been there: a legacy client who is underpaying for a lower level of service winds up getting the same amount of time and resources dedicated to servicing their account as someone who is bringing the firm more revenue.
While treating clients with equal care is a fantastic goal to have, firm owners need to be realistic about how they spend their client service budget. Even if every client goes through the same initial planning process, clients in your top-tier client segment may warrant more time or ongoing nurturing depending on their unique needs, and how your service calendar is set up to support them.
You can clarify where you need additional support. Understanding how many clients you serve in each client segment can help you clearly see where you need more support by leveraging people, processes, or technology.
Client segmentation brings future goals into focus. Creating client segments clarifies what you need more of at the moment – time or money – but it also helps you to get some focus around your future business efforts. If you know you want to bring on more comprehensive planning clients, you may look to adjust your marketing efforts and budget to reflect those goals. Or if you feel like your client segments are nearing capacity, you can look to increase rates or budget for a future hire.
Remember: you determine what defines a client segment.
Historically, the financial planning profession focused on AUM as a way to segment clients. However, you don’t have to stick to this as a hard and fast rule. In fact, as the profession evolves and an increasing number of firms are offering more robust service types, we recommend developing specific client segments that reflect:
- Total revenue per client
- Client service calendar or deliverables received
- AUM (as necessary)
- Qualitative information (ex: clients who are in transition, specific phases of life, etc.)
These differentiators allow you to clearly see your book of business, define who you serve, and make confident decisions about your business going forward.
Introducing the GROW Framework
At Level Best, we use the GROW Framework to help our clients segment their book of business. The framework is straightforward, but flexible enough to work for firms who want to use more qualitative criteria for their client segmentation:
- G: Growth Potential
- R: Referral Source
- O: Optimal Fit
- W: Wealth Contribution
G: Growth Potential. The first indicator for your client segmentation is the client’s growth potential. There are a few different ways to view this:
- Financial health: What do their current finances look like? Are they financially fit?
- Growth opportunities: A client might have opportunities to expand business with them in the future. They could have additional assets you aren’t managing yet, be on the brink of a liquidity event or an inheritance, or want to uplevel the work they do with your firm in the near term.
- Proactive engagement: Is your client engaged in your process? Are they open to recommendations or new service offerings?
- History: Has this client consistently represented an increase in revenue in the past? Is your partnership financially fruitful as well as emotionally fulfilling?
Many firms plan to work with their clients on an ongoing basis, regardless of how they charge. It’s important to understand your clients’ current financial situation before segmenting them for future decision-making.
R: Referral Source. You may have a legacy client who takes up more of your time than you’d like, or who underpays for their tier of service – but they send you amazing referrals regularly. This can and should influence the client segment they fall under.
If a client is sending qualified referrals your way, is part of an active network of professionals or likeminded people who want (and will pay!) for your services, and who regularly supports your firm in other ways, they may wind up in a higher tier client segment because they keep client acquisition cost down, and increases their lifetime value.
O: Optimal Fit. Who do you want to work with? Do you currently serve clients who fit your ideal target audience? If they:
- Fit your niche
- Listens to your advice
- Takes action when prompted
- Communicates openly
- Share your firm values
- Are generally easy to work with
They’re an optimal fit. This influences client segmentation because optimal fit clients are generally more satisfied with your work, communicate promptly, and empower you to effectively allocate your resources because you can scale your services to partner with more of your optimal fit prospects in the future. This increase in efficiency gives this particular client segment more weight than others in your book of business.
W: Wealth Contribution. Revenue can’t be completely overlooked when segmenting your book of business. After all, retaining a client is less expensive than trying to generate new business. Assessing and categorizing clients based on their current financial contribution to your bottom line can help you:
- Project future revenue
- Identify upsell opportunities
- Increase on overall firm profitability
Implementing the GROW Framework
To implement the GROW Framework for your firm, start by deciding on which factors are most important to you. You don’t have to use every possible metric to create client segments – focus on the ones that will help you move toward a scalable, values-aligned firm in the future.
From there, you need to determine a clear way to assign metrics (and track them) internally. This often looks like a metric in your CRM for easy tracking. Next, you can begin assigning metrics to your existing book of business. Update your metrics regularly (quarterly or semiannually) to stay up to date on where your business currently stands.
Pro Tip: Find ways to make these metrics as quantitative as possible! Once you have a clear system on how to track and measure this, your ops professional or administrative team can keep track of the metrics without the advisory team’s involvement.
Success stories with the GROW Framework
Our Level Best team has helped firms of every size implement the GROW Framework successfully with results that speak for themselves.
Solopreneur. An advisor we partnered with had been a solopreneur for years. They were happy running the show by themselves…until they weren’t. They needed to hire to avoid the burnout cycle, and fast. But they also weren’t sure where and how to delegate, and were afraid of not actually getting enough work off of their plate to make the hiring effective. We were able to evaluate their book of business, re-segment their clients, and clarify exactly who would be serviced by their new advisor. This freed up their capacity, and clients were excited to meet a new, eager advisor who was excited to work with them as part of the team.
Family office with ultra-high net worth clientele. A firm we worked with served multigeneration families who are ultra-high net worth. They wanted to segment their clients to implement new service initiatives across their business including tax planning, legacy planning, wealth management, etc.
At first, it was unclear how to segment their clients. The firm offered a high touch service as their set standard across the board, but it was also clear that resource allocation wasn’t at all efficient. Finally, we were able to clarify the firm’s values, and segmented their client list based on both level of service each segment required, and whether or not they aligned with the firm’s core mission and ideal client type. They were able to create a streamlined service calendar for each client segment, and have the tools going forward to allocate their time and budget appropriately.
Multi-advisor firm that hit a capacity wall as leadership nears retirement. Having more than one lead advisor on a team and still hitting capacity can feel like a big problem, but what if lead advisors are nearing retirement? As lead advisors gain tenure at your firm, they may have a desire to maintain control over the types of clients they work with.
That’s completely normal! They’ve earned the flexibility to dictate their unique book of business. However, nobody wants to sacrifice legacy relationships when they don’t have to. For this particular firm we took them through a client segmentation process that prioritized revenue per client, alignment with their firm’s optimal fit, and length of time a client had been with the firm. As a result, we could quickly see who the “top tier” clients were, and had a clear list of clients who could be phased out to free up capacity or delegated to an associate advisor.
Build up a strong foundation for your firm’s future growth with client segmentation
Advisors have a heart for serving others. As a fellow consultant, I get it. It can be challenging to go through a client segmentation process, especially when you’re dedicated to helping as many people as you can with your expertise. However, by taking the time to segment your clients in a way that aligns with your firm’s values and growth goals, you’re laying a strong foundation to build on for years to come. Clear segmentation can help you uplevel the service you provide, avoid burnout for you and your team, and increase both revenue and profit as you make strategic decisions about where you spend resources and the types of clients you onboard going forward.
