Key Takeaways

• Financial advisory firms often segment clients based on the revenue they generate, with larger portfolios placed in higher tiers, leading to a disparity in service quality.
• Clients contributing more revenue are typically assigned to more experienced, senior advisors, while those with smaller portfolios may be assigned to junior advisors or even client service associates.
• To understand where you fall within a firm’s client segmentation model, look at factors like the experience level of your advisor, the number of clients they serve, and the quality and frequency of service you receive.
• To avoid the downsides of client segmentation, clients can seek flat-fee financial advisors as an alternative, ensuring equal attention and expertise for all clients, regardless of portfolio size.

Like employees of any other business, financial advisors work for “for-profit” firms whose owners seek to maximize their profitability.  These owners seek to maximize their revenues and minimize their costs to maximize profit.  One of the practices often used to achieve this end in the world of financial advising is known as “client segmentation.”

What is Client Segmentation?

Client segmentation is the process of dividing up a firm’s client base along the lines of a particular basis.  Client segmentation can serve clients better if the segmentation is based on a client's need for specialization, like retirement planning or family planning.  

Segmenting clients based on their needs can allow an assigned financial advisor to build experiential expertise by focusing on a particular area of need, enabling the financial advisor to deliver more valuable advice and service.  (See our Insight entitled “Retirement Specialist or Financial Advisor” for more.)  

The Problem with Client Segmentation for Those in the Retirement Planning Stage

Unfortunately, however, the predominant practice utilized by most financial advisory firms is to segment clients based on the amount of revenue they contribute to the firm.  Given that most financial advisors are not flat-fee advisors, but rather charge based on a percentage of the client’s portfolio (%AUM), clients with the largest portfolios end up in the top segmentation tier(s).  In contrast, clients with smaller portfolios end up in the bottom tier(s).  

While financial advisory firms may segment clients differently (i.e., quarters, deciles, etc.), their logic all follows some form of the old “80/20” business rule.  The 80/20 business rule states that 80% of a firm’s revenues generally stem from its top 20% of customers.   

Client segmentation impacts you as a client in two main ways:

1.Determines who will serve you at the firm – Most financial advisory firms employ financial advisors with differing experience and credentials.  Hiring only highly experienced and credentialed financial advisors is difficult and expensive, so most firms hire cheaper and more plentiful junior advisors.  Naturally, the highest revenue-generating clients will be assigned to the firm’s most senior financial (or “A” team) advisors.  In contrast, the lower revenue-generating clients will be assigned to the firm’s junior (or “B” and “C” team) advisors.  We’ve even seen circumstances where ~20% of a firm’s clients were left unassigned and simply served by Client Service Associates who leaned on financial advisors when they called in needing something.

2.Determines what quality of service you will receive – Revenue contribution is used not only to determine which financial advisor you are assigned to but also the level of service you receive.  Top-tier clients often receive the bulk of a firm’s time, attention, and priority through more proactive service, access to other firm team members, additional service touchpoints, and additional services, such as highly specialized retirement planning solutions or guidance with estate planning.  After all, if 80% of revenues come from the top 20% of clients, the firm cannot afford to risk losing a top client.  Unfortunately, the problem this practice creates is that the bottom 80% of clients often end up underserved.

As a client, it can be hard to determine where you fit in terms of importance within a financial advisory firm because it’s all relative.  A client with a $3 million portfolio may be in the top 20% if that firm mainly served clients with portfolios between $250,000 to $1,000,000.  If that same client were at a firm that mainly served clients with portfolios between $1,000,000 and $10,000,000, they would most certainly not be among the firm’s top clients and thus would likely be underserved simply because of their portfolio size.  

3 Ways to Figure Out Where You Fit in a Firm’s Client Segmentation Model

If you’re working with an advisor who charges based on a percentage of your assets (rather than a flat-fee advisor), there is a possibility that you’re part of the firm’s client segmentation model. 

While it can be hard to figure out where you fit in terms of importance to a firm, there are some tell-tale signs:

1.Experience level – Suppose you look at the firm’s website under the “team” section and find you are assigned to one of the more senior financial advisors with many years of applicable experience and the proper educational credentials (CFP®, CFA, MBA, etc..).  In this case, you are probably among the firm’s top clientele.  If you find your assigned financial advisor is more junior and lacking the proper educational credentials, you are probably not among the firm’s top clientele.

2.Client count – If your financial advisor serves more than 100 clients, it is highly unlikely that the financial advisor can give all clients equal time, attention, and priority.  Being assigned to an advisor with more than 100 clients means one of two things.  First, the financial advisor has had to segment their own clients, and you will need to figure out where you fit within that financial advisor’s client base.  Second, you are not among the firm’s top clientele and have been relegated to a lower-tier advisor not expected to deliver the same high-quality service as the firm’s top clientele.

3.Service – Suppose the firm is proactively rebalancing, tax-loss harvesting, investing cash, reaching out with unique retirement income planning ideas, estate planning ideas, or tax strategy ideas, and keeping you abreast of what is happening in financial markets.  In that case, you are probably among the firm’s top clientele.  However, if you feel the only time you speak with your financial advisor is when you reach out to them or find very little being done on your behalf, you are likely not among the firm’s top clientele.

How to Protect Yourself Against the Downsides of Client Segmentation

Suppose you would rather not play this client segmentation game.  In that case, the solution is to seek a financial advisory firm that charges the same flat fee to all clients regardless of portfolio size, income level, complexity, etc.  

A single flat fee advisor who only hires experienced senior financial advisors and does not overload them with clients ensures that every client receives the same great service and advisory expertise.  (See our Insight entitled “Why a Flat-Fee Advisor is Best for Retirees” for more.)  

As a side note, it is ironic that the industry charges based on a percentage of a client's portfolio as if it is the management of the portfolio that takes more time or adds the greatest value to clients.  While you can certainly help people not destroy value in the investment management process (by shunning the high cost of active management, correcting inefficient portfolio construction, and managing behavioral issues), the real value creation for a retiree often comes from other proactive services such as: actively managing sequence-of-returns risk, strategically planning to minimize lifetime taxes, and applying dynamic withdrawal rules to sustainable retirement spending (preferably in the form of Total-Risk Based Guardrails).  These three tactics can actually add material value, yet have nothing to do with the size of a portfolio.

If you would like help with retirement planning and investment management but would rather not play the client segmentation game, we stand by and are ready to help. You can feel free to reach out here at any time.