Richard Leeson goes through the many different types of client that an adviser has to deal with.
It is impossible to write an article this year with the Retail Distribution Review (RDR) looming on the horizon and not be tempted to mention it, so I will not even try!
However, while the RDR is a driver for a seismic change in the way advisers and clients interact, there are some basic parameters that should always have been applied in identifying target clients, but which have been ignored by some firms.
The need for careful planning to target ‘economic clients'* increases with the advent of fee-based advice. As we switch from commission to fees, even those advisers who have segmented their ideal clients will need to review their approach to ensure it is still valid.
In the past, a firm of advisers may have been able to enjoy commission-based remuneration on single premium pension transfers. This may not be such an attractive market if the client is unwilling to pay a fee of £750 per transfer, a sum quoted to me by my financial adviser.
Similarly regular savings plans may have offered economic markets in the past, but in the future are unlikely to be areas where the advice and attaching fee meets the criteria of a client's cost/benefit analysis (CBA).
Increasingly it is expected that clients will apply a CBA to the advice they receive and this will shape the range and type of services and advice which they will expect of an advisory firm.
Advisers will need to anticipate this as they redesign their business models and either refocus on new advice areas for existing clients or look for strategies to attract new types of clients.
With advice likely to become restricted to those who can a) afford an economic fee level and b) value the benefit of the advice, lessons may be learned from the private banking market which has successfully targeted this segment, as indeed have an increasing number of independent advisers.
Private banks deal almost exclusively within the very high net worth segment and ultra-high net worth segment.
Typically this has meant clients needing ‘investable assets' of over £1m or £10m respectively, although amounts differ from bank to bank. While high street retail banks have been content to segment their target clients by income and or capital, private banks have been more specific about their client types based on behaviours and this is where advisers can benefit from following their lead.
High street banks typically classify clients based on their ‘worth' to the bank, below £100,000 of income or £100,000 of capital is likely to mean the client was offered an in-house or tied investment and protection product range.
As clients' worth increases they are progressively offered first independent financial advice and then private banking (and in some cases ultra-high net worth banking).
This segmentation is fairly crude since it takes no account of differing client behaviours, and therefore, is limited in its ability to assist accurate client targeting and defining the advice proposition.
Over the years advisers have often segmented themselves by product advice. How many times have you heard: ‘I am a pensions specialist' or ‘I focus on lump sum investment'? Going forward, where advice is the proposition and not the product there needs to be a radical change to seeking clients who will be economic based on ‘advice points'.
Advice points are the occasions where an adviser can add value to a client and, for an ‘economic client' this will involve both frequency and value. In other words advisers will have to segment their clients according to the advice opportunities they represent.
A client who requires a simple, low value piece of advice, say for an open market option annuity, may no longer be economic for the adviser unless the client's perceived benefit from the advice is high.
There are some obvious areas of high value advice with high frequency, inheritance tax planning; trust planning; will planning; estate planning; at/post-retirement investment planning and complex pension products such as drawdown and SIPPs.
Almost all of these fit a particular life cycle segment: at or near retirement. It is at this point when clients have accumulated sufficient capital and income and have need of advice on a range of areas where the perceived value of the advice is high, allowing advisers to consider them ‘economic clients'.
The reason that this segment is obvious is that the adviser will have been dealing with the client for some time. As the client nears retirement they rely on the trusted relationship they have with their adviser, possibly over many years.
There are other segmentations which are less obvious but which again provide advisers with opportunities to target their marketing. These are the ones private banks have been using; dealing with rich clients, they have learned a trick or two over the years. First, the traditional private bank client might be described as the ‘Norfolk farmer'; one who has a large holding of land inherited from his father.
The client banks at the same bank as his father and his son in turn will open an account at the same private bank, and all will benefit from an established existing relationship. However there are newer sources of wealth: the accumulated value of ‘old money' (for this read ‘Norfolk farmer') was overtaken in the last decade by ‘new money'.
New money can be acquired in a number of areas: lottery winners; sports people; city professionals; inheritance; personal injury settlements; divorce and sales of businesses. These are areas open to the adviser market as evidenced by the increasing competition between independent advisers and private banks.
These new wealth segments are sometimes alienated by the traditional private bank offering which can be seen as out of date. Segmenting these clients can prove very profitable for an advisory firm.
The first lesson is that there is a world of difference between male and female clients. It is generally felt that the former are less trusting and likely to spread their assets around two or three advisers, keeping each one in the dark.
The latter are very trusting and once they have decided on an adviser they trust they are happy to invest all their wealth through them. Some female clients who inherit or receive wealth from divorce settlements are unfamiliar with financial services and rely on a trusted partner to guide them. This can and does include advice on banking as well as other financial products. For these clients the proposition needs to establish trustworthiness and reliability, any slip from total dependability will result in a lost client.
Solicitors are likely to be the richest source for this sort of introduction and the proposition must satisfy their fear of trusting a valued client to a third party. Male clients tend, though not always, to be more financially aware and will keep the adviser on his toes. Again trust is the important element in the relationship.
For sports people there is a common disinterest in their wealth but a high propensity to minimise tax. For personal injury clients the Court of Protection is usually the ‘client' and therefore the proposition needs to stand up to close scrutiny on its value at the outset of the investment and also the life of the person concerned, with less emphasis on the future generations than in other segments.
Newly made millionaires from the sale of business (or earned income in high paying professions) are more tax motivated than most and willing to take more risk in their avoidance strategies.
While it is easy to assume that the richer you are the more risk you can take, the opposite is usually true.
If your client has divorced, inherited, sold a business, made a fortune in sports or employment then their biggest concern is not losing what they have accumulated. Low risk and guarantees in particular are always in demand.
With six months before RDR is upon us, this is a time to sit down and take a long hard look at the future. Advisers need to be very clear about their proposition to the market, and perhaps what clients value the most isn't what advisers think it is.
It is well worth ratifying this by engaging with some long-standing clients and identifying exactly what is, that you as an adviser do, that they value.
Usually the word ‘trust' will come up more than once. As a trusted adviser, the post-RDR market is a real opportunity; there are thousands of clients looking for what you offer and more than willing to pay well to access your services and advice.
Richard Leeson is sales and marketing director at AXA Wealth International
*Those clients that advisers spending more time with than they charge for.
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