Client Segmentation Can Help Maximize RIA Firm Profitability and Client Experience Says New Report From Schwab Advisor Services

Latest Schwab Market Knowledge Tools® report examines how effective client segmentation strategies can benefit independent investment advisors

BOSTON--(BUSINESS WIRE)-- Charles Schwab, a leading provider of custodial, operational and trading support for more than 6,000 independent RIAs, today announced its latest RIA industry report, Best-Managed Firms: Client Segmentation Strategies – Optimizing client experience and firm performance. The report, which is part of the Schwab Market Knowledge Tools^® (MKT) series, is an in-depth examination of how client segmentation strategies can help RIAs serve a diverse client base while also building a more profitable and scalable business.

“As advisory firms grow, they develop an increasingly diverse mix of clients with differing needs. Meeting the needs of different kinds of clients while strategically allocating a firm’s resources is often a significant challenge,” said Scott Slater, managing director of business consulting with Schwab Advisor Services. “Client segmentation can be a real win-win approach, helping firms provide different types of clients with the right balance of services, while better aligning service levels to drive profitability and build scale into the firm’s service model. Our report shows how to implement segmentation so that clients receive a better service experience while also enabling a firm to improve their business performance.”

According the report, segmentation can play a critical role for RIAs, because the diversity of many firms’ clients in terms of asset levels and specific needs can pose challenges to a firm’s profitability and scalability. Firms are managing an increasingly diverse client base, where the majority of clients account for a minority of revenue. According to the 2010 RIA Benchmarking Study from Charles Schwab, 65 percent of RIA firms’ clients have $1 million or less in assets under management (AUM), but these clients account for only 22 percent of firm revenue. By contrast, the seven percent of firms’ clients with more than $5 million in AUM account for 38 percent of firm revenue. Firms are stressed to meet the needs and expectations of all client segments, and do so profitably, while at the same time focusing on specific, lucrative client segments as part of their plans for future growth.

Additional key report findings include:

• Firms that find segmentation most useful typically have a more diverse client base and higher variable cost for the services they offer, most often with more complex services such as wealth management and financial planning.
• Firms with formal client segmentation strategies most often segment a few high-level elements of the client experience, such as financial planning, while most other services, such as reporting, remain consistent across segments.
• Whether firms have formal or informal segmentation approaches in place, the most common client segmenting criterion is relationship revenue or AUM.
• Formal segmentation strategies can help firms maintain an understanding of how much time they spend with their largest, most important clients, while also shifting work from principals down to advisors or junior staff according to the size, importance or complexity of clients’ needs.

More RIA Firms Looking to Client Segmentation

Eighty-three percent of firms in Schwab’s 2010 RIA Benchmarking Study differentiate service in some way – formally or informally. Eight out of 10 of these firms (79%) differentiate service informally on a case-by-case basis with no formal definition of what the client experience is or how it is delivered. By contrast, almost half (44%) of those firms that differentiate service by grouping clients into segments have formally defined sets of offerings or service levels assigned to each segment.

The report details some of the specific benefits firms see in developing a client segmentation strategy. In terms of client experience, firms are increasingly looking to segmentation to achieve:

• Consistency in the client experience by setting clear definitions around the level and types of services offered to different sets of clients,
• Deeper client relationships by providing specialized expertise to clients with specific needs (and not over delivering to clients who have more basic needs), and
• Optimization of non-core client relationships that without segmentation tend to be managed on an ad hoc basis leading to inefficiency and inconsistency.

At the firm level, advisors are using segmentation to realize:

• Improved team member efficiency and productivity through better resource allocation and development of standardized workflows for serving clients,
• Better alignment of revenues and cost to serve clients by strategically matching time and staffing to each client’s level of need and the amount of revenue they generate for the firm, and
• Strategic business development support by helping firms define an ideal client profile, articulate their firm’s unique value proposition, and put a more systematic framework around driving more targeted client referrals.

“Service differentiation is actually quite common in the RIA industry if you take into account firms that have an informal approach to client segmentation,” said Slater. “What informal practices lack, however, is a systematic approach to defining, managing and enhancing the client experience, while at the same time understanding how differing levels of client service impact a firm’s profitability.”

Implementing a Client Segmentation Strategy

The Schwab report lays out four recommended steps for building and implementing a client segmentation program: (1) strategic planning, (2) segmentation strategy development, (3) delivery planning and rollout, and (4) monitoring and refinement.

As part of strategic planning, firms should clearly establish their vision and goals, identify their strengths, weaknesses, opportunities and threats, develop an ideal client profile and firm value proposition, and seek to understand the dynamics of the current client experience they provide.

As firms begin to develop an actual segmentation strategy, they should set clear goals for the program, articulate the components of what will be offered to different sets of clients and the staffing and resources decked against each offer. According to the report, the most critical component of this step is calculating and understanding the cost to serve different sets of clients and determining client-level profitability for each segment.

Once firms are ready to rollout a segmentation program, they should have identified any existing gaps between their current capabilities and the services they want to offer clients. In addition, firms should implement necessary processes and procedures, such as coding of clients and accounts and integrating any necessary systems, and clearly define client-facing and back-office roles and responsibilities. The most critical part of any segmentation program rollout, however, is clearly and effectively communicating to clients to ensure they understand the changes and the benefits to them.

Lastly, firms should commit to ongoing monitoring and refinement of a client segmentation program. Important elements to this step include developing a formal system for gathering client feedback and clearly defining specific success metrics for the program before it is rolled out to clients.

“Even if a firm does not implement a formal client segmentation strategy, just walking through the analytics behind segmentation can provide tremendous value,” noted Slater. “The process can improve firm performance by better aligning a firm’s profitability with the services it provides clients, and can enhance client experience by identifying the specific needs of different types of clients setting clear expectations around how the firm will meet those needs.”

Information included in the report was gathered from the top 20 percent of qualifying firms ranked by productivity, profitability and revenue growth in the 2009 RIA Benchmarking Study from Charles Schwab.

About Schwab Market Knowledge Tools® (MKT) Reports

The Schwab Market Knowledge Tools series is an ongoing program of industry research reports, white papers and guides from Charles Schwab designed to keep investment advisors on the forefront of trends and competitive challenges facing the industry today. Offered exclusively to Charles Schwab’s valued clients, the Schwab MKT program delivers the kind of relevant and timely information needed for future business planning. Information provided is for general informational purposes only and is not intended to provide specific financial, compliance, regulatory or legal advice. Schwab makes no representations about the accuracy of the information or its appropriateness for any given situation. For further information, please contact your legal counsel.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 7.9 million client brokerage accounts, 1.5 million corporate retirement plan participants, 665,000 banking accounts, and $1.47 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. (1010-6772)

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2010 RIA Benchmarking Study

Responses were collected during February and March of 2010.

All information contained in the 2010 RIA Benchmarking Study report is provided for general informational purposes only.

All data is self-reported by study participants and is not verified or validated.

Charles SchwabMichael Cianfrocca, 415-667-0344
[email protected]
or
Makovsky + CompanyJanet Yoo, 212-508-9606
[email protected]

Source: Charles Schwab