Most wealth management firms would say that personalised service lies at the heart of their proposition - so why then is placing clients in groups, or segments, such a prevalent practice? Speaking to WealthBriefing, industry experts outline how segmentation can deliver huge benefits for clients, as well as for the banks themselves.

The wealth management industry is underpinned by the notion of putting the needs of the client first, providing tailor-made advice and a personalised service. It might come as some surprise then that a recent poll carried out by WealthBriefing found that just under half (45 per cent) of wealth managers believe that banks segment their clients primarily for their own benefit, rather than for the good of those they serve.

While it may not have always been the case, the segmentation of clients – grouping them according to characteristics such as domicile, asset base or profession – is a widespread practice, particularly within the larger international firms. So why then do so many institutions engage in a practice that sees individuals placed into categories and would seem to be at odds with the “client-centric” focus which most banks would say is at the heart of their offering?

It is not hard to imagine a scenario where a high net worth individual, who pays a premium for their wealth management and expects a premium service that is custom-made, might baulk at the idea of being treated as part of a tranche of similar clients. However, segmentation is widely held to be an important means to help firms run their business lines more efficiently. This is particularly true of the larger players as it is arguably a lot easier for smaller firms to take a more informal, less segmented approach when, for example, clients predominantly come through the door via word of mouth. However, even boutique-style wealth managers will usually employ some kind of segmentation – even just the yardstick of minimum investable assets – to determine how a client can best be served.

Many firms are then understandably keen to realise the efficiency gains created by segmentation, but, as an array of luminaries from the private banking industry told WealthBriefing, segmentation isn’t just about the bank’s needs.

Critics of client segmentation argue that the practice is too reductive and say, perhaps justifiably, that clients may object to the notion of being pigeonholed. Segmentation, they might say, flies in the face of what private banking stands for in terms of personalised service. But however intuitively correct these objections might appear to be, there is much to be said about the benefits of segmentation – and not just for the banks themselves - senior executives told this publication.

Segments not silos

A point that many of the wealth managers interviewed were keen to stress is that the term segmentation is often misunderstood and taken to mean depositing clients in a particular group and restricting their service provision. This, according to Jacqui Brabazon, global head of marketing, philanthropy and key clients at The Standard Chartered Private Bank, is simply not the case. “The word segmentation has come to mean that you put a person in a box and treat everyone in that box as one. What we think it should mean is that the organisation has developed specialised services for a defined need,” she said, “it should not mean that clients cannot access specialised services offered to different ‘segments.’”

This point was echoed by Rory Gilbert, managing director, UK Private Bank, at Barclays Wealth, who said that his firm’s use of broad segments – such as entrepreneurs, landowners or entertainers – is by no means prescriptive and clients interface across many parts of the business and therefore access many sector specialists. “Clients are certainly not placed within silos,” he said.

“Artistic” segmentation

One possible objection to the practice of segmentation is a practical one: how do banks take high net worth individuals, who typically have more complex financial affairs than the general populace, and assign them to a single group? And isn’t it the case that two, or even more, segments could apply to a single client?

There is obviously some validity to this point, as, for example, it is not hard to conceive of a client who is both resident non-domiciled and an entertainer, or one who is both a landowner and in retirement. The answer, it seems, is not to practice segmentation too rigidly and instead to look upon it in terms of broad guidelines.

Caution over using segmentation too prescriptively, was shared among the executives interviewed, who recognised that it can be quite a “blunt tool” if approached too rigidly. Instead they advocated a freer interpretation of which segment a client might “belong” to. In summarising his firm’s approach, Nick Tucker, UK & Ireland market leader at Merrill Lynch Wealth Management EMEA, said: “We segment clients ‘artistically’ rather than ‘scientifically’ as an overly regimented approach to segmentation can get in the way of what individual clients want.”

This need for an “artistic” approach to segmentation become even more apparent when one considers that clients’ circumstances, and therefore their most relevant client group, are likely to change over time. A client may, for instance, have begun a career as a financial services executive, before going on to launch a firm and then becoming resident non-domiciled – should he or she then be asked to change their private banker several times?

Relationships are key

This notion of constant segmentation changes was roundly dismissed by those interviewed in recognition of the fact that the relationship between banker and client is key to the retention of clients: effectively destroying a relationship in order to place a client in the “right” segment would clearly be unwise. Segmentation practices should then never supersede a well-established relationship between banker and client, the executives agreed.

Another potential area of difficulty is when a client first comes on board, particularly in the case of introduction by an existing client. It might be the case that an existing client introduces a friend to their own banker, and is it not then reasonable that the new client is assigned the banker of their choice, if for no other reason than they “clicked” when they met?

It would seem that in this scenario banks would have to perform a delicate balancing act between giving the client what they want and providing optimal service by matching them to a banker who specialises in their needs. It would arguably be quite right for a client to turn on their heels if a bank began to dictate terms too much, but equally there is no sense in a client being serviced by a non-specialist in their particular requirements.

“It can be quite arrogant for a firm to dictate which banker a client can have,” said Martin Heale, head of client proposition at Kleinwort Benson. “The client comes first, second and third.” Mr Heale added that new clients are usually happy with their banker from the first meeting as they tend have the same views and profile – if only because they are recommended by friends or business associates who move in the same circles.

Persuasion not imposition

In many ways this notion of “steering” clients towards the right segment, and banker, for their needs cuts to the heart of the case for segmentation. While it might be true that clients don’t want to feel pigeonholed by being placed in a particular segment, the feeling from wealth management professionals is that clients can be brought to view segmentation positively if the reasoning for it is properly explained. As David Man, partner at London-based RMG Wealth Management, put it: “I think it [segmentation] works if explained from the outset and clients have to opportunity to object and request a different group.”

What then of a bank which has not previously segmented clients, and then finds itself wanting to implement such groupings? A case in point is Coutts, the UK private bank, which formed its various client groups in 1999. Perry Littleboy, senior client partner within Coutts’ entrepreneurial group, explains that when groups - such as entrepreneurs, family business owners, executives, professionals and landowners – were introduced clients were understandably somewhat reluctant to change their banker. Now, however, “clients are unequivocally positive” about segmentation, he said.

Speciality service

While only ten per cent of respondents to WealthBriefing’s survey believed that banks segment primarily for the benefit of the client, wealth managers have a lot to say in terms of how the practice can enhance service provision. One very powerful point touched on by many of those interviewed is that by creating a specialist client group, a firm also fosters a specialist knowledge base among its bankers. It is clear, for example, that a banker serving sports professionals would need to be able to anticipate a particular set of needs from their clients, such as uneven income streams and early retirement. Equally, a private banker would need considerable knowledge in matters such as tax planning in order to help a landowner eventually bequeath their estate intact. And it is this need for highly specialised expertise that cuts to the heart of the need for segmentation.

In the view of Mr Littleboy of Coutts, one of the primary benefits of segmentation - for both firms and their clients – is that it facilitates the development of specialist intellectual capital, whereby the bankers serving a particular client group become truly expert. And what is more, these specialist bankers can then transmit their knowledge easily to colleagues. “How else can you build that intellectual capital and share it without segmentation?” said Mr Littleboy, adding that it might be “theoretically possible” to disseminate segment-specific knowledge through channels such as a company intranet, but that in his experience this would be “incredibly difficult.”

The extra mile

If segmentation is thought about in this way – in terms of matching clients with the precisely targeted expertise – it seems clear that segmentation does not, in reality, mean service becomes depersonalised. In fact, executives hold the exact opposite to be true. For Ms Brabazon of The Standard Chartered Private Bank, segmentation is all about providing “tailored services” which complement a core private banking offering.

“To a certain extent, segmentation is no different to buying a present - you want to ensure you give something the person really wants. In order to do this, you need to have a good understanding of the individual you are buying for,” she said. “Similarly, segmentation is about ensuring we give clients something they want. Our experience is that if the specialist services are client-driven, then they are well received,” she said.

So while detractors may view segmentation as a reductive attempt to impose a “one size fits all” service on a particular group of clients, its advocates strongly refute this notion. Graham Harvey, director at Scorpio Partnership, the wealth management consultancy, said: “We see no reason why segmentation is a depersonalisation of the service. In many ways it should be the opposite. If banks can understand how clusters of clients act they can better highlight relevant scenarios or start to be predictive. Both sides win.”

A win-win approach

Of course, while providing highly “client-centric” services must be a top priority for wealth managers, the benefits to the firms themselves are not to be underestimated. First is the obvious competitive advantage derived from offering a service that other firms do not provide. “There is little differentiation between organisations so segmentation can help a client compare and contrast private banks,” said Ms Brabazon of The Standard Chartered Private Bank. “As a relatively new player in the market we know we have to work harder to differentiate ourselves from the competition.”  The bank, as readers will know, has developed Global Australian Executive, Global Indian and Global Korean programmes in recent years, in addition to launching specialist services for professional sportspeople.

In addition to conveying a competitive advantage in attracting clients, segmentation can also be hugely beneficial in many other ways, such as from a marketing perspective - being known for having particular expertise in serving a “niche” client group would be no bad thing for a firm’s profile. Additionally, segmentation provides myriad opportunities for highly targeted marketing efforts, such as social events for existing and potential clients, and could therefore make prospecting for new business a more productive exercise.

Happy clients, happy staff

In addition to generating efficiency gains and enabling banks to give a tighter focus to their marketing and branding efforts in terms of the clients they are targeting, Kleinwort Benson’s Mr Heale pointed out a further, potentially very significant benefit to be derived from client segmentation: improved staff retention.

According to Mr Heale, Kleinwort Benson’s segmentation methodology allows the firm to more accurately match banker to client in terms of their compatibility on the basis of a range of factors on both sides, such as investment philosophy or preferred communication method. “Empathy is critical in the people business… people like people like them”, Mr Heale said, adding that this matching process creates greater job satisfaction among bankers. In fact such is the power of this effect that Kleinwort Benson saw banker satisfaction improve by 30 per cent in the first year after client segmentation was introduced, along with a corresponding improvement in retention rates.

As well as making bankers more likely to stay with a firm, Mr Heale said segmentation can also make it easier and less time-consuming to recruit bankers. As he says, when recruiting bankers to serve a particular client group Kleinwort Benson can be very specific about the type of expertise and characteristics that it is looking for in candidates. A client who is an investment banker would probably interact well with a private banker who is keen to constantly explore new investment ideas and is a little more sanguine about risk, for example. By having desirable characteristics already set out in this way “search firms can send the right sort of candidate first time”, he said.

A people business

So while it might initially seem counter-intuitive that placing clients into groups makes it easier to deliver a personalised service, there are powerful arguments suggesting that this is indeed the case. And although clients certainly wouldn’t want to feel like an anonymous member of a group, segmentation, if applied sensitively, can bring about significant benefits for clients, bankers and firms. “Clients like to be treated as individuals, and not a segment, but they do want to speak to someone who knows where they are coming from," as Nick Tucker of Merrill Lynch said.

It is then the way that segmentation is used which is crucial to its success – the case for the practice is strong, but clients still need to feel they are being treated as individuals and that they have full access to all their wealth managers’ services. In the words of Ms Brabazon of The Standard Chartered Private Bank, “ultimately clients should be treated as a ‘segment of one”.