The factors that have resulted in clients’ portfolio decimation have been well documented in the press. What is less clear is what the impact has been, and should be, on the management of retail wealth management firms.

The absolute decline in client asset values has created various outcomes within wealth management firms. These include large-scale advisor migration from one network to another as they seek to rebuild personal net worth. Other effects include moves from a large wealth manager to an independent firm or brokerage as they seek greater valuation from their client relationships and less onerous compliance regimes.

Other outcomes include fewer transactions after the flurry of selling; large amounts of cash sitting idle and less revenue for advisors paid based on assets under administration.

Given the dramatic changes, what are the ramifications for firms’ segmentation schemes? If the firm segments clients simply on assets with the firm, their entire book of business has declined, radically changing the value proposition and requiring resegmentation of much of the entire base.

Firms that provided a specific level of services for a client with a million dollars with the firm may now be providing the same level of services for someone with $750,000 in assets, much of which may be in cash. The client is now over-served, and the value proposition has tilted in favour of the client. In fact, these clients may no longer be profitable to a firm. They are certainly a lot less profitable to the financial advisor.

From the client’s standpoint, the services they received when they had a million dollars may have been adequate, but now, given their decline in wealth, may be seen as inadequate, requiring further tilting of the value proposition in favour of the client to maintain the client, and again driving the client toward unprofitability for the firm.

In fact, basing a segmentation scheme on the assets a client has with a firm may be easy, but it is retail wealth management malpractice. Celent has long advocated segmentation that is based on net worth at the household level combined with other behavioural and psychographic attributes. We always begin with four mega-segments based on net worth:

Mass market clients with a household net worth less than $250,000.

Mass affluent clients with a household net worth from $250,000 to $2 million.

High net worth clients with a household net worth from $2 million to $10 million.

Ultra-high net worth clients with a household net worth above $10 million.

Despite the decline in portfolio values and real estate prices, we still believe these are the relevant divisions based on current products, as well as present estate and tax planning requirements. However, as the new US administration searches for a variety of tax enhancements that may impact these aspects, we may be forced to change the mega-segmentation scheme, unfortunately in a downward direction.

What will definitely change segmentation schemes though are those sub-segments that define the clients’ behaviors and attributes. These include:

Risk tolerance.

Sources of revenue and wealth.

Impact of various forms of taxes.

Accumulation vs. distribution phases, including retirement dates.

Advice dependency.

If the firm had been looking at the client as not a single pool of assets, but as an entire household segmented based on net worth, the firm will have a better understanding of the dynamics of the client. With the equity in both primary residences and overseas property down, and declining investment portfolio values, the firm is better-able to assess whether the client situation is serious enough to warrant reclassification as far as the segment scheme.

Questions that should be asked at this point include: Will the asset values of the portfolio increase to former levels in the near future? (This would be unlikely for most clients). Another question: Will property values increase significantly in the near future, sufficient to replace losses across all asset classes? Another is: Has the client the capability and temperament to earn at the current or a higher rate in order to rebuild the portfolio through savings? This is actually occurring across many levels of wealth management clients already, to the detriment of car dealers and travel agents.

Managers also need to know if the client’s understanding and tolerance of risk changed. As more than one wit has observed, clients’ tolerance of risk is high when values are going up and low when markets are declining. This area of segmentation probably warrants considerable expansion and refinement.

It is also important to know if lower values have changed the outlook for retirement planning in terms of dates and income assumptions. Unfortunately, except for the wealthiest clients, this area also looks like a certain issue, especially for those with fewer years to rebuild their portfolios.

Also, will the traditional products, such as mutual funds, get the client back on track, or will new types of products, such as ETFs, annuities or structured investments, now be necessary for the clients’ financial well-being? More and more, I am seeing a positive answer to this question as well.

Once the new segmentation scheme has been developed and clients have been reassessed and moved into their new segment classifications, where appropriate, the value proposition can be re-evaluated.

I can see several ways that wealth managers will change how they segment clients. There will be more emphasis in financial planning. The client now understands the benefits more, and may be willing to pay beyond either a transaction or assets under administration basis. I also expect to see more assistance with retirement income planning, including advice on retirement dates and career decisions such as part-time employment.

There could also be better online tools as clients are transitioned to self-service. One unfortunate outcome of the market moves is that, with the declining number of advisors and the clients’ lower revenue generation, firms may need to transition more clients to self-service. How a firm handles this, and the tools they provide, will determine if they hang on to the client, or even if they should try to hang on to the client.

The changes over the past year in financial services have been cataclysmic. To assume that a firm’s segmentation scheme should remain static in light of the new developments of this new era seem simplistic, and possibly dangerous.