Delivering solutions successfully to clients depends on knowing exactly what clients need, says Alan Shields.

Private banks have endured a significant downturn in revenue during the economic crisis. But when it comes to the question of what to do about it and how to restore revenue growth, agreement is harder to find. After several years of accelerating growth, the economic crisis brought growth in private banking to a sharp stop for most. Assets under management fell precipitously during 2008-09. At the same time, operating costs increased, as clients demanded more advice and firms tried to counter poor portfolio performance with greater levels of service.

Research from many sectors shows that placing clients at the centre of the business model pays dividends. While some recent reports have shown that the most profitable wealth managers have the lowest ratios of clients per relationship manager across each wealth segment, this is only part of the story. It is clear that relationship managers need time and space to build relationships and to grow to understand their clients’ (and their clients’ families’) needs, and to identify the best and most profitable ways to serve these needs. But as is often the case, there is a balance to be struck between too little service and too much, which eats into profitability. Client segmentation can be a useful tool to manage both the level and type of service.

Traditionally, private banks have segmented their client bases according to assets under management. It is easy to manage and to see which client belongs in which segment, and it is intuitively simple to assign greater levels of service to the wealthier clients who provide more income. But where a large proportion of income comes from fees, it may not be an ideal indicator of revenue. If applied without subtlety, and without a view to potential assets, it can cause relationship managers (RMs) to under-service clients to whom it might be beneficial to give more time and service – perhaps those with high net worth who have only a proportion of their money with the bank; or those who may be moving quickly up the wealth scale, whether they be high earners, business owners about to sell up, or heirs about to inherit.

On the other hand, it can also lead to overservicing if RMs find themselves expected to provide the same levels of service they give to the leader of a wealthy family to other members of the family who may not have such significant assets under management (AUM). The financial crisis underlined the vulnerability of service models that fail to align client value with actual cost-to-serve in a detailed and sensitive way. Recent research shows that leading firms have begun to supplement the simplistic segmentation by AUM with more sophisticated models that use detailed knowledge about clients to provide a more carefully calibrated service model matching revenue to service. While AUM and potential AUM provide part of the picture, much can be learned from banks that have pioneered the use of other forms of segmentation.

It is becoming increasingly common to segment and serve on the basis of the source of wealth, assuming that those within each of the groups – such as entrepreneurs, business executives, financial professionals and inheritors – will have similar needs. While this approach makes obvious sense at certain times – for example, when organising meet-and-greets for client groups – it is by no means obvious that simply because two clients share a similar source of wealth they will also share other needs and attitudes. Another approach that’s becoming more popular is to segment and serve based on geographical origin; so we see increasing numbers of teams set up to serve, for example, wealthy Indians abroad, or indeed the internationallymobile wealthy of any nation. The value of this approach is that it allows private banks to team up their clients with RMs who speak their language – not only literally, but in the sense of a shared culture and shared values and attitudes to wealth.

The most sophisticated approach involves gathering information directly from clients and segmenting them according to what they reveal about themselves and their needs. Some of the questions that private banks can ask their clients in order to develop their segmentation models include:

  • Confidence: How confident are you in your own financial knowledge and skills? And how much advice do you feel you need?
  • Complexity of needs: How complex do you feel your financial situation and needs are?
  • Value placed on expertise: What value do you place on expert financial advice and how willing are you to pay for it?
  • Engagement: How interested are you in wealth? How often do you check on the performance of your investments and what sources of information do you use?

The answers to questions such as these – when cross-referenced with existing product holdings, value and cost-to-serve information – can help private banks to identify both how much to serve the client and in what ways the clients’ needs can most profitably be met, and provide relationship managers with the tools they need to do the job.

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