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Client Segmentation for Financial Planners

By Martin Iglesias, CFP

The issue of classifying clients, according to their needs and behaviors, is something I’ve been working on for many years. This issue, in my point of view, becomes more important as a financial planner’s client portfolio grows and the planner doesn’t necessarily have a close relationship with all of their clients.

My focus has always been to offer investment services and so my classification is very focused on delivering this kind of solution.

I believe in a segmentation based on three pillars. The first is how investors make decisions, the second has to do with the way and speed they make investments, redemptions and changes in the allocation of their portfolio and the third is about risk taking.

Client Decision Making

  1. There are investors who like to make decisions on their own. For these clients, your core work is to provide them with information and analysis that help them do this, as accurately as possible.
  2. Some clients like to hear your recommendation before making their final decision. In this case, you need to show several solutions, and discuss advantages and disadvantages of each one.
  3. Some clients don’t want to make decisions and expect you to do it for them. These customers generally are more demanding, but they also see more value in a well-done financial planning service.

Investment Movement

It is important to understand if the investor is in a phase of capital accumulation, stability, or redemptions. The investment requirements for each of these phases are drastically different.

Investors in a redemption phase need to have a lower risk tolerance, so they need conservative assets and a greater demand for income-generating products.

It is essential to understand how active the investor is in changing the allocation of their portfolio. That’s why it is important to classify clients as active or passive investors.

Active investors will demand ever more information than the passive ones. However, the passive investor tends to over-analyze their allocation before making any changes.

Risk Taking

This is the classic investor classification, based on the description of the utility functions of Markovitz. Risk taking analysis is done to map how the customer reacts to negative market events. Based on tests, customers can be classified into the following groups: conservative, moderate and aggressive.

Segmentation Conclusions

The combination of the three segments allows us to get a good picture of the behavior and needs of each investor, which in turn helps us to serve them with the most appropriate products, services and information.

The most important takeaway is that each person is different, and the exercise of trying to segment them to better understand their needs depends largely on the kind of service you offer.

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