Managing an effective segmentation strategy in Asia's fragmented wealth management market

The turbulent stock markets and unprecedented regulatory changes are squeezing the profit margins of wealth managers as a result of making higher regulatory investments in processes and technology while at the same time, clients prefer to hold cash/deposits and avoid sophisticated structured products.

In Singapore especially, some of the wealth managers are either scaling down their operations by exiting certain markets or moving the back-office functions to other cheaper offshore locations.

Consequently, wealth managers are quick to downgrade/upgrade a client to a lower/higher segment when the AUM (Asset Under Management) reaches a threshold for a change in segment. While wealth managers are actively managing their costs, there is seemingly lack of a COHERENT strategy on how to deepen the client's share of wallet. With revenue from existing clients slowing down in a challenging environment, wealth managers turn to client acquisition as a strategy to raise short-term revenue without reviewing critically of the performance of its existing client segmentation strategy.

Most wealth managers segment their clients by Assets Under Management (AUM). It can either based on current or potential assets or both. According to a 2009 global private banking wealth survey by PWC, more than 80% of the respondents segment their clients by currents assets and a growing number of wealth managers are including potential assets in their segmentation strategy. This clearly reflects the recognition of revenue potential from the clients.

The growing sophistication of high net-worth clients means that segmentation by assets size is no longer sufficient. The diverse nature in which wealth is derived in Asia and the investment culture of Asians mean that new segmentation criteria are required such as investment behavioral patterns, extended client profiles and total wealth.

A complete segmentation strategy requires the development of a holistic approach based on the 2-Step Segmentation Framework. See diagram below.

The dynamic nature of segmentation means that no single criteria dominates a segmentation strategy.  Broadly, segmentation criteria are classified into 3 broad areas, namely, Financial, Customer Profile and Behavior. The holistic approach is based on the fact that wealth managers should define their segmentation strategies based on the 3 aspects of a customer. To execute the defined segmentation strategy, it must incorporate and aligned its pricing framework, products/services offering, business capabilities and organization structure together.

1) First-Step

• Financial

The ability to accurately capture the total wealth of the client determines how the wealth manager can increase the client's share of wallet. The type of assets that are held by the client are also critical in determining how wealth manager target the right investment solution to the client. Most wealth managers are capturing the current assets of the client. However, few are able to capture the actual size and type of assets held outside the institution including those in real estate and commodities.

• Profile

In the 2012 Asia-Pacific Wealth Management report by Capgemini and RBC, entrepreneurship and commerce were sighted as the main source of HNWI (High Networth Individual) growth. The importance of identifying source of wealth growth is more pertinent than merely focusing on source of wealth. The dynamic and diverse nature of the asian wealth market means that wealth manager must understand where wealth markets and specific industries that are experiencing high growth.

Increasingly, customer-based profiling using client key life events such as company's IPO, business acquisition/divestment, marriage, retirement to target specific client segments. Services such as estate planning, philanthropy, trust services are areas where wealth managers can leverage and extend the relationship with the client.

• Behavior

There has been increasing interest in defining a behavioral-based segmentation. For example, Barclays Wealth is using a psychometric model in its investment profiling to determine the investment style and risk profile of the client when it comes to making investment decisions. The idea of using such model is based on studies that clients attach emotions and financial beliefs when making investment decisions. Such profiling techniques are relatively complex and have not gained much industry practice although most wealth managers agree that this is the way forward. The implications of such detailed profiling mean that wealth managers are in a unique position to establish a deeper relationship with the client and provide a very targeted investment solutions that addresses their investment objectives.

2) Second-Step

Client segmentation strategy is not just about the ability to classify the clients' attributes to accurately reflect the revenue potential. The ability to price a product/service to the right customer segment using the most effective business capability, marketing and an aligned organization holds the key to a profitable client segmentation strategy.

• Products/Services

Whether it is a large private bank belonging to a universal banking group or a boutique private bank, the ability to define a suite of products that best matches the customer segment would not only bring down the costs of product development/maintenance but raised the profitability of the products.

    a) A structure approach to product shelf

The development of a core and satellite offering product model framework allows wealth managers to structure its suite of solutions according to the right customer segment.  This framework should be based on a combination of investment strategies against the profiled investment behavior of the client.

    b) Establishing a framework of product attributes

In the past, product attributes are merely instrument static information that provides relationship manager to search and capture a client order. However, these attributes are insufficient to ensure that the product matches the client needs. Attributes such as overall risk rating, product sophistication level, underlying asset classes (of derivatives and structured products) and investment strategies are information that supports an aligned segmentation strategy.

• Business Capabilities

In a recent study by Scorpio Partnership and Sungard (FutureAdvisor Asia, 2012), the top 3 priorities in the development of wealth managers' business capabilities are Business Intelliegence, CRM (Client Relationship Management) and Risk Management.To be successful in increasing the share of wallet of the client, wealth managers must equipped their relationship managers with business capabilities that allow them to identify (data mining), plan and strategise (CRM) and propose the investment solution that meet the client's needs (Risk Management).

As the costs of acquiring the next dollar of the client asset increases, understanding the costs of running an effective segmentation campaign, through investment in good business intelligence capability, for example, is critical to continue growing the gross margin and reduce the cost/income ratio.

• Organization

The third aspect to ensure top-of-the-line growth from existing clients is to organize the sales team to support the segmentation strategy. Wealth managers must recognise that there are two groups of relationship managers, namely, hunters and farmers. Hunters are those that actively seek new prospects and convert them to clients. Farmers are those that actively seek to deepen the share of wallet of existing clients. Wealth managers must not only be able to differentiate these 2 groups of relationship managers but to develop KPIs (Key Performance Indicators) that match the strength of the individual relationship managers and aligned with the appropriate segmentation strategies.

Any segmentation strategy must also take into consideration relationship managers' load balance. In the report by Scorpio Partnership and Sungard (FutureAdvisor Asia, 2012), China's number of clients per RM of 117.6 is above the global average of 85.8. Hong Kong and Singapore fared better at 49.8 and 75.3 clients per RM, respecitvely. Whilst these 2 key offshore booking centres are still below the global average, wealth managers need to strike a balance between increasing assets under management from new clients versus from existing clients. A high client/advisor will have a negative impact to the quality of service to the client.

• Pricing

Wealth managers margins have been squeezed in the past 3 years due to increasing regulatory pressures, competition for talent and growing price sensitiveness of clients. The global financial crisis in 2008 have resulted in reduction in AUM and have subsequently forced relationship managers to give discounts without a structured consideration of the client relationship. Subsequently, exceptional approvals for waivers and deep discounts are given without due consideration to the impact on the bottom-line.

There is no one-size-fits-all model to manage pricing. A framework that establishes one's pricing model should be based on the 4Ps:

a) Pricing Strategy
Pricing Strategy defines the overall goal based on its business objectives (eg, target margin to be achieved), on how the wealth manager is going to position itself among its competitors, how it wants to be perceived by its customers and lastly how it going to achieve its objective through effective training and communication of its pricing strategy.

b) Price Establishment
Pricing establishment sets the principles in which prices are defined for its products and services. Principles includes pricing benchmarks against competitors and minimum pricing.

c) Price Management
Management of pricing includes defining discounting and approval guidelines and regular benchmarking of pricing against competitors and setting effective KPIs for products and services.

d) Pricing Data
The ability to mine pricing data from all the products and services facilitates the measurement of the effectiveness of the execution of the pricing model and allows quick fine-tuning of the policies.

In conclusion, to manage one's profit margin in a highly fragmented Asia wealth management market, a disciplined and structured approach is the key.