Retirement Planning: Segmenting customers for good outcomes

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For financial professionals only

There’s a deafening silence across the investment advice industry about one aspect of Consumer Duty - client segmentation.

Personally, I put that down to the good sense and pragmatism of financial advisers.

I think everyone supports the objectives of Consumer Duty, but wealth management advice is highly personalised. There’s a very strong view in the sector that every client getting personal advice needs to be treated as unique, because the fact is ­– they all need different treatments. Advised clients are hard to categorise.

Where to begin? Savers vs Spenders

If I was challenged to segment a group of advised clients, I think my starting point would be to split people between those who are financially secure, so either retired or working for the non-monetary rewards, from those still pursuing their plan to achieve financial freedom.

Those who are no longer working will probably represent 50% or more of my client base, so what next?

'Special cases'

Rather than segment further by age, gender, wealth, risk aversion, fee level, star sign or birth weight, I'd next look to pull out a limited group of highly unusual ‘special cases’ from within the client base - for example, Court of Protection clients.

Level of secure income

Then, to distinguish between all the others, I’d examine their ratio of household spending to secure income. This would likely show me that a third had all or almost all of household spending covered, a half were somewhere in the middle, and a few had less than 30% of their spending covered from secure income.

And this would say something pretty important about the risks of foreseeable harm to the less secure group - which is part of the regulatory challenge here.

Capacity for loss without material secure income

It would also lead me to consider just how much capacity for loss they have in their balance sheets and how this excess is being invested. No one, in drawdown, highly exposed to investment markets and receiving advice, kicks off with only just enough money and a hope of a following wind.  From the adviser’s point of view that’s a risk not worth taking.

The sequence risk effect can impact any stage in the drawdown journey so the art here is professional judgement setting an appropriate margin for error, in terms of surplus capital, given the client’s age, the risk level being selected and the materiality of the withdrawals relative to the capital invested.

Overspending: an unwelcome challenge

My approach also flushes out a challenge in relation to those clients who are still working and whose lifestyle is well underpinned by their secure income. This important group is likely to have assets surplus to their income needs and real options as to what to do with their money. How might foreseeable financial harm come to their door? I’m not sure I have the answer, which is great news for them. Unless, of course, foreseeable harm comes from an inability to control spending.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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