Financial Planners and advisers who segment clients believe it can deliver better outcomes, improve value for money and offer lower-cost services to some client groups, according to a new study.

Despite the benefits one in four financial advice professionals are failing to segment their client base, even though it might help them deliver on their Consumer Duty obligations, the study said.  

Segmentation is the process of using client data to identify characteristics, such as asset level, age and life-stage.

Segmentation can help advisers and firms assess what value is being delivered to certain types of clients and it can also help ensure the right tools and services are in place at appropriate points in the client journey as needs evolve, according to M&G Wealth.

Of 200 financial advice professionals surveyed, 74% said they were segmenting their client base. That meant just over a quarter (26%) are not – an increase of 10% from last year (16%).   

The research also found that advisers think the main benefits of client segmentation are delivering better outcomes (60%), improving value for money (57%) and offering lower cost services to some client groups (39%). 

The report explained differences in interpretation of client segmentation, which might explain why an increasing number state they are not segmenting clients. For example, segmentation doesn’t mean having as many propositions as client types or trying to force clients into a template and ignoring the individuality of their needs, said M&G.

Rather, segmentation helps advisers and firms support their business objectives as it offers an opportunity for firms to offer a clear and differentiated proposition, keep clients engaged as they meet their distinct needs and justify fees. 

M&G has launched a new client segmentation guide in collaboration with wealth consultancy NextWealth with practical tips and tools to help advisers and firms better evidence how they understand and meet client needs in support of their Consumer Duty obligations.  

The guide contains an eight-step process to help create and review existing segmentation strategy, a checklist for building a framework and examples of what an applied client segmentation framework might look like. 

Catriona McInally, investment specialist at M&G Wealth, said: “With the industry’s focus on ongoing fees and service, segmentation can help advisers to evidence and deliver on Consumer Duty obligations. 

“It's encouraging that a fifth of advice firms say they are now looking at segmentation more holistically and exploring characteristics, such as communication preferences and behavioural criteria, that can influence outcomes.”

Philip Leigh, senior qualitative researcher at NextWealth, said: “Effective interpretation is key in how well advice firms meet their obligations. Firms have to be able to show they have reviewed how different clients will experience their service. The research has shown that client segmentation is the most obvious way – and that it can come with other benefits to the business.”

• The guide was produced by NextWealth with input from: interviews with 12 financial advice professionals; an interview with Carla Langley, an independent compliance consultant; a telephone conversation with a representative at the FCA; an online survey of 200 financial advice professionals, conducted in November 2023.