Sunday Email: Segmentation / SimCity

Read time: ~6.30 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

The other day, I had an unexpected realization.

Five of us were seated around a conference room table, about two and a half hours into an ideation session.

We were nearing the end of a discussion that was supposed to reshape our firm's segmentation strategy.

Yet, something was missing, and it was starting to feel uncomfortable.

We explored various exercises during the session to understand what would drive our segmentation strategy.

But as the conversation evolved, it became clear that we focused less on financial metrics and more on how we could connect emotionally and deeply with our clients and their families.

This was new territory for us. We considered psychographics—clients' personalities, values, and emotional drivers—over more traditional metrics like assets under management (AUM).

And here's where things got uncomfortable: we weren't discussing AUM. For a wealth management firm, that felt almost heretical. AUM, or revenue per client, has always been the cornerstone of our segmentation strategies. It's a metric that makes sense because it directly relates to how we get paid and allocate resources. So, why wasn't it coming up?

As I listened to the discussion, I realized I was also falling into a familiar trap. I was clinging to how things had always been done, assuming it was the "right" approach for the future. I wasn't alone. Our group was wrestling with the same internal conflict: should depth of connection be tied to a client's wealth or the value they bring to the firm?

That's when it hit me: the services we offer shouldn't dictate how we communicate with our clients and their families. Yet, our segmentation strategies have always intertwined the two, treating them as the same when, in fact, they are entirely different beasts.

For example, consider two clients: one with $10 million in AUM and another with $1 million. Both have the same anxiety about their finances because they grew up in similar circumstances. If we segment based on AUM alone, we will treat them differently, potentially missing the opportunity to connect deeply with both.

The more I thought about it, the more I realized our traditional approach's flaws.

On the one hand, it seems logical to dedicate more resources to higher-AUM clients—they're paying us more, after all, and we need to show the value.

But acquiring any client is costly, and it's a wasted effort if we can't connect with them.

Moreover, our industry has changed. Technology now allows us to monitor more data points and personalize communication at scale. The old model, which is segmented by AUM because of the intensive human effort required, no longer serves us in a world where we can scale our efforts more intelligently.

This realization led me to distinguish between two concepts: services and servicing.

Services are what we provide—investment management, tax preparation, estate planning, etc.

Servicing is how we deliver those services and interact with clients.

As our industry evolves from owner-operator models to more mature, multi-layered business operations, we must adapt our thinking around both.

When my dad founded our firm 28 years ago, investment management was our primary service. Everyone got the same service, which was differentiated by meeting frequency: higher-AUM clients might meet more often simply because we have limited hours in the day.

But as the industry evolves, we're adding more services, from tax preparation to health insurance advice, because the original service is becoming commoditized. We must rethink how we segment and service clients to differentiate and elevate our value while optimizing our resources and leveraging technology.

Instead of relying on AUM or revenue per client, future segmentation should be how we connect and communicate with our clients. Psychographics—understanding clients' fears, values, and motivations—are far more effective for this purpose than mere numerical metrics.

Take, for instance, two different sets of clients:

1. Jane and Jim both have deep anxieties about their finances because they grew up poor and feel they have much at stake.

2. Steve and Susan, on the other hand, both come from wealth, are more focused on philanthropy, and are generally comfortable with the ebb and flow of investing.

Traditionally, Jane and Steve (both $10M clients) would be grouped together, while Jim and Susan ($1M clients) would be in another segment. But if we communicate with them based on their AUM alone, we'd miss the mark. Jane, who has high anxiety, would benefit from regular touchpoints and reassurance. Steve, who is more laid back, might find this level of communication overwhelming or unnecessary.

By segmenting based on psychographics, we ensure that Jane gets the support she needs while saving time and resources on Steve, who doesn't. Likewise, we avoid bombarding Susan with updates when she's perfectly content with minimal contact, while Jim, who shares Jane's anxiety, gets the reassurance he needs.

Yet Jane and Steve may get different services than Jim and Susan.

To make this shift, we need to separate segmentation from services. Segmentation should focus on how we communicate with clients, while services focus on what we deliver.

Creating a service matrix, an internal document outlining expectations for each client based on AUM or revenue per client can help manage resources more effectively. This matrix could specify meeting frequency, communication methods, and other service parameters but should not be shared with clients.

Meanwhile, segmentation should remain dynamic and rooted in psychographics. People's mindsets and emotions change over time, so we must regularly gather this data through surveys, deeper questions, and active listening. Our technology stack should support automated segmentation scoring and communication, making delivering the right message to the right client at the right time easier.

Firms that excel in the future will be those that can understand their client's financial needs and psychological drivers.

Understanding how clients think and feel and knowing the right actions to take in various situations—whether to calm an anxious client or inspire a confident one—will differentiate the great firms from the good ones.

This shift isn't just about managing money; it's about managing behavior.

The combination of psychographic segmentation and a well-defined service matrix will create the tools necessary to become exceptional behavior managers, making us more sought-after wealth managers.

By evolving this way, we can build stronger emotional connections with our clients, leading to greater loyalty and higher retention rates—the true holy grail for any firm.

A Thought To Ponder This Week

I remember playing the game SimCity.

I had a blast building a city and trying to create a vibrant community and economy.

My focus was on the game.

Yet, underneath it all I gained an understanding of how the world works.

I didn’t feel like it was a learning experience, yet much of what I was forced to learn to progress in the game has paid dividends in what I do today.

Did it teach me everything? No way.

Did it expose me to new learnings? Of course.

As we continue to be faced with a challenge of financial literacy in our country, the advisor community has an opportunity to make a greater impact.

Through knowledge and tech advancements, we can make finance fun.

Lack of financial literacy leads to beliefs and narratives being built that don’t accurately depict reality.

Financial literacy has no immediate ROI on advisors, but it has tremendous long term appreciation opportunity for our industry.

At the root of challenges that we may face with regards to perceptions of what we do is a lack of knowledge.

Financial literacy can change that.

As we head into the week ahead, let’s put our “for the greater good” hats on. And think of one way we can help our communities become a bit more financially literate.

It’s mutually beneficial.

The best is ahead!

-Matt