How client segmentation has made advice firms lives easier

New research has found a link between client segmentation and the amount of due diligence advisers do on the model portfolio services they use – potentially placing those with a targeted client bank at an advantage when it comes to the regulator’s assessment of their compliance with Consumer Duty rules.

Advice firms who look after a clearly defined profile of clients are more likely to have a distinct due diligence process to assess investment providers, data from Quilter Cheviot and NextWealth has found.

Almost all (96%) advisers with a targeted client bank also have a structured due diligence process, according to the research. Among clients who do not segment their clients at all, 28% of advisers lack formal ways to assess their investment providers.

Advisers with a defined target client profile also tend to work with more investment partners, the research found – an average of 3.6 compared to just 2.6 for those without a defined profile.

Even firms with more limited client segmentation use an average of 3.3 investment providers, compared to 2.9 for those without a client segmentation strategy.

Segmentation is also linked to greater investment partner turnover. Among firms with a segmentation strategy, 37% have reviewed their outsourced investment partners in the last 18 months, and 33% have started work with a new provider.  

For firms without a defined segmentation strategy, only 14% have conducted a review and just 7% have engaged a new partner. Notably, two thirds of these firms have taken no action on their outsourced investment relationships during that time.

Simon Doherty, head of managed portfolio services at Quilter Cheviot, said: “Consumer Duty has been a force for good in encouraging advisers to kick the tires on their investment providers.  

“The benefits of having that defined client profile and segmentation strategy will mean the adviser can stay in control and on top of the partners they trust with their clients’ assets.”  

Julie Best, insight director at NextWealth, added: “Firms that clearly define their target clients appear to be not only more structured in their due diligence, but also more confident and proactive in managing investment relationships.

“More generally, we would encourage adviser firms to consider the benefits of taking a more proactive stance with investment providers, taking more control of the relationship and recognising that due diligence is not ‘just a job for compliance’ but for several parties.”

The FCA is currently undertaking a multi-firm review of model portfolio services to assess how firms are implementing the Consumer Duty, having noted MPS use has been growing “at pace”.

The regulator intends for the review to “provide confidence investors are receiving good outcomes from MPS and share good practice on how firms are doing this”. The FCA will no doubt have a keen eye on how much due diligence advisers are doing on the MPS’ they use.

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