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Personalized financial planning tactics for wealth managers

Why segmentation is dead

Global Wealth Management Offering Manager, IBM
Senior Offering Associate, Wealth Management, IBM

The wealth management industry has always aspired to offer truly personalized financial planning advice, but that gold-standard service has only ever been feasible for select clients. Businesses operating during the era of advanced analytics, however, can offer increasingly personalized service to an ever broader base of clients, deepening business relationships as a result.

Segmentation: A blunt instrument

Dividing a client base into segments that reflect clients’ needs and interests is standard practice in the corporate world. Too often, however, market segmentation efforts in the wealth management industry have boiled down to classifying clients by a single salient characteristic: the depth of their pockets. Advisors have been able to afford lavishing extremes of care and attention on only the most valuable clients, who thus alone have enjoyed the benefits of a truly personalized investment strategy.

But such segmentation tactics have hampered advisors’ growth efforts—and, indeed, industry experts warn that old-fashioned segmentation might itself be holding the industry back. “We’re seeing a lot of wealth managers struggling with segmentation,” explains Al Chiaradonna, senior vice president of SEI Wealth Platform. “Current segmentation based on wallet-share has caused a significant strain on resources, as firms tend to focus on providing their wealthiest clients highly customized solutions. This greatly limits how many clients a wealth manager can adequately serve.”

The problem isn’t becoming an easier one, either. This antiquated approach to segmentation still so prevalent in the wealth management industry deters advisors from providing the unprecedented levels of attention and personalization requested by younger clients, many of whom are at various stages of asset generation. These younger investors demand increasing amounts of information and particularly individualized attention from their advisors—and they’re not entirely satisfied with what they’re receiving. In a 2015 Salesforce Research survey, 30 percent of Generation X clients reported having left a financial advisor in response to a perceived lack of communication. Furthermore, in a recent survey, ScorpioPartnership explains that a quarter of US millennials said that they hadn’t been given adequate information about how their investment performance was generated. Indeed, only one in four high-net-worth millennials attributed the success of his or her investments to a relationship manager or wealth management firm.

Dynamic segmentation through advanced analytics

Clearly, clients’ demand for more personalized financial advice is intensifying. But no matter their business model, advisors struggle to provide the same level of personalized service to each individual client beyond a certain threshold.

How, then, can advisors position themselves to meet the expectations of modern clients? The industry must move beyond crude market segmentation into a new era of advanced analytics marked by the ability to determine optimal service level and channel when servicing individual clients.

Using machine learning techniques, advanced analytics can process vast amounts of information drawn from a wide variety of sources, testing demographic factors such as location, marital status and cultural background along with behavioral factors such as appetite for risk and investment behavior to create data-driven dynamic segmentations. By drawing on this sort of deep analysis, individual advisors as well as branches, regions and even whole firms can uncover actionable insights at the user level that help them generate highly personalized client servicing, marketing, education and retention actions. Furthermore, users of tools that provide dynamic segmentation can tailor client profiles at still finer levels, even predicting a client’s affinity for certain financial products and services as well as that client’s likelihood of attrition.

Consider the case of Union Investment GmbH, a European wealth management firm whose assets under management are worth more than EUR 200 billion. For years, it relied on nothing more than gut instinct to tailor products to clients, but switching to an advanced analytics platform helped Union identify as many as 300 to 1,000 characteristics that influence individuals’ decisions to purchase mutual funds. By analyzing correlations among these characteristics, Union was able to provide ever more personalized advice to its clients, stepping up conversions for its direct sales agents while cutting down on overall churn.

Case studies such as Union’s point the way forward for an entire industry. By helping advisors rapidly develop unique profiles for each client, advanced analytics allows the tailoring of service levels, preferred channels and even investment strategies. What’s more, when advisors can comprehend a client’s appetite for risk at a glance or can be alerted to upcoming life events that might require adjustments in a client’s plans, they become able to offer personalized financial advice to more clients than ever before. When they do, financial plans can even become living documents, a striking contrast to the static documents that were once updated only yearly.

By offering this level of service to mass-affluent clientele, advisors can greatly expand their firm’s potential client pool. Moreover, as these clients begin to join the ranks of the high-net-worth clientele—and, indeed, analytics can help predict those who will—advisors have already done much to make themselves trusted partners.

Wealth management in the cognitive era

IBM has created an offering specifically designed to bring the wealth management industry into the cognitive era. By combining wealth management thought leadership with leading cognitive and advanced analytics solutions, IBM has created an end-to-end prebuilt offering for the wealth management industry: Client Insight for Wealth Management.

IBM Client Insight for Wealth Management generates dynamic client segmentations based on clients’ behavioral profiles, predicting client life events using historical data analysis and event detection techniques. These capabilities help alert financial advisors to important events affecting clients’ financial lives—allowing advisors to uncover deep client insights that help them provide timely, personalized advice and tailored recommendations to their clients.

The future of personalization

In the era of advanced analytics, advisors can bring personalized service to a much broader base of individuals than ever before while deepening their relationships with existing clients. By using offerings such as IBM Client Insight for Wealth Management, advisors can use modern cognitive, prescriptive and predictive analytics capabilities to provide actionable client insights while enjoying a net time savings, allowing them to focus on what’s truly important: growing and sustaining their practice while providing personalized financial advice to individual clients.