With regulatory costs on the rise, many financial advisers are feeling the strain and so, in an attempt to remain profitable, are making radical changes to their businesses. According to data published in PIMFA’s most recent Cost of regulation report, financial advice firms as a whole spent an estimated £470m on regulation in 2015 – up from £460m two years earlier.

Faced with higher costs as they grapple with regulation, one obvious temptation for advisory firms is to take a hard and fast look at their client books and speedily dismiss those who do not meet minimum requirements.

The bar is steadily rising in this respect, with anecdotal evidence from across the market suggesting even investors with portfolios of less than £70,000 or £100,000 – no small amounts, by any means – are being told to make alternative arrangements.

Specialisation is of course a perfectly acceptable and indeed sensible strategy for advisory firms, but taking such an approach could turn out to be ill-judged in the longer run if not considered carefully. Clients who may today seem low-value on paper may in the future prove to be big fee-earners as their financial planning needs become more complex.

The worry is if advisory firms give investors their marching orders now they may unintentionally be providing referrals to their closest competitors or robo-advisers that could prove lucrative in the longer term. If advisers dismiss those clients now, the earning potential from that individual may be lost forever.

Forward-thinking advisory firms are increasingly discovering segmentation provides a way for them to manage their resources effectively and ensure they remain profitable in both the short and long term. As clients’ lives evolve and their ability and willingness to pay higher levels of fees change, then a firm can alter the level of service provided accordingly.

Whether an investment proposition is delivered in-house or is outsourced can make a considerable difference to the cost of providing a service to clients. Yes, there are merits in offering a bespoke investment service but it requires a considerable amount of an adviser’s time when you consider all the research that needs to be undertaken to satisfy suitability requirements. And, given costs are on the rise for firms, this is not necessarily viable if clients do not have a sizeable amount to invest.


Effective segmentation

If advisory firms effectively segment their client banks, intermediaries will find it is not hard to profitably service many of their lower net worth clients through a managed portfolio service, accessed through an investment platform. For traditional balanced growth clients without any capital gains issues, outsourcing to an investment manager in this way could be ideal.

By using a managed portfolio service for lower net worth clients, intermediaries will have more time to spend with their higher net worth clients and those with more complex financial planning requirements.

Advisers cannot control the costs of regulation but they are in charge of their own destinies when it comes to other elements of their business. How investment services are delivered can make the difference between an investor being profitable and unprofitable, both now and in the future.

Firms should make effective use of technology, adopt segmentation techniques and outsource where appropriate. Perhaps most importantly of all, they must make sure they do not lose forever the clients who will prove important to their business in the years to come.

Please feel free to leave a comment below. We are keen to hear from those who have implemented a segmentation strategy in their advisory firm,  any success stories or challenges.


This post was created for the DISCUS website based on the recent Smith & Williamson article written by Mickey Morrissey. You can find out more about their investment services here ›