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Client segmentation: is yours fit for purpose?

With the nation slowly returning to some sort of normality, now is a good time for advisers to dust off their ‘to do’ lists and make sure they are in a healthy place when it comes to satisfying the regulator.

One of the essential elements of housekeeping is ensuring you are PROD-proof. The Product Intervention and Product Governance Sourcebook – known as PROD – came in as part of MiFID II in 2018.

In essence, the regulation formalises the RPPD [Responsibilities of Providers and Distributors for the Fair Treatment of Customers] guidelines which have been around since 2006. However, these are rules, rather than guidance, and yet compliance with PROD is something that many advisers still haven’t fully addressed.

Since the introduction of the Retail Distribution Regulation (RDR) in 2012, most advisers will have undertaken some sort of client segmentation exercise. If you haven’t, then you should do so with some urgency.

If you have, the key questions you need to ask yourself are:

  • Did you segment clients to better understand how much revenue they are contributing and therefore how much service you should be providing?

Or…

  • Did you segment clients to better understand their needs and the types of services that are suitable for them?

Segmenting to identify what each client is contributing to your business makes commercial sense, but the regulator has been very clear that they don’t want advisers segmenting their clients based on investible assets. To be PROD-proof, it’s essential to have segmented your clients based on their needs.

We recently carried out an exercise to find out how advisers can implement PROD efficiently, effectively and with minimum complication. To start with, we consulted with a number of regulatory experts, including representatives from Diminimis, The Timebank, Threesixty and Compliancy Services. Here are the six key takeaways from our discussions:

  1. Documenting every step of your PROD process is critical. You will need the full audit trail if the regulator ever comes calling.
  2. Do not treat PROD as a tick-box exercise. Your job is not done just because you have produced a PROD policy. And you can’t outsource this to a compliance consultant. You need to evidence that your firm is complying for each client on a daily basis.
  3. You will definitely need multiple client segments given FCA guidance that the “target market should be identified at a sufficiently granular level”, but we don’t think it has to be the 50+ segments being talked about by some industry commentators.
  4. Understand how many investment and platform providers you need to cover the breadth of your client requirements. It is possible this may require starting new relationships. And maybe even terminating some existing ones if there is too much overlap.
  5. Ensuring consistency of approach across all your advisers will be critical for anyone running a firm of more than one adviser. After the arrival of the Senior Management & Certification Regime (SMCR), responsibility for complying with PROD will fall to the MD so they can no longer afford to let advisers ‘do their own thing’.
  6. Do not create too complex a system. Simplicity is your friend.

All agreed that advisers who fail to segment clients effectively, in line with PROD regulations, face the prospect of severe punishment by the regulator.

Segmenting clients is not complicated, but it does take planning, focus and process. The best approach starts at the advice service level. A lot of firms currently only have one service offering and this is unlikely to be enough. Advisers should consider the different types of clients that exist (not just the ones they currently manage) and assess if there are other service levels that could be offered by their firm.

The next stage is to look at all the different investment solutions that would fit comfortably within the adviser’s business and consider if alternatives might work better for some clients. Then look at platforms – are there platform providers that might offer something better for certain types of clients?

Follow this process as many times as is required to ensure there are sufficient service levels, investment solutions and platforms to cover the needs of any client likely to ask for advice. Once complete, advisers can then work through their list of clients and group them together into a suitable solution, which avoids the complication of too many segments.

Being able to demonstrate this process to the regulator will provide good evidence that clients have been thoughtfully segmented and provided with appropriate solutions.

Read more articles like this via our insights page


About the author

Ben Peele joined PortfolioMetrix in April 2019. He has over 20 years of experience in the financial services industry. Prior to joining PortfolioMetrix Ben ran equity sales teams at UBS Investment Bank and held senior positions in the fintech industry.


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You can find more information and practical advice and tools for developing a PROD-compliant process by visiting the PortfolioMetrix website.

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