Webinar slides: Peeling the orange: How segmenting your client base can make your business better

Peeling the orange: How segmenting your client base can make your business better 24 March 2021 This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

Your host

Your presenter

Sarah Wolfe

Simon Hoyle

Marketing, Netwealth

Head of Market Insight, CoreData

Before we get started The views expressed in this presentation are those of the author and presenter and do not necessarily reflect those of Netwealth Investments Limited’s. It is a general summary only and contains opinions on public available information and services. It is not advice nor an endorsement of any product or service.

Netwealth Investments Limited (Netwealth) who is a provider of superannuation and investment products and services, and information contained within this presentation about Netwealth’s services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

3

| netwealth

Housekeeping

1 CPD point available • Must have attended for >80% of the webinar • CPD details will be included in the postwebinar email

4

| netwealth

This webinar is being recorded

Enter your questions in the chat

• Slides will be sent to you • We will get to them at the after the webinar via email end of the webinar

Posting to social?

• Please use #netwealthinvest or tweet @netwealthInvest

A little bit about Netwealth Suitable for investors of all types

Best in class technology and service

• Buy, sell and track super and nonsuper investments in one place

• Market leading, home grown platform

• Multiple account options to suit your different needs

• Award winning, nimble and highly responsive

• A wide range of investment options, such as ASX & international securities, 400 + managed funds, managed accounts and TDs

• Comprehensive suite of reports and charts • Mobile app • Investment Trends Winner • Chant West Best Advised Product • Forbes Asia’s 200 Best Under $1b

5

| netwealth

Peeling the orange: How segmenting your client base can make your business better March 2021

6

ABOUT US

GLOBAL PRESENCE, LOCAL FOCUS

CoreData Research is a global specialist financial services research and strategy consultancy, founded in 2002 and headquartered in Australia, with operations in Sydney, Perth, London, Boston and Manila.

It provides clients with bespoke and syndicated research services through a variety of data collection strategies and methodologies, along with consulting and research, database hosting and outsourcing services.

CoreData provides both business-to-business and business to-consumer research, while the group’s offering includes market intelligence, guidance on strategic positioning, methods for developing new business, advice on operational marketing and other consulting services.

7

Peeling the orange

8

Look closer

9

How many clients Approximately how many clients do you personally manage?

What percentage of these do you personally meet with at least once a year?

77.6%

2500

High Average Low 194 3 Source: CoreData 2020 Licensee Research

10

What we’ll talk about today

1

The key benefits of segmentation and how it can help improve your service offering and marketing activities.

2

How to assess a segmentation model to see if it’s the right fit for your business now and in the future.

3

Common approaches to building segmentation models and the different types of approaches that can be used.

4

Some dos and don’ts to maximise your chances of success.

11

What is segmentation?

“It is the practice of dividing a client base into groups of individuals that are similar in specific ways relevant to marketing and service delivery, such as age, gender, interests, life events, risk profile, investable assets, etc.”

Client segmentation – a primer for advisers , Ray McHale, ifa, March 2017

“Segmenting clients into bands and groups is an invaluable method for advisers because it ensures tailored advice, products and services, to each segment and, therefore, to each client. It also leads to correct charging structures.”

A B C D

How advisers are segmenting clients, FT Adviser, June 2019

“There are ways to effectively segment clients, without giving bad or “incomplete” advice – either by simply defining and limiting the scope of the engagement in the first place, adding more services or perks for top-tier clients (as opposed to “taking away” from bottom-tier clients), or just differentiating in how those services are delivered and how much additional support is provided along the way.”

How Can Financial Advisors Differentiate Their Services Across Segmented Client Tiers? Michael Kitces, Nerd’s Eye View, December 2014

12

What are we hoping to achieve?

Target

Efficiency

Cross-sell

Service

Retain

13

What are the risks of not doing it?

01 02

Not understanding which clients are profitable and which ones are not - and failing to spot potentially unprofitable prospects Spending too much time with clients that are

Xxxxxx unprofitable or are only low profitability Xxxxx xxxxx xxxxxx xxx

03 04

Missing opportunities to sell additional services to existing clients, or to introduce new services.

Putting existing client relationships at risk by not delivering to them the service they want (at a price they can afford)

14

What are the benefits?

Focused communications and marketing Strategic basis for matching the needs of various clients and potential clients with more targeted communications and service offerings catering to unique specific needs and desires.

Improving client engagement Not only does segmentation improve your understanding of how clients actually think but it helps demonstrates to them you have earned the right to understand them.

Maximising the efficiency of client retention efforts Who is in danger of leaving? Who is worth retaining? How can existing clients be bonded/encouraged to engage/use/contribute more? Retention can be encouraged through the life cycle of a client.

15

Key benefits Maximising the efficiency of client acquisition Who is out there worth acquiring? How do we appeal and communicate to them most effectively? Segmentation also plays a crucial role in expansion into new markets and the development of new products and services.

Niche Marketing and Brand Equity Targeting a defined client group who seek a distinct set of benefits. This process and the ability to uniquely engage clients promotes the perception of your firm as a distinctive brand offering in the market, thus promoting brand recall and equity.

Drive profit growth Improving client retention/acquisition and delivering services profitably will will inevitably lead to growth over the long term.

16

The segmentation mindset

01

02

• Understand who your clients are and don’t simply define them by what product or service you think they will buy, how much they have to invest, or how much they pay in fees

• Focus less on your features and more on the benefits you provide your client. You will begin to understand client needs, which will give you the most accurate picture of who your customers really are.

03 • Consider how clients think and why they act but also who they are and where to find them.

04 • One segmentation model will not be ideal for all marketing decisions, nor will one segmentation model be ideal for all businesses.

• Some client segmentation is better than none!

17

Flip the perspective

As JFK might have said: “Ask not about what your clients are worth to you; ask what you’re worth to your clients.”

18

Common approaches How do you segment your clients?

Fees

43.3%

Our practice does not segment clients

28.5%

Stage of life

16.5%

Funds under advice (FUA)

16.8%

Client preferences and behaviours In-force premium

15.1% 5.5%

Types of service packages

2.7%

Complexity of Advice

2.1%

Other Source: CoreData Adviser Pulse Check Survey Q4 2020

4.1%

19

Number of segments?

How many segments does your practice have?

41.3% 33.2%

15.4% 10.1%

2

Source: CoreData Adviser Pulse Check Survey Q4 2020

3

4

5 or more

20

What they do next Do you tailor a service to each client segment?

81.3%

18.8%

Yes Source: CoreData Adviser Pulse Check Survey Q4 2020

No 21

A closer look: 2019 Peer Summit

22

Clients and FUM

988 active clients

128 clients per adviser

1.8% of firm’s income is conflicted grandfathered remuneration

$562,505,225 of client funds under management n = 27

23

Ongoing fee benchmarks What is your minimum ongoing fee?

$4,192.5

What is the average upfront fee paid by your clients?

$5,095.0

What is the average ongoing fee paid by your clients?

$8,093.6

What is the average recurring fee income generated by each adviser in your firm?

$744,346

n = 28

24

Revenue is trending up What was your firm’s total revenue in (please answer to nearest $100,000)

n = 28

2016-17

$4,878,279

2017-18

$5,613,028

2018-19

$6,629,182

Average $ 25

Basis of segmentation On what basis do you segment clients?

Service level FUM

75.0% 8.3%

Combination of Fees generated, Potential for growth, FUM and Service Level

4.2%

Combination of FUM, service and relationship

4.2%

Demographics

4.2%

Fees

4.2%

n = 24, respondents who segment their clients

26

Four segments the norm Do you segment your clients? / How many segments?

2 segments

4.2%

3 segments

85.7% Yes

29.2%

4 segments More than 4 segments

54.2%

12.5%

n = 28

27

Fee levels by segment (1) What are the minimum fees for each segments

2 segments $10,000

3 segments $27,217

$7,183 $1,000 Segment 1 Segment 2

$4,717

Segment 1 Segment 2 Segment 3

n = 28

28

Fee levels by segment (2) What are the minimum fees for each segments

More than 4 segments

4 segments

$35,667

$17,060

$7,523

$7,029

$8,718

Segment 1 Segment 2 Segment 3 Segment 4

$6,333

$5,667

$8,333

$7,750

Segment 1 Segment 2 Segment 3 Segment 4 Addional segments

n = 28

29

The holy grail of segmentation

INFORMATION REQUIRED

A segment of one – “the TIDAL experience” Benefits Psychographic Behavioural Socioeconomic / Sociocultural Demographic Generation Geographic Occasions Product usage and channel utilisation 30

Getting started

31

KEY INSIGHTS/ INFOGRAPHIC

Pick two things FAST GROWING

LARGE

SMALL

SLOW GROWING 32

KEY INSIGHTS/ INFOGRAPHIC

Allocate the firms - Foxes FAST GROWING

LARGE

SMALL

SLOW GROWING 33

KEY INSIGHTS/ INFOGRAPHIC

Allocate the firms - Oxes FAST GROWING

LARGE

SMALL

SLOW GROWING 34

KEY INSIGHTS/ INFOGRAPHIC

Allocate the firms - Islands FAST GROWING

LARGE

SMALL

SLOW GROWING 35

KEY INSIGHTS/ INFOGRAPHIC

Allocate the firms - Cruisers FAST GROWING

LARGE

SMALL

SLOW GROWING 36

KEY INSIGHTS/ INFOGRAPHIC

What did we find out?

FAST GROWING

LARGE

SMALL

42% of the market by number

SLOW GROWING 37

A simple model Two simple variables: Age, and income Variables Age: Under 50, over 50 Wealth: Income under $100,000 and over $100,000

Age (50)

2

3 Income ($100,000)

Four client segments: 1. Under 50, under $100,000 2. Under 50, over $100,000 3. Over 50, over $100,000 4. Over 50, under $100,000

1

4 38

What are the implications?

Age (50)

2

3 Income ($100,000)

1

4

Age Over 50: Getting closer to retirement; risk tolerance; asset allocation; additional contributions?

Under 50: Other financial priorities – mortgage, school fees? What’s their saving/investing capacity now and in future?

Income Under $100,000: Is it going to grow? How old are they?

Do we even want them as clients? Do they see value in advice?

Over $100,000: Are they young and likely to increase in value?

Risk tolerance; saving capacity; perception of value of advice

39

A more sophisticated approach

40

Other ways to create segments Segmentations can be obtained by a number of approaches. An existing discrete variable may be chosen, also called "a priori" segmentation. At the other extreme, a research project may collect data on many attributes and use statistical analyses to identify segments, also called "post-hoc" segmentation.

A priori - Choose your variables upfront (age, wealth) - Sort individuals according to chosen variables Post hoc - Cluster analysis reveals natural groupings (or clusters) within a data set that would otherwise not be apparent.

This procedure allows sensible segmentations from which focused segment definitions are refined.

- This allows identification of key segment characteristics and likely expected behaviour, attitudes and preferences from these segments. It also groups samples into to these segments i.e. allocating individuals.

41

Cluster analysis • The aim is to identify groups of individuals, based on a number of variables, that most closely resemble each other, but which are as different as possible from other groups of individuals • Allows behavioural issues to be factored into segmentation models • Allows preferences, needs, wants and goals to be considered

• The downside is it takes a lot of statistical analysis know-how, it doesn’t always produce “clean” segments, and it is possible to get lost in the complexity • It also works best with large sampler sizes – typically 1000 or more

42

A real-life case study

43

The information in this report is based on an extensive survey of 2,228 Australians.

The questionnaire was developed and hosted

by CoreData on behalf of Fidelity International and survey responses were collected between 4 November and 15 November 2019.

The survey’s valid survey responses consisted of: 594 retirees and 1,634 non-retirees.

502 currently advised individuals, 570 previously advised individuals and 1,156 unadvised individuals.

44

Specific needs vary greatly “The specific financial advice needs of Australians can vary greatly depending on their personal and financial circumstances. Overlaying these financial needs are a range of other factors that dictate how an individual relates to money and what they’re looking for from a relationship with an adviser – and whether they are looking for a relationship at all or would be just as happy with a more transactional engagement.”

- Fidelity International, The value of advice: Helping Australians towards a better financial future

45

Understand what drives each of the segments

“In addition to solving the technical aspects of an individual’s financial needs, advisers must also understand what drives each of the segments, what they are looking for from the adviser, what their key needs and wants are and, crucially, how they define value.”

- Fidelity International, The value of advice: Helping Australians towards a better financial future

46

Transcends a common approach to segmenting clients

“These segments are based on behavioural traits and characteristics, including what a client values, what motivates them around money and what they expect from an adviser. It transcends a common existing approach to segmenting clients, which is based on the value of the client’s investments.

“A segmentation model based on asset values runs the risk of aggregating into a single segment clients with quite different motivations, ideas of value and expectations from an advice relationship.”

- Fidelity International, The value of advice: Helping Australians towards a better financial future 47

The concept of the navigators Celestial navigators Focus on competency and trust to solve their specific complex jobs to be done/needs. Think big-picture and beyond the horizon.

GPS navigators Focus on evidence of value for money and transparency in costs/benefits. Want here-and-now issues pinpointed with accuracy.

Radio navigators Focus on building rapport and evidence of positive client reviews. Require more intuitive guidance, with human interaction.

Compass navigators Focus on low/scaled fees and personal referral through family and friends. Want to be pointed in the right direction.

48 Source: Fidelity International, The value of advice: Helping Australians towards a better financial future

Getting to know them Celestial navigators • Look to financial advisers as a trusted source of information.

• Think big-picture and beyond the horizon.

About a third (30.9%) of clients may be defined as Celestial navigators.

They are generally reasonably affluent individuals, on the home stretch to retirement or at least with retirement on their minds.

49 Source: Fidelity International, The value of advice: Helping Australians towards a better financial future

Age and wealth Celestial navigators tend to be mature individuals with sizeable investment portfolios.

• • • • •

Tend to be older, with a significant proportion aged 60 or above.

Majority still working, although tend to have more retirees than the other groups.

Tend to have children who have already grown up and left home.

Highly educated, with a diploma or certificate being the most likely tertiary qualification.

Tend to have mid-range income but will usually have large investment portfolios, likely driven by age and a greater amount of time to accumulate wealth.

50 Source: Fidelity International, The value of advice: Helping Australians towards a better financial future

Financial literacy and resilience Celestial navigators have sound financial knowledge and typically have well-organised finances that are equipped to handle any emergency costs. They tend to:

• Be reasonably confident about making financial decisions, although sometimes look for • • • • •

assurances from their financial adviser.

Be financially prepared, with the ability to sustain themselves for long periods of time if they were suddenly unable to work.

Worry least often about money compared to other groups.

Feel prepared for retirement.

Be least likely to have financial issues that affect physical health, mental health or relationships.

Be least likely to believe that they will be working past retirement age.

51

Source: Fidelity International, The value of advice: Helping Australians towards a better financial future

Relationship status Celestial navigators have a long, trusted relationship with their adviser. They tend to:

• • • • • • •

Rely on financial advisers as a critical source of information and decision-making support.

Funnel most of their financial decisions through their adviser.

Believe and trust that their adviser will act in their best interests.

Be very satisfied with their financial adviser exceeding their expectations.

Be likely to continue the relationship and unlikely to consider switching advisers.

Have irregular contact with their adviser, as they prefer contact as needed.

Prefer to talk to their adviser in person.

52 Source: Fidelity International, The value of advice: Helping Australians towards a better financial future

Introducing the Emerging Affluent

53

Who did we talk to?

The Advisable Australian survey was in field from September 28 to October 10 and received 1,012 valid responses consisting of 618 ‘currently advised’ responses and 235 ‘never advised’ and 159 ‘previously advised’ responses.

Source: Netwealth’s Advisable Australian - The Emerging Affluent

54

Segment formation The methodology for deriving the four persona segments is as follows: Emerging versus established = 45 years and under versus over 45 years Affluent versus Mass Market = Combination of: • Personal income • Household income • Value of residential property relative to debt • Household investment portfolio • Household super

Source: Netwealth’s Advisable Australian - The Emerging Affluent

55

Assessing wealth Income versus assets comes into consideration for wealth as individuals may have a lower income but substantial assets and vice versa.

The starting point is everyone being considered mass market unless they reach a certain threshold on any of the following wealth measures i.e., they are affluent if: • Personal income is greater than $100,000, or • Household income is greater than $150,000, or • Household investment portfolio is over $250,000, or • Residential property equity is greater than $650,000 (this is determined by subtracting outstanding household debt from residential property value), or • Household super is greater than $100,000 if aged under 35 years, or greater than $250,000 if aged 35 to 45 years, or greater than $500,000 if aged over 45 years.

Source: Netwealth’s Advisable Australian - The Emerging Affluent

56

Key dimension formation The segmentation models for the key construct dimensions were developed from both a-priori and adhoc perspectives, using cluster analysis and latent class analysis to derive key variables and group allocations.

Cluster analysis is a group of tools algorithms which focus on ‘unsupervised’ learning (that is, there is no response variable). Cluster analysis allows us to find hidden grouping in the data, forming the basis of segmentation modelling.

It is used to classify different objects into groups in such a way that the similarity between two objects is maximal if they belong to the same group and minimal otherwise – that is, it identifies the natural groupings of ‘tribes’ within a diverse sample.

Source: Netwealth’s Advisable Australian - The Emerging Affluent

57

The six dimensions

1

Advice Propensity A measure of Emerging Affluents likelihood to seek or use financial advice services.

2

Financial Capability A measure of Emerging Affluents financial knowledge and ability to take control of a financial situation.

3

Financial Resilience A measure of how prepared and the ability of Emerging Affluents to navigate threats to financial security and unexpected events.

Source: Netwealth’s Advisable Australian - The Emerging Affluent

4

Financial Wellbeing A measure of the impact of financial issues on The Emerging Affluents physical, mental and social health.

5

Technology Adoption A measure of how The Emerging Affluent use and the value they place in technology and digital services.

6

Brand Affinity A measure of the brand attitudes, loyalty and the factors most important to The Emerging Affluent when evaluating a brand.

58

What we learned about the Emerging Affluent

Source: Netwealth’s Advisable Australian - The Emerging Affluent

59

What we learned about the Emerging Affluent

Source: Netwealth’s Advisable Australian - The Emerging Affluent

60

Some simple dos and don’ts Do

Don’t

• Start • Work with what you know • Start with simple (coarse) segments • Put each customer in only one segment • Build up your insight and intelligence over time • Evolve your segmentation model • Review it (e.g. clients get older, wealthier) • Link what you learn about your clients to what services you can offer them and how you communicate • Seek help if you need it

• Expect to nail it first time • Try to solve everything at once • Create too many segments – you may not have enough clients to sustain more than three or four • Spend months and months trying to build the “perfect” model • Use variables that are vague or open to interpretation • Pay a fortune (even to CoreData!) to get it done

61

Thank you

62

63

Questions and answers

Thank you

1 CPD point available

Webinar recording and slides

• Must have attended for >80%

• These will be included in the webinar resources email

• CPD details will be included in the webinar resources email

65

| netwealth

Thank you www.netwealth.com.au/advisableaustralian

Read volumes 1 and 2 of The Advisable Australian report

Attend our masterclass webinars

Run an internal workshop

Value proposition and pricing models for different customer segments with Peloton March 26, 2021 @ 1pm AEDT

www.netwealth.com.au/innovation

66

| netwealth

General use

Disclaimer

This information has been prepared and issued by Netwealth Investments Limited (netwealth), ABN 85 090 569 109, AFSL 230975, RSE L0000192). It contains factual information and general financial product advice only and has been prepared without taking into account your individual objectives, financial situation or needs. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to your particular circumstances and seek any independent financial or other professional advice you may require. The relevant disclosure document should be obtained from netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Unless specified, all information in this document is as at 04/08/2020.

67

| netwealth