An enduring debate in wealth management is how advisors should segment clients, or should they at all? Should they be guided by financial metrics, such as minimum investible assets, or by sources of the money? We talk to The Colony Group, an organization gathering a wide variety of advisory groups under one roof.
The Colony Group, a US wealth and business management company, last year launched Curated by Colony, a range of non-financial services covering areas such as travel, healthcare, career development and cybersecurity. This shows that there is more to managing clients’ affairs than picking stocks or filing taxes.
The development also came from a firm with a variety of client segments. Client segmentation and how to do it is a debated topic. Can managers segment clients by investible wealth alone, by sources of wealth, or their specific needs? And how can segmentation help wealth managers stand out from the crowd? And can advisors deliver on a promise to be true fiduciaries if they don’t get segmentation right?
Family Wealth Report recently spoke to Michael Nathanson, chief executive of the Colony Group. Nathanson attended Brandeis University as an undergraduate, subsequently he attended Harvard Law School for his JD degree, and Boston University School of Law for his LLM degree in taxation. He started his career as a lawyer at a large law firm called Hale and Dorr, which ultimately became Wilmer Cutler Pickering Hale and Dorr, also known as WilmerHale, through a well-publicized merger. Nathanson practiced tax law for nearly 13 years, rising to the ranks of senior partner. In 2004, he was recruited by one of his smallest clients, The Colony Group, to join them. Although the move involved a pay cut, Nathanson said he decided to take the “biggest risk” in his career. So far, it has paid off handsomely, he told FWR.
The Colony Group has about $12 billion in assets under management, with 15 offices in eight US states. In total. there are 250 people in the firm, covering various institutions and businesses, family enterprises, business owners, entrepreneurs, corporate executives, professional athletes, entertainers, and professionals (such as lawyers, etc).
Nathanson said his firm thinks segmenting clients is a big differentiator.
“We approach segmentation by focusing primarily on the personal needs of our clients and, unlike most others, only secondarily on how large a relationship happens to be at a particular point in time,” he said. “Here’s why: first, the whole notion of segmentation based on relationship size is a simplistic, temporal mistake. It fails to acknowledge that small clients become large clients, and large clients become small clients. It’s an assessment based on a set of facts that will change.”
“Second, this old-fashioned approach fails to incorporate the fact that clients’ needs are primarily driven by their personal circumstances and particular needs, which are based on many factors, including, but in no way limited to, the size of their portfolios,” Nathanson continued. “Rather than try to cram our clients into basic, size-based service models that are convenient for us, we develop and deploy specialization around groups of clients that have common needs because of their shared circumstances.”
“In most cases, this means segmenting our clients as current and former business executives, business owners and entrepreneurs, professionals, family enterprises, private-equity and venture-capital investors, entertainers, athletes, family members in transition, and institutions, among others,” he said.
Segmentation remains a strategy debating point. In February last year, a study of wealth management firms around the world from data and analytics provider Refinitiv said that the vast majority (90 per cent) of them have reviewed or changed how they segment clients, moving away from an approach of placing clients based on minimum asset sizes. A white paper from the organization, entitled The Transformation of Wealth Management - Five Trends For 2020 and Beyond, also finds that all (100 per cent) the respondents to its survey think that the transfer of wealth will be one of their top-three concerns. As a result, organizations are changing the way in which they are set up to handle this multi-trillion shift in assets from Baby Boomers to succeeding generations. (The Refinitiv report was based on views taken from 46 firms (19 the Americas, 16 Europe, and 11 Asia).
Another report, issued in June 2019, found that two-thirds of US RIAs do not impose account minimums on clients or forgo setting them at all, suggesting that they are not only focusing on profitable growth. That study was from CanAm Research’s 2019 RIA Capacity and Segmentation Practices Survey, commissioned by Facet Wealth, a firm based in Baltimore.
Of course, with some structures, such as single family offices, there is not necessarily a “segment,” other perhaps than between principals and other family members with different approaches to how members, including young adults, are brought into conversations about wealth. Even here, however, there are nuances, including between SFOs in different parts of the world with varying family cultures and expectations. Approaches may also vary depending on AuM and whether or not a family office is linked to an operational company throwing out cash.
“I’ve often said if I had a problem with my heart, I’d want to see a cardiologist and not a general practitioner or, even worse, a doctor that mainly saw people with other types of conditions. How is it that so many financial practitioners are able to get away with simplistic service models that don’t require specialization?” Nathanson asked.
“I’d suggest that it’s because specializing on different client types requires too much investment, too much effort, and a discipline that would require turning some prospective clients away. If I’m right, then there is a real disconnect in how the fiduciary standard is being applied within the financial services industry. Clients don’t just need more services. They also need the right services delivered by advisors with the right expertise and experience in offering solutions to specific types of clients,” he said.
Segmentation, when done properly, does appear to work in getting clients through the door, Nathanson said.
“I believe that our approach does help us attract - and retain - clients, and I do think they understand it. Like everyone else, we tell prospective clients that we seek to provide services tailored to their needs. We just couple our statement with knowledge, experience, and examples that hopefully resonate with them. Let me use the example of a corporate executive,” he said.
“When we serve a corporate executive, we endeavor to do so through a team that doesn’t focus merely on generic planning but also concentrates on corporate executives – one that understands equity incentives, employment agreements, long- and short-term incentive plans, changes of control, concentrated positions, planning for liquidity events, 10b5-1 trading plans, net unrealized appreciation in retirement plans, and so many other nuances that can make a meaningful difference in serving them,” Nathanson continued.
Unsurprisingly, some clients sometimes fit into more than one segment. Nathanson said that in such cases the Colony Group assesses the client’s main areas of needs and tries to classify them accordingly.