 Did you know that 77 percent of advisors use referrals to generate new leads? Clearly, referrals are a key tactic in generating new leads, as the data from the TD AMERITRADE Institutional June 2009 RIA Sentiment Survey shows. So how do you make sure you’re doing everything you can to ensure the quality of those referrals? A good place to start is by segmenting your customers to help you determine your “ideal” client. Having that information can help you find other similar clients, and knowing who to go after can help you fine-tune the referral process. Read on to learn more about implementing a customer segmentation strategy from George Tamer, Director of Strategic Relationships at TD AMERITRADE Institutional, who frequently consults with advisors on practice management topics. Q: Why is customer segmentation so important? George: It is important for a number of reasons—especially now as investors have seen their assets go down due to market conditions and advisors’ revenues have taken a corresponding drop. A lot of times advisors think the way to increase business is to add more clients, but it’s important to do it without increasing your staff or expenses. And you don’t want to impact your existing clients negatively by being stretched too thin. Segmentation allows you to increase your bandwidth in terms of the number of clients and also provide services to your existing clients equal to the value of the revenue they bring to your firm. It allows you to track which clients give you referrals and to see what type of clients you actually have. You may think you have one type of client, but when you actually look at your client base, you might see something quite different. For example we worked with a client several months ago who swore he didn’t have clients with assets less than $750,000. When we actually did the analysis, what we found was that, unrelated to the market, his average account size was closer to $500,000. Segmentation also allows you to identify less profitable clients, and once you have the data, you can figure out what options you have. For example, maybe you have a less profitable client who is a great source of referrals. You probably don’t want to get rid of that client, but you have to know how each client fits into your overall plan. You want to limit pro bono cases to an amount that’s acceptable to your firm. Q: How do I get started? George: First of all, you want to define what success looks like—how do you know that you’ve done it right? Start by figuring out what you’re trying to accomplish—are you trying to increase your number of clients? Are you trying to increase revenue from existing clients? Or are you just trying to be more efficient? Once you figure that out, you need to determine your average cost per client. Most advisors have a good handle on what they think their time is worth. Break it down into specific actions—how much it costs you to meet with the client, take a call, do a financial plan—any service associated with the client. Then look at how much that client brought you in revenue over the past 12 months. Also consider such things as do they provide referrals? Do you like working with the client? Once you do the cost-revenue analysis for your client base, you can translate the information into lessons learned for your business. Q: How hard is it to do? George: It’s not difficult, but it is time consuming. It’s a simple process to define costs and revenue. You may have to compile the data from various sources such as your CRM system or your portfolio management system. You might not even have tracked your time in the past. It is probably a two-and-a-half to five-day undertaking, depending on how much information you have available. I suggest because it is so time consuming that you work with a consultant in the industry who can help you through the process. As a custodian, TD AMERITRADE Institutional has been providing this service to advisors for years. Q: Can you give some examples of customer segmentation working? George: Segmenting customers allows you to make specific changes to your business. Take, for example, the advisor I talked about before with the lower-than-expected average account size. After doing the analysis, he realized that to grow his business sufficiently, he really had to stick to the $750,000 minimum he thought he had, and going forward, he needed to tailor his marketing to reach his target client. There are other benefits to segmentation as well. With the information you compile, for example, you can create a tiered service model, so your best clients receive your highest level of service. It allows you to also create cross-selling opportunities for clients. You might find that a certain subset of clients needs a particular service such as estate planning, financial planning or tax preparation. You might start to offer those services if you find enough demand exists. It also allows you to address what to do with your unprofitable clients. You may set a minimum fee, you could raise your fees to those clients, or you could decide to divest them altogether.  
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