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Building the Business 101: Client Categories and Preferred Niches

By classifying clients, our strenghs and weaknesses come into focus.

Veena A. Kutler and Annette F. Simon, 03/22/2007

This monthly series of articles describes the many steps and occasional missteps we have taken in building our financial advisory business, Garnet Group LLC. Garnet has more than 90 clients, $300 million in client net worth under advisement, offices in Bethesda, Md., and Boston, and eight staff members. Veena Kutler, CFA, and Annette Simon, CFP, are the principals managing the Garnet office in Bethesda.

Earlier this year, while attending an industry conference, the two of us spent some time brainstorming about various long-term strategic issues we believe are critical to the future success of Garnet Group. As is often the case, we found that getting out of the office and away from day-to-day issues provided us with the energy and perspective we needed to tackle some important, big-picture concerns. On this particular occasion, we began a review of our client base and an examination of the differences and similarities between them. We followed up by discussing this topic with our Boston partners so that we could have a unified strategy across both offices.

At first glance, our clients appear all over the map in terms of their interests, values, stages in life, and significance to our practice. A closer review, however, revealed that our clients can actually be classified into broad categories with common needs and concerns. Why is this important? We believe that clients are attracted to our practice for a reason. By sorting our clients into broad classifications and then analyzing those groups, our strengths and weaknesses as defined by our clients come into focus. In addition, understanding the types of clients we now have allows us to manage our growth by focusing our marketing efforts on prospective clients in the categories that best fit our capabilities and preferences as a firm.

The Garnet Client Categories
Before starting, we wondered if some of our clients might be outliers whom we would struggle to artificially slot into categories that did not truly fit their situations. But after establishing our five broad client categories, we found that each current client fits well into one classification or another--with a few who straddle two or more categories but predominantly exhibit the characteristics of one segment over all others. Our five client categories are:

Busy Professionals
Our largest category, approximately 38% of Garnet's clients are corporate executives or professionals working in law, medicine, or government. These clients generally share a number of characteristics:

  • Highly educated.
  • Moderately high to high earned income.
  • Net asset accumulators.
  • Complex planning needs often related to benefits packages, employment contracts, stock options, and other executive benefits.

Clients in this category tend to have a common primary goal: retirement or financial independence, generally within a fixed number of years. Typically, they have been focused for so long on excelling in their professional lives that planning for a happy and productive retirement has been ignored. We incorporate life planning techniques to help our soon-to-be former professionals prepare for life beyond the structured work world they are accustomed to operating within. Planning for self-actualization in retirement goes hand-in-hand with the financial planning work we do for this group.

Thirty percent of our client base falls into this large and growing segment. As we help our busy professionals achieve their goals, they will naturally shift into this category. Common among our retired clients are:

  • Complex financial planning needs related to living on fixed incomes and with the current expectation of much longer life expectancies.
  • A desire for asset management strategies that both grow and preserve the portfolio over increasingly long periods of withdrawal.
  • Need for long term care and focused estate planning.

Because of extended life expectancies, returns in retirement need to be high in order to sustain continued growth, even though contributions to the portfolio have ceased and in most cases regular withdrawals suggest lower risk allocations. Insurance planning is often limited by the client's age and inability to acquire long-term care or life insurance at a reasonable cost. On the life planning side, retirees are ready to focus on their legacy. We urge them to look ahead past their active retirement to the next phases of their lives as well as the role of their wealth in the lives of their children and grandchildren.

Legacy Families
We define a legacy family as one whose primary source of funds is inherited wealth. This category comprises approximately 15% of Garnet's client current client base. Generally, this client has received trust accounts and/or property from prior generation family members. Their challenges most frequently revolve around how they relate to and manage their money and complex family issues that inherited wealth can create. They tend to be concerned with:

  • Good stewardship of the legacy they have inherited.
  • Philanthropy--either new or as an extension of family philanthropic goals.
  • Passing wealth to the next generation.
  • Educating and motivating their children in money matters.

Our legacy family clients appreciate big-picture advice that helps them understand how the various elements of their financial picture fit together. Our primary role with them is to coordinate and facilitate communication among the various advisors (financial, legal and accounting) and to help educate the family across generations about the opportunities, limitations, and responsibilities they face as inheritors of significant wealth. Legacy families demand a high level of service and seamless handling of details. Our primary life planning challenge with this group lies in helping clients lead a fulfilling and productive life when working for money is unnecessary.

Owners of Closely Held Businesses
This entrepreneurial group represents roughly 12% of our existing client base. Involved in running a business either on their own or with partners, members of this group usually have high incomes which they may or may not be saving. Frequently, their earnings are immediately reinvested into the business to the detriment of the owner's personal balance sheet. This client is often so busy that he or she has previously taken little time for managing the details of his/her personal financial life. Planning issues for the Business Owner include:

  • Planning for the growth of the business.
  • Succession planning.
  • Legacy planning.
  • Asset and liability protection--both business and personal.
  • Ensuring the owner has sufficient and appropriate liquidity, health and long-term care insurance, and retirement savings.
  • Incorporating the value and inherent risk of owning the business in establishing an overall asset allocation.

This client segment is rich in financial planning opportunities. We can add considerable value for business owners by integrating personal with business planning. Substantial value can be passed along to the owner via the business by establishing attractive retirement plans, insurance and other benefit plans. Many benefits can be shared and even expanded by employing spouses and family members in the business.  As a group, their greatest life planning challenge is in learning to separate themselves from the business. We encourage them to develop interests outside of the business, which may lead to more fulfilled post-retirement lives.

Growing Young Family
Only 5% of our client base, these are our young professionals. For them, retirement is a distant goal; their more immediate objectives are planning for their children's education, upgrading and improving their homes, and planning for family vacations. Their incomes are more moderate than our older busy professionals, but they also tend to be relatively committed savers who are motivated to plan. Their financial planning needs are broad, but fairly straightforward:

  • Basic estate-planning.
  • Education planning.
  • Retirement planning.
  • Wide ranging insurance needs.

Education planning is central to group; and as moms who have had children in public schools, private schools, and college, we have often serve as informal educational consultants. We've discussed whether it makes sense to pay for private schools or move to an area with better public schools, as well as exploring various college admissions and funding strategies with clients in this category. Their life planning issues generally revolve around prioritization of needs, allocating resources, and keeping their future lives as empty nesters and eventually retirees in the corners of their eyes.PAGEBREAK

Preferred Niches
Having identified the segments within our existing client base and discussed the unique needs of each group, we were able to assess the tools and human resources required to provide superior service for each group today and in the future. In doing so, we recognized that each category provides a different combination of profitability and growth for the firm. Armed with this information, we ranked the five client categories in order of preference and have set future growth targets for each group. While we are happy to continue working with clients in all five categories, our marketing and growth efforts will focus on a subset of those categories: the busy professionals, legacy families, and owners of closely held businesses.

We looked at the demographics of our region and discussed how we might attract and retain future clients from our preferred niches. Something that  really jumped out at us from the analysis of our client segments was that life planning issues are critical and probably seldom addressed by other advisors for clients in our preferred niches. We've decided that further instruction in life planning is a good use of our time and financial resources; hence, Veena is pursuing further training by attending the Kinder Institute in May after the NAPFA National Conference.

Moreover, as clients move from other categories into the retirees group, we've concluded that the complexity of planning is likely to increase rather than decline. To optimize staff time and meet these future demands, we'll need even better technological solutions than we have now. We plan to increase our technology budget both for hardware and software solutions as well as for outsourced services.

Benefits of Categorization
Our client segmentation exercise has flowed throughout our practice and helped us make additional decisions related to our future growth and direction. We encourage other advisors to evaluate the client categories they current serve, and determine their target categories for future growth. Feel free to use our categories, to come up with your own, or to seek advice from one of the many marketing consulting firms that have more scientifically established unique client profiles and assessments. However you approach it, understanding more about the makeup of your client base will enable you to make more informed decisions on the direction of your future growth.

Next month, we will continue the discussion of client categorization by focusing on client assessments--a somewhat different although related topic that covers the relationship between our clients and our firm.

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