Introduction to PROD and Client Segmentation

Recap on the PROD rules

Consumer Duty leads on from the PROD rules that we've had in place. A lot of Sense and Lyncombe member firms have already carried out good work in this space, but we need to really ‘focus the lens’ on what we're doing in this area.

Product Governance

Good product governance should result in products that:

• Meet the needs of one or more identifiable target markets.

• Are sold to clients in the target markets by appropriate distribution channels.

• Deliver appropriate client outcomes.

Advisers distributing the products to clients should:

• Understand the products being distributed.

• Assess the compatibility of the products with the needs of the client, by considering the target market identified by the manufacturer.

• Ensure products are only distributed when in the best interests of the client.

Product governance effectively determines the broad compatibility of products and services to an identified target market. It's also worth bearing in mind that when building a CIP, this is effectively selecting products and providers that should meet the needs of your different client segments.

Key aspects of an Investment Proposition

Client segmentation has become increasingly important because of PROD with the Consumer Duty, creating an even greater focus on understanding your client groups and the services you want to deliver for those clients.

Client segmentation is the starting point and the most important aspect of the entire proposition. Below are some points you need to consider:

• What are the common circumstances, needs, and goals of those clients?

• Ideally, work on life stages, because that's all about where they are in life, their planning needs, and requirements, and then the products and services that align to that.

• Do your clients have complex or simple needs?

Generally, the more clients you have, the more segments you should have.

Client Segmentation based on Investable Assets

Historically, segmentation within Financial Services has been done based on asset values.

Here are four example client types where the assets are all the same at half a million pounds.

All these clients have half a million pounds, but they have quite different advice needs therefore, the service you would provide for them will also be quite different.

This highlights the problem with working on investable assets, so we need to move focus away from it and ensure that we're working on commonalities and needs for clients, then aligning products and services accordingly to that.

There are other ways in which you can do client segmentation, but life planning stages tends to work for most. Each firm within the ASHL Group networks will be different. Firms may not necessarily have all these segments, some may have more, or some may be specialised.

As an overview, most firms will have young savers and those planning for retirement. More and more, clients will probably phase into retirement, but you’ve then got those that are retired, taking benefits, and then later life planning.

The one thing to consider there though is in the retired category, where you could potentially have two segments. You could have a segment of retired clients, where they're drawing an income from the money that you look after for them. You could also have another segment that's retired, but not drawing income from the money that you look after for them. That could be because they're receiving their income from DB schemes or state pensions and that covers their income needs.

For reference, here’s an example of a young savers segment:

• Age <45

• Accumulating wealth and have some savings and want to grow them.

• Employed

• Debt to pay.

• Have young children.

• They’ll have protection needs, certainly with young children and working,

• They are likely to have a workplace pension and possibly an ISA.

• They will be conscious about the impact on the environment, so they are ESG aware.

• They have a high capacity for loss, based on the timeframe to whatever their goal is, but let's assume, it's retirement in this example.

• They are time poor, they don't want, or need regular meetings.

• They have simple planning needs.

You can see by these two examples, the quite drastic difference in needs, with regards to relationship as well as solution requirements.

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Find out more

To find out more, we have an Advice Proposition Masterclass hub, which is freely available to subscribers of Sense and Lyncombe Networks. Here you can find a suite of webinars with helpful support on the various aspects of advice proposition development, including a dedicated episode on ensuring that you are prepared for Consumer Duty.

If you are interested in finding out more about the suite of support services available to you as members of the ASHL Group networks Sense and Lyncombe, get in touch today.