High net worth investors – client segmentation & needs

Having established that there is a reasonably large, and growing, number of potential clients with wealth, we need to ask what their needs are. What does ‘managing wealth’ actually mean?

Client segmentation – beyond source of wealth

We can safely assume that all potential clients – the high net worth individuals – are not the same, and hence, their needs might vary based on their differences. So we should segment the market by some attributes; these could be demographic, psychographic, behavioural or simply based on needs.

  • Demographics are quantifiable statistics such as age, gender, income, education level, marital status etc. 
  • Psychographics classify people according to psychological variables such as attitudes, opinions, values and interests. These could be more useful than demographics for the wealth management industry. For example, some HNWIs believe in getting the highest possible returns while others might want to protect their wealth, or reflect their values on environmental or social issues.
  • Behavioural attributes describe whether someone takes a particular action and how frequently they do. Some HNWIs might like to trade often while others believe in a buy-and-hold strategy.
  • Needs-based segmentation divides potential customers based on distinct needs. Some HNWIs simply want consolidated reporting while others want their wealth to grow by a certain hurdle rate.

The newly wealthy also take time to figure out their own investment philosophy and investing personality. These concepts are different from the risk profile or tolerance.

An investment philosophy is a succinct statement of how the investor believes markets behave and what opportunities they have the capabilities to take advantage of. Even professional investors evolve their investment philosophy over time as they experience multiple business cycles and live through once-in-a-lifetime market events. Clients might take even longer to discover that their understanding of markets may be flawed or incomplete and of course, the unknown unknowns.

Investor personalities are archetypes of their preferences for sophistication and control. Some investors like to delegate while others do not, irrespective of their knowledge levels and risk tolerance. 

Charlotte Beyer, a veteran in advising and working ultra high net worth individuals, recommends both advisers and investors go on a journey of self-discovery. She encourages both to place themselves on this schematic, Quadrants of Sophistication and Control, originally presented in the early 90s. In an paper titled ‘Relationship Alpha’ for the CFA Research Foundation, she reminds advisers that such an evaluation process will save time and aggravation as advisers and investors can be matched appropriately.

Michael Pompian, another veteran in advising UHNWIs has written multiple books on behavioural finance and how it helps to segment clients into four types based on behaviour. His books include questionnaires to help with the segmentation.

Pompian suggests such behavioural personality profiling is very useful in the relationship management as it guides whether firm should try to moderate the biases or adapt to them.

We are not aware of any large scale surveys of investors on risk profiles, preferences or attitudes in India. The Kotak Top of the Pyramid report is the only survey that appears to have asked investors about their approach to investing. It highlighted the approaches being different depending on whether the investors were entrepreneurs, inheritors or professionals.

None of the wealth managers interviewed mentioned anything about helping investors figure their investment philosophy or personality. 

Client needs – including expressive and emotional

Once a wealth firm has determined or at least has a working hypothesis about the potential clients, it must focus on understanding customer needs, especially underserved needs. Whether called needs, wants, desires or pain points, it’s important for the industry to uncover and understand these needs. 

The technology industry uses the concept of ‘user story’ which follows the format ‘as [a type of user], I want to [do something], so that I can [desired benefit]. 

It’s important to ask customers ‘why that is important to you’ repeatedly until it doesn’t lead to any new answers. This ‘peeling the onion technique’ helps elevate the discussion from more granular, detailed benefits to higher-level benefits, or root cause of a problem. 

Another way of prioritizing needs is using the Maslow’s hierarchy of human needs, starting with physiological, safety, belonging, esteem and self-actualisation. The implication of the hierarchy is that a higher level need doesn’t matter unless the more basic needs are met. In technology, the UX design doesn’t matter if the site is not ‘up’, the page load times are too slow or there are too many bugs in the main functionality. 

Once the customer needs are listed, they need to be prioritised. While ‘importance’ is one dimension, it’s also useful to look at the ‘satisfaction’ level for each need or benefit. Some needs are low in importance so the satisfaction levels may not matter. If plotted on a x-y axis, the highly important needs being met with good satisfaction levels is a competitive space. The real opportunity lies in an important need not being met well to customers’ satisfaction levels.

Wealth is an emotional topic. Wealth managers have to remember that investors may not just want utilitarian benefits i.e. the highest returns but also expressive and emotional benefits. In his book, Finance for Normal People, Meir Statman suggests most people want these three kinds of benefits – utilitarian, expressive, and emotional – from all products and services, including financial products and services. 

  • Utilitarian benefits answer this question: What does something do for me and my pocketbook? 
  • Expressive benefits answer this question: What does something say about me to others and to me? 
  • Emotional benefits answer this question: How does something make me feel?

He suggests that “investment wants include the utilitarian benefits of safety, as by an insured bank deposit; the expressive benefits of high social status, as by a hedge fund; and the emotional benefits of exhilaration, as by a successful initial public offering.”

Explaining why the wealthy may seek exotic investments such as hedge funds or venture capital, he writes “the utilitarian benefits of hedge funds are no higher than those of index funds. Indeed, the utilitarian benefits of hedge funds are likely lower because their returns to investors are lower and their fees higher. But hedge funds offer investors the expressive and emotional benefits of high social status because they are available only to the wealthy, whereas index funds are available to almost all. Similarly, the utilitarian benefits of shares sold at initial public offerings are no greater than those of shares of established companies. Indeed, the utilitarian benefits of IPO shares are likely lower because their returns are likely lower. But shares sold at initial public offerings offer emotional benefits of hope and exhilaration that established companies’ shares cannot match.”

So what do the wealthy want from wealth managers?

Whether earned over a number of generations or suddenly coming into wealth, if there is such a thing, most wealthy have probably thought about what they would like to do with their wealth. Wealth is the means to other ends, such as the feeling of security, freedom or power. Some like the idea of leaving a legacy, whether for their own family or a particular cause. Perhaps they have yet to figure all this out.

Source: Charlotte B Beyer, Wealth Management Unwrapped

Most wealthy investors are clear that the wealth industry can’t hope to match the returns that created the wealth to start with. So they are savvy enough to know the returns will need to be somewhere between those available from fixed deposits (for which they don’t need a wealth manager) and those from a single business. They spend some time figuring out the returns that a diversified portfolio can generate with what level of volatility and downside risk.

When asked, investors may list some of the following – 

  • Consistent returns above inflation
  • Peace of mind that wealth is protected from downside risk
  • Consolidated reporting
  • Insights into global economics and markets
  • Tax planning
  • Protection strategies and vehicles
  • Business succession
  • Family governance
  • Help with children’s education (such as admission to Ivy League colleges)

While managing investments may appear to be the top priority need, HNWIs do have additional challenges that are different from those that an institutional investor or a retail investor might face. These challenges include taxes, family dynamics and investor personality & values. Beyer likens this to playing multi-level chess games – a move on one chess board impacts the other three.

Most experienced wealth managers no doubt understand and appreciate the complexities that come with different client segments and needs. However, during industry conversations we didn’t hear about any efforts to group different personalities and needs to be able to cater to them more effectively. So we thought of presenting some ideas from global veterans.


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