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How to build a market segmentation matrix for PROD

Guest authors

Here’s an approach to segmenting your client bank and target market that can help you begin to work on meeting the requirements for PROD set by the Financial Conduct Authority (FCA).

In part one and part two of this blog series, you learned about the reporting requirements for Product Intervention and Product Governance (PROD) compliance.

In this final section of the series, we’re rolling up our sleeves to show you how you can begin to segment your client bank and target markets.

The intention of this blog is to describe the elements of a market segmentation matrix so you can put pen to paper – or more likely, cursor to spreadsheet – and start to build a market segmentation matrix of your own, as PROD requires.

Every firm is unique

It's important to note that there are many different ways to structure a market segmentation matrix. The table below is just a starting point – you can modify the table to your own needs. No matter what format or structure your firm uses, it’s important to:

  • have an organised approach
  • be consistent
  • update your client segmentation matrix regularly to reflect any changes in your underlying business

A hypothetical sample market segmentation matrix

The table below is a market segmentation matrix for a fictional firm we’re calling ‘UK Financial Advisers’. There are five columns across the top of the diagram. Let’s take a look.

Client Segmentation Matrix

1. Life stage 2. Sub- segment 3. Platform selection 4. Service requirements 5. Client needs and objectives
Saving for the future
(under 45)
DIY Platform X Lite touch - monitoring of basic financial needs through regular contact. Annual monitoring
  • Have some savings and want to build them up
  • Strategies for an exciting future
  • General investment advice
  • Protection planning
  • Don’t want/need regular meetings
  • Time poor
  • Pro-active service
  • Banking apps set the standards
Young Professional Platform Y Core service - stay on track with a professionally managed plan. Annual review
Nearing retirement
(45 to 64)
Basic investor Platform X Lite touch - monitoring of basic financial needs through regular contact. Annual monitoring
  • Want to discuss personal goals and objectives - not money
  • Want current lifestyle to continue into retirement
  • Help me do what I really want to do
  • Time poor - remove the hassle from managing money - simplify things
  • Need for structure - regular reviews
  • Capital preservation
Informed investor Platform Y Core service – stay on track with a professionally managed plan. Annual review
Enjoying retirement
(65 plus)
Low income Platform Y Decumulation service – bespoke approach to generating income, designed to meet the income requirements of clients
  • Protect capital and maximise income, rainy day, long term care, pass on wealth
  • Estate and IHT planning
  • High quality personal service
  • Need to feel secure and confident in those they deal with
  • Time rich - waste our time
High income   Decumulation Service – bespoke approach to generating income, designed to meet the income requirements of clients

Column 1: General client classification

If your firm runs an investment proposition, it will need to be tailored for an identifiable target market.

To do this, you’ll want to consider what kinds of clients does your firm target? If the target market is too narrow, your firm will have to reject clients. If it’s too wide, it will effectively cover everyone.

Since UK Financial Advisers has a client base which includes a wide range of individuals in all age groups, and a common thread for these clients is retirement planning, the firm has elected to define their target markets into ‘Life Stage’ classifications.

The categories they use are:

  • Saving for the future (under 45)
  • Nearing retirement (45 to 60)
  • Enjoying retirement (60 plus)

You may use other variables to target segments but the segments you select should be based on your business having the necessary skills, knowledge and expertise to service the segment.

Column 2: Break down your classifications into sub-segments

Since UK Financial Advisers uses life stage classifications, they’ve established subsets that align with that approach, breaking down their client types into these sub-segments:

  • The under 45 segment is divided into DIY investors and Young professional investors
  • The 45 to 54 segment is divided into Basic investor and Informed investor categories
  • The 65 plus segment is divided into Low income and High income categories

Your firm’s particular sub-segments will depend on the type of classifications you’re using to group your clients.

Column 3: Platform selection

UK Financial Advisers has chosen an investment platform for each client type which takes their clients’ financial goals into consideration. In the third column, the firm has documented which type of platform functionality is required to suit the needs of each client type.

Note that choosing a platform for its ‘low cost’ should not be the only reason to use it. There needs to be evidence that the chosen platform is suitable and can meet the client’s overall needs.

Column 4: Service requirements

It’s important to address the different service levels available to meet the needs of different types of clients.

UK Financial Advisers provides a different level of service to each of their sub-segments, appropriate for client need. The firm has a 'lite' service, a full service, and a special decumulation service proposition.

Column 5: Client needs and objectives

In this last column, UK Financial Advisers has set out a list of issues their clients commonly face at various stages of their lifetime financial journey. This list shows that the firm has a grasp of the practical and emotional challenges of the target market.

In effect, this section is saying: “This is our target market and we have designed our investment solutions, platform selections and services in this way in order to work for that target market”.

What’s not in the table: Identify and describe your investment solution

One component of the segmentation deliberately omitted from this chart is identifying and describing your investment solution. This is a lengthy subject and outside the parameters of a short blog.

In general however, this is the step where advisers identify and assess the compatibility of their chosen investment solutions for each client. In a nutshell, PROD asks advisers to understand the products it is distributing to clients, assess the compatibility of those products with the needs of the client to whom it distributes (taking into account the manufacturer’s identified target market) and to ensure the products are only distributed when in the best interests of the client. Doing so requires advisers to assess the target market of each individual investment product against each client. The European Securities and Markets Authority (ESMA) guidelines suggest that the following categories be used:

  • The type of clients to whom the product is targeted
  • The knowledge and experience required of the target client
  • The financial situation of the client with a focus on the ability to bear losses
  • The risk tolerance and compatibility of the risk/reward profile of the product with the client
  • The client needs and objectives the investment is intended to meet against the needs of the client

The FCA is looking at this to ensure that advisers are fulfilling suitability requirements. The main thing to remember is to make sure that the target market of each fund or asset being used in each segment is compatible with the needs of each client.

Your compliance consultant can offer more support and advice on how to complete this requirement.

In conclusion

Recognising the differences between different segments of clients, understanding their differing needs, and communicating how best you can support these requirements, is at the heart of your client segmentation.

In addition to helping you form a response to an inquiry from the FCA, completing a market segmentation matrix can also help to align the efforts of your colleagues throughout your organisation and provide clarity that can help focus your firm’s marketing efforts

However, it bears repeating that there are different ways to create a market segmentation matrix. You may find the example provided here useful, but it does not necessarily contain all the elements your firm’s market segmentation matrix should contain so you may wish to explore other formats.

To learn more about your firm’s obligation under PROD, check out these articles:

Why PROD rules make it important to segment your target markets

Tips to help your firm’s PROD reporting

The value of investments can go down as well as up, and could be worth less than originally invested.

The views expressed in this blog should not be regarded as financial advice.

Standard Life accepts no responsibility for advice that may be formulated on the basis of this information.