Historically, Registered Investment Advisor (RIA) firms have been able to survive and even thrive by focusing on a single service for one type of client with minimal marketing efforts. However, modern consumers exhibit diverse buying patterns and preferences for new service models, necessitating a more targeted and flexible approach that diversifies consumer choice.
If RIAs want to increase enterprise value, they must adapt to changing consumer preferences and emerging client archetypes to stay competitive and achieve healthy, organic growth.
This whitepaper aims to provide RIA firm owners and executives with insights into shifting consumer archetypes, as well as strategies to tailor their marketing and service offerings for each archetype.
Drawing on our own experience, and publicly available research from various sources, including Forrester, Accenture, J.D Power, Schwab, and others, this paper will explore several ways to dissect consumer archetypes to empower sales and marketing leaders. If RIA leaders can segment their customers, they can optimize their marketing, sales, and operations around specific service offerings, and ultimately achieve healthy, above-average growth rates in a highly competitive market.
In the following sections, we will delve deeper into each consumer archetype, examine the marketing strategies and service offerings that resonate with them, and discuss the importance of targeting multiple archetypes to increase your organic growth rate and improve your enterprise value.
The Problem: Consumers Are Voting with Their Feet
We think RIA firms are a bit too casual right now, moving at a relatively slow pace that will leave many of them open to disruption. Consumer behavior is rapidly evolving. This shift is driven by various factors, including technological advances that reduce the cost to serve, demographic changes, and the ongoing pursuit of more personalization. Consumers are increasingly willing to reevaluate their financial advisory relationships and seek alternatives1,2.
According to the J.D. Power Full-Service Investor Satisfaction Study, younger clients, particularly those from the Millennial and Generation Z demographics, are ready to 'vote with their feet.' Among clients in all age groups, these young investors are the most likely to switch firms in the next 12 months. Notably, more than one-fourth (27%) say they “definitely will” or “probably will” switch firms, and almost half (49%) reveal they are already working with a secondary investment firm3.
Simultaneously, Accenture's State of Wealth report indicates that technological giants may soon become formidable contenders in the wealth management space. The report found that 69% of respondents would consider using Google, Apple, or Facebook to manage their money if these channels featured a wealth and money management offering2.
Moreover, Forrester's Consumer Research identifies an emergent group of investors known as "digitally savvy delegators." These individuals seek financial management solutions that differ from traditional offerings, indicating a shift in consumer expectations1.
These trends signal a critical wake-up call for firms. If 27% of surveyed investors are contemplating a switch and 49% are working with a secondary firm, while 69% of next-generation investors are waiting for tech giants to launch advisory services, firms need to urgently reassess and reinforce their value propositions to safeguard against diminishing enterprise value1,2. This urgency is not solely about preserving current income — increasing organic growth rates is directly linked to having a "healthy" business, one that attracts younger talent and the right capital partners.
As the landscape evolves, firms must adapt by understanding their clientele, segmenting their markets, and contemplating diverse service offerings that cater to varying consumer needs. By doing so, firms can position themselves to thrive amid changing consumer behaviors and preferences.
Segmenting Your Clientele Properly
To rationalize your market position and contemplate the different service offerings required to address the diverse consumer types in 2023, we recommend segmenting your existing clientele.
This section will introduce two distinct segmentation models from industry-leading research firms, J.D. Power and Forrester. Understanding how these two researchers segment customers will allow us to draw on common ground, and then move forward with an exercise you can use to socialize your ideas with executives and team members. It's important to note that the suggestions made in this exercise are not affiliated with Forrester or J.D. Power.
J.D. Power dissects wealth management consumers into four primary segments3:
Full Service: These consumers prefer a high level of personal attention and guidance from a financial advisor. They value a comprehensive, personalized service and are willing to pay a premium for it.
Seeking Guidance: This segment includes consumers looking for financial guidance but may not require a full-service advisor. They may be comfortable with a hybrid model that combines digital tools with a personal advisor's occasional guidance.
Digital Advice: These consumers prefer working with a digital advisor, or robo-advisor, to manage their investments. They value low fees, transparency, and ease of use and may prefer a more hands-off approach to their finances.
Do-It-Yourself (DIY): These consumers prefer to manage their investments independently. They may be experienced investors comfortable making their own investment decisions or novices wanting to learn by doing.
Now, let’s take a look at Forrester's Client Segmentation Model. It provides a distinct approach to segmenting consumers in the wealth management space1:
Delegators: These clients prefer to hand over the reins to their financial advisors, trusting in their expertise to manage their investments and make financial decisions.
Validators: Validators are clients who want to be involved in decision-making but still seek professional advice. They appreciate having a financial advisor to validate their decisions.
Self-Directed Consumers: These clients prefer to handle their investments independently. They don't seek professional advice often but might use advisory services for major financial decisions.
Disengaged: This segment includes clients who aren't actively involved in managing their investments. They may have minimal interaction with their financial advisor and are often indifferent to the investment process.
Elements Client Segmentation Exercise for RIAs
Understanding these segmentation models can provide valuable insights into different consumer behaviors and preferences, informing your approach to client service and marketing strategies. As a starting point, without doing an in-depth study on your clientele, we recommend grouping your clientele, and offerings into three groups:
Group 1: Customers who want to fully delegate their financial management.
Group 2: Customers who prefer an advisor-supported service where they maintain a degree of control.
Group 3: Customers who prefer to direct their financial management independently, without sharing too much or collaborating with another professional.
At Elements, we propose that RIA firm owners and executives consider these distinct client segments when designing their service offerings. The more diverse your offerings, and the more client segments you consciously serve, the more likely you are to stimulate organic growth.
Step 1 - Segment Your Customers into one of these 3 Groups.
For traditional firms, it's likely that you have primarily one service line at one price point. However, within this service, you probably cater to several types of consumers. We propose an initial segmentation of your clients into three groups: Group 1, Group 2, and Group 3. As we describe these groups, we encourage you to envision a second service segment beyond your traditional offering.
This group aligns with the traditional client archetype. They lack the expertise, time, or emotional detachment to manage their wealth effectively. Hence, they prefer to delegate this task to a professional. As they align strongly with your full-service offering, they are likely to be less price-sensitive and might not have strong preferences regarding fee models. The majority of your existing clients probably fall into this category, akin to Forrester's 'Delegator' or J.D. Power’s 'Full Service.' They see you as the pilot, and this will likely be your most premium service.
This segment of clients seeks to maintain control over their financial management. They appreciate an advisor's support but prefer to be the pilot, with you as the co-pilot. They might not initially know which model they prefer, but by offering two choices, you can determine their likely preference. They are more analytical about price and may prefer non-AUM pricing. However, they might be comfortable with a lower AUM fee combined with various retainer, subscription, or fixed-fee complements. Over time, Group 2 clients might convert to full service as they become more familiar with your offering's value proposition. They are likely to align with Forrester's 'digitally savvy delegator' or J.D. Power’s 'Seeking Guidance' archetype.
This group primarily consists of DIY or self-directed clients. They prefer to maintain privacy and control over their financial management and are unlikely to seek professional services. However, they do seek content, research, and resources to aid their financial journey. Technology continues to offer a wide range of options to this group. They are likely the largest individual segment in the population and primarily seek intellectual capital. Offerings that resonate with this segment are likely specialized content, training, and coaching services, designed to educate and inform rather than convert.
While Group 1 has traditionally been the primary and most lucrative channel for advisors, we see Groups 2 and 3 as not only growth opportunities but essential segments for capturing market share from Gen XYZ customers. By expanding into Group 2, advisors can increase their organic growth rate and create more opportunities to convert these clients into Group 1. If advisors want to engage with Group 3, a content or training-focused offering is recommended. As technology evolves, more Gen X and Y investors naturally gravitate towards Group 2 offerings. By catering to Group 2 and Group 3, you can increase organic referrals and attract a wider pool of potential Group 1 clients who may need a bit more nurturing.
The Imperative of Boosting Organic Growth for RIA Firms
As leaders in the Registered Investment Advisor (RIA) industry, we are all keenly aware of the concept of growth. But not all growth is created equal. The type of growth that truly matters, the growth that is the lifeblood of our firms, is organic growth.
Organic growth is a powerful measure of a firm's health and the potency of its value proposition. This type of growth arises from the firm's ability to attract net new assets, secure new subscriptions, and generate transactions. It is growth that's happening net of market returns and any revenues exiting the firm. Simply put, organic growth is the purest reflection of our ability to serve our clients and attract new ones.
So, why does organic growth matter so much? It's simple. Organic growth is a testament to our ability to connect with clients, understand their needs, and deliver services that resonate with them. It's a measure of our relevance in an increasingly competitive and complex market.
However, recent industry data suggest that organic growth is proving elusive for many RIA firms. According to a study by Dimensional Fund Advisors, the average organic growth rate for firms is hovering around just 3%. This is significantly lower than what many advisors estimate, where they place their organic growth rate closer to 7%. The Charles Schwab annual Advisor Benchmark Study paints a similar picture for large firms, with smaller firms achieving an organic growth rate similar to Dimensional's estimate.
These figures tell us one thing: there's room for improvement.
Many firms appear to be facing challenges when it comes to organic growth. Although there has been significant M&A activity in recent years (inorganic growth), organic growth has not been on the rise. And the shifts in consumer preferences we discussed will continue to make organic growth a key challenge for RIA firms.
In an increasingly competitive landscape, with shifting consumer archetypes and evolving expectations, focusing on strategies to boost organic growth is not just a nice to have. It's an imperative. It's about future-proofing our businesses and ensuring we remain relevant and valuable to clients.
RIA firms need to revisit client segmentation models, diversify their service offerings, and most importantly, align their approach with clients’ unique needs and preferences. Because in the end, organic growth is not just about the numbers. It's a reflection of improving the quality of advice we offer, serving our clients better, and making a meaningful difference in their financial lives.
As we've explored in the previous section, understanding and effectively segmenting our client base is a crucial step toward improving our organic growth rates. By tailoring our service offerings to resonate with diverse client archetypes and their unique needs, we can better align our value proposition with our clients’ expectations, thereby enhancing our client engagement and satisfaction. This alignment not only aids in client retention but also increases the likelihood of garnering referrals, which directly contributes to organic growth. Thus, the connection between client segmentation and organic growth is clear - the more accurately we understand and cater to our clients, the more we stand to grow organically in this highly competitive market.
By embracing change and adapting to the evolving market, we can continue to provide superior service to our clients, attract new business, and ensure the longevity and success of our firms. The future of the RIA industry lies in the firm’s ability to understand, adapt, innovate, and seize the opportunities that lie ahead.
Raghavan, V. (2021a, September 10). Meet the most interesting investor segment: The digitally savvy delegator. Forrester. https://www.forrester.com/blogs/meet-the-most-interesting-investor-segment-the-digitally-savvy-delegator/
Wealth Management Consumer Report: The New State of Advice . Accenture. (n.d.). https://www.accenture.com/content/dam/accenture/final/a-com-migration/r3-3/pdf/pdf-162/accenture-wealth-management-consumer-report-new-state-of-advice.pdf#zoom=40
Wealth Management Platform | J.D. power. (n.d.-b). https://www.jdpower.com/business/wealth-management-platform
2021 Ria Benchmarking Study - Schwab Brokerage. (n.d.). https://content.schwab.com/web/retail/public/about-schwab/schwab_ria_benchmmarking_study_2021_0721-1KN1.pdf
Dimensional Fund Advisors. (Year of publication not provided). Title of the study was not provided. Retrieved from [website URL not provided].
Title of the publication not provided. (Year of publication not provided). "Blueprint for Success: The Bricks and Mortar of a High-Performing Firm." Retrieved from [website URL not provided].
Charles Schwab. (2022). "Advisor Benchmark Study." Retrieved from Charles Schwab Website.
Great article Reese. I really think there is so much opportunity to work with underserved demographics at this point with the right service offering (and tech of course to support and scale it profitably).