For advice firms themselves, target markets also provide clarity of proposition, allowing them to really focus on their core clients – not only from an investment point of view, but also from a business point of view.
By working hard to define and understand their clients (their challenges, their opportunities, their strengths, the risks they face) firms can ensure that their investment solutions are aligned and can also harness other benefits of client segmentation – tailoring marketing and communication styles accordingly, for example.
Leaning on technology makes this even more powerful. By embedding target markets in their systems, firms will be able to link client groups to desired outcomes, product criteria and even specific product groups.
They will be able to add justifications for recommending certain products to this target market, streamlining the suitability process and saving huge amounts of back-office time. They will be able to monitor portfolios against desired outcomes and evidence all of this work to the regulator.
With implementation now just a few months away, advice firms that are onboard with the shift are starting to identify and build their target markets.
In my company’s software, some 300 firms have already set up around 500 target markets, as they think about how to group their clients most effectively and how to define those groups.
To create their initial target markets, firms are using factors such as demographics, wealth bracket, attitude to risk, attitude to sustainability, client need, investment experience and desired outcomes.
Ironing out the details
As with any change, getting this right will take time.
Target markets that are too broad – ‘clients in retirement’ – fail to capture important nuances and mean the firm will not be able to identify products that are suitable for everyone in the group.
Those that are too narrow, for example ‘risk level five farmers 10 years from retirement with two children and a high emphasis on sustainability’, may be similarly unhelpful.
As the regulator notes, any target market is likely to include some customers with characteristics of vulnerability, given that people move in and out of vulnerable circumstances throughout their lives. Firms must ensure they consider the needs and objectives of these customers within the group.
There is a lot of work to be done as the July deadline approaches. But it is valuable work.
By embedding target markets up and down the value chain, manufacturers and distributors deepen their understanding of client needs, improve their ability to share information with each other and with the regulator, and ensure clients are sold suitable products aligned with desired outcomes.
