The client classification model of A, B, C, D will become obsolete as more financial planning firms transition their business to a fee-for-service model, according to advice consultants.
The common segmentation model was only appropriate for commission-based businesses but not effective for fee-based firms, E&W Strategic Partners managing director Lap-Tin Tsun said.
"Basically it is a very flawed model in terms of trying to use it to segment anyone because it's only based around the client's profitability and income," Tsun said.
"It works well in the existing world because it's all based around how much money a planner makes on a client and that is based on FUM (funds under management), but it really has no use in a fee-for-service world."
The model does not take into account any social, economic, geographical or behavioural attributes of the client.
"The problem is each segmentation is made up of a mishmash of people and there is no real definition, no clarity and no consistency," Tsun said.
"Now if an advice firm is changing to a fee model, an A client may not be as profitable anymore."
Behavioural segmentation that gauged more meaningful information about the client's profile and characteristics would be a more effective classification model in the new world, he said.
"But a lot of the big dealer groups still use the A, B, C, D segmentation because it's worked for them in the past and at this point in time they don't fully understand that it needs to change," he said.
Advice Centre Consulting principal David Fox agreed there needed to be a shift in the current mindset towards client segmentation.
"I do believe that the old categorisation model for the businesses that are equipping themselves to be successful in the future is now irrelevant," Fox said.
"For any new clients I do believe the categorisation will be more around the different groups of clients according to their advice needs."
MLC advice solutions general manager Greg Miller said the better A, B, C, D models did have an overview of relationships and were not just based on dollar value.
"But still you're going to have to do some level of segmentation because you're going to have to match the fees charged to the services provided for each client," Miller said.
"In moving to a fee-for-service model, what we have talked to advisers more about is what sort of service and what sort of value can they add on an ongoing basis.
"I think the A, B, C, D model in some respects can change, but it's more about just aligning what am I going to do for the client, what does it cost me to do that, what value do I add and then charging an appropriate fee for that."
