While the wealth management industry has traditionally viewed clients through three “static” lenses - level of wealth, source of wealth and age of wealth - SEI believes a more “dynamic” segmentation type has emerged.

“While this approach worked successfully for many years, wealth management clients’ needs and values have evolved,” the technology firm said in Can Segmentation Lead to Sustainable Profits?

According to Al Chiaradonna, senior vice president, SEI Wealth Platform, segmenting clients based on their wallet size limits how many clients a wealth manager can serve because firms “tend to focus on providing their wealthiest clients highly customized solutions.”

The insights add to recent discussions among industry players as regards what is the most profitable client base, or client “sweet spot.” There has been a big focus on the ultra high net worth market due to the perceived level of sophistication among clients in that segment. However, more recently, it has been acknowledged that it can be an expensive and complex one to serve.

Indeed, SEI believes there is an opportunity for wealth managers to create a “unique client experience” for high net worth - and even mass affluent - investors.

Peter Charrington, chief executive for North America at Citi Private Bank, told Family Wealth Report last year that those wealth management firms focused on the $5- $25 million HNW space tend to have “big armies on the field” and are therefore in a very profitable place. However, this volume-based approach often relies on an “off-the-shelf” type of service and doesn’t marry well with customization, he said.

Meanwhile, a 2012 McKinsey report, entitled A Tale of Two Millionaires, predicted that “core millionaires” will generate over 80 per cent of net new revenue growth in wealth management by 2015.

On the other hand, some firms believe wealthy investors “vary too much to be segmented,” SEI said. But that is not to say they don't have similar goals and attitudes. Categorizing clients by goals and behaviors enables wealth management firms to improve resource allocations by ensuring an efficient commercial distribution of products and services, according to the paper. “Firms must balance the cost to acquire and the cost to serve clients with the overall value the clients bring to the firm.”

“It’s clear that wealth management firms become more profitable as they evolve with and ahead of their customers, and enhanced client segmentation strategies have been found to help drive this evolution and profitability,” said Chiaradonna.

“We’ve also found that achieving this will hinge on a firm’s ability to develop a technological environment that can collect, manage, and analyze vital client data. With this improved data, firms can better understand the modern segmentation of their clients and prospects and ultimately target them more effectively,” he said.

The paper was published by SEI Executive Connections and is the third in a four-part series entitled SEI Insights: The Future of Wealth Management.