In the time since the great financial crisis, wealth in the United States has more than doubled—U.S. household investable assets grew from $27 trillion in 2011 to $56 trillion in 2022. This massive growth in wealth has driven an expansion in addressable demographics for private banking service providers. To strengthen and secure their competitive position, banks must implement defined client segmentation strategies to better address the needs of the current and future wealth demographics they service, according to The Cerulli Report—U.S. Private Banks and Trust Companies 2023: Adapting Service Models.

In 2011, assets controlled by high-net-worth (HNW) clients (households greater than $5 million in financial assets) represented 28% of the overall addressable market. Over the past decade, the HNW marketshare has jumped to 44%. As targeting HNW and ultra-high-net worth (UHNW) clients (those with at least $20 million in investable assets) becomes pivotal for success in the wealth management industry, many banks have sought to grow their services aimed at these households while maintaining traditional mass-affluent-focused business units. Despite this increased need, nearly one-quarter (23%) of banks have no notable operational distinction in how they serve clients of different wealth demographics, while another one-third (32%) only have two unique segmentations.

There are myriad benefits of client segmentation strategies. According to Cerulli, the most commonly cited benefit of a client segmentation strategy at banks is that it improves the quality of services offered across the board (71%), followed by an expanded client base (47%), better management of intergenerational relationships (41%), greater profitability (35%), and higher productivity among their advisors (29%).

“Banks and other large wealth management firms that can offer distinctly tailored services to specific wealth demographics are able to fine-tune their products, services, and overall service delivery and operational models around the needs of a specific client type, and by doing so, are able to provide their clients with an elevated and more precise client experience,” says Chayce Horton, senior analyst. “In contrast, when firms operate with a singular set of services, they limit the clientele they are able to serve properly to a specific demographic, causing banks to naturally underserve their ideal clients while also forcing advisors to overserve smaller accounts.”

As banks increase their adoption of segmentation strategies, asset managers and other third parties will play an important role in helping banks outsource less profitable or more cumbersome operational aspects of their wealth businesses. Asset managers can help banks refine the product sets tailored to specific demographics, technology providers can help optimize back-end functions across units, and third-party marketers can help banks allocate greater focus on their top priorities.

Overall, as demographic shifts, service demand increases, and competitive dynamics put greater pressure on banks to refine their services for clients and seek out new avenues for profitability, banks will need to consider the benefits of a defined client segmentation strategy. In many cases, the benefits outweigh the drawbacks and requisite investments needed.