Advice firms that have a defined client profile are more likely to have distinct due diligence processes in place for assessing investment providers, research from Quilter Cheviot and NextWealth has found.

It showed that 96 per cent of advisers with a clearly defined client profile also have a structured due diligence process.

Just 4 per cent of advisers with a target client profile lacked a due diligence process, compared to 28 per cent of advisers who do not segment their clients at all.

Furthermore, advisers with a defined target client profile typically worked with more investment partners, averaging 3.6 investment partners compared to just 2.6 for those without one.

The analysis also revealed that advisers with any form of client segmentation strategy worked with an average of 3.3 investment providers, compared to 2.9 for those without one.

Quilter Cheviot and NextWealth highlighted that segmentation was also linked to greater partner turnover, with 37 per cent of firms with a segmentation strategy having reviewed their outsourced investment partners in the past 18 months, and 33 per cent having started working with a new provider.

For firms without a defined segmentation strategy, just 14 per cent have conducted a review and 7 per cent have engaged a new partner over the past 18 months.

Two thirds of these firms have not taken any action on their outsourced investment relationships during that period.

The research underpins a guide from Quilter Cheviot and NextWealth, which is designed to help advice firms better meet their obligations around managed portfolio service (MPS) due diligence.

“The data is quite clear that defining your client offering and target market is likely going to lead to more activity,” said Quilter Cheviot head of managed portfolio services, Simon Doherty.

“Forward-thinking advice firms know their clients’ needs and circumstances inside out, and as a result this is likely to result in a wider range of propositions being made available.

“Consumer Duty has been a force for good in encouraging advisers to kick the tyres on their investment providers.

“Clearly the burden of regulation and the tax landscape means advisers are time poor or may not have the confidence in understanding the regulatory needs. But the benefits of having that defined client profile and segmentation strategy will mean the adviser can stay in control and on top of the partners they trust with their clients’ assets.”

NextWealth insight director, Julie Best, added: “The research highlights that client segmentation plays a critical role in delivering better outcomes. Firms that clearly define their target clients appear to be not only more structured in their due diligence, but also more confident and proactive in managing investment relationships.

“More generally, we would encourage adviser firms to consider the benefits of taking a more proactive stance with investment providers, taking more control of the relationship and recognising that due diligence is not ‘just a job for compliance’ but for several parties.”

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