Editor's Note: This article draws from the findings of DSG's recent consumer segmentation study, "Consumer Attitudes and Perceptions About Retirement Income"

DSG has observed over the past several years that consumer segmentation is becoming somewhat more sophisticated for the retirement income market. While investable assets continues to be the primary criterion for targeting consumers and tailoring retirement income products and solutions, other information elements are beginning to enter the mix as a means to further prioritize target consumers and to make the relationship between advisor and client more effective.

Examples of Retirement Income Market Segmentation Practices

While each financial services company has its own terminology and investable asset ranges, there tends to be three primary target markets for retirement income products and services:

• The High Net Worth Market: typically investable assets in excess of $1 million.
• The Mass Affluent Market: typically investable assets from $500,000 to $1 million.
• The Middle Market: typically investable assets from $250,000 to $500,000.

Now in an effort to facilitate the highly complex retirement income advice and sales process, executives are further slicing the above markets into more attractive and workable segments.

Additional demographics such as age, gender and ethnicity are being prominently used. Many executives believe that consumers do not begin thinking about their financial preparedness for retirement until they are only a few years away, and older retirees are too set in their ways to buy additional products or shift assets to other instruments. As a result, the most popular age band being targeted by firms and their financial advisors is between 55 and 70.

Single females are also drawing much attention as an attractive market segment. While the segment with investable assets in excess of $250,000 is fairly narrow, their mean investable asset level is fairly substantial at $560,000. In addition, single females are significantly more likely than other survey respondents (at same age and asset levels) to have worked with a financial advisor (80% vs. 66%); to have fully disclosed all of their assets to their advisor (62% vs. 44%); and to own annuities (50% vs. 39%).

African Americans and Asians are being targeted as well by some firms, and there has also been mention of Hispanics. The mean age of Hispanics remains under 30, however, so it will be quite some time before their numbers warrant major attention.

Lifestyle segmentation has also entered into the picture, but on a more limited scale. It has long been recognized that the baby boomer market is too large and varied to address uniformly. As a result, some companies have defined stages of pre and post retirement, have identified key characteristics of each stage, and have tailored their income producing solutions and their communication strategies to these unique subgroups.

Companies are also beginning to factor in consumers' financial sophistication levels and actually steer away from those exhibiting greater investment knowledge as well as those that are in highly technical and analytical occupations. It is suggested that the more sophisticated clients make life more difficult for the firms' financial advisors.

It should be noted that less than a handful of companies, to DSG's knowledge, actually customize retirement income solution sets and organize distribution channels to specific demographic and asset level consumer segments. So if the bulk of the industry's segmentation efforts are done in piecemeal fashion, it is not clear just how controlled and successful these efforts really are.

The Case for Attitudinal Segmentation

The segmentation elements discussed thus far are the more tangible and observable consumer characteristics and therefore, more easy to apply. What these criteria do not address, however, are the emotional dimensions that are inherent in any consumer's decisions surrounding the use of their money. But how does one identify and leverage these emotions?

In the past it has been the financial services companies who have developed a variety of calculations to determine whether a consumer should feel comfortable or uncomfortable with his or her retirement savings and its sufficiency to generate a lifetime stream of income. DSG, on the other hand, would suggest that a consumer's self-defined attitude towards retirement savings is both more practical and powerful than how others may choose to categorize them.

To that end, DSG asked 1228 consumers (including 628 pre and 600 post retirees) between the ages of 55 and 70 with investable assets of $250,000 and above, whether they were Comfortable or Uncomfortable with their financial future. From there we did a battery of statistical analyses to better understand the underlying issues that contributed to their attitude selection and asked a raft of questions dealing with their retirement objectives and worries, their current ownership and anticipated use of retirement products and solutions, and their relationships with financial advisors.

Overall two-thirds of our consumers said they were Comfortable about their financial futures. However, it is those one-third Uncomfortable folks that we find much more interesting.

As an example, while comfort levels do increase with investable assets, there are still significant numbers of consumers that remain Uncomfortable even at higher asset levels, as shown on Chart 1

In addition, those consumers who deem themselves Uncomfortable are significantly less likely to be satisfied with the products or solutions chosen to provide retirement income (see Chart 2).

As a result of these and other DSG findings, it is believed that knowing a prospect's comfort level about their financial future is an important element in targeting and in delivering appropriate retirement income information and solutions.

When scratching beneath the surface of these self-defined attitudes, an Uncomfortable consumer has the following perceptions and characteristics:

• Poor Savers. Irrespective of their retirement savings, Uncomfortable consumers believe they have not done a good job throughout their lives with savings discipline and therefore do not believe they have sufficient funds to last through retirement. Because they feel unable to save and plan they are more concerned about cuts in Social Security and Medicare.
• Dissatisfied with Financial Decisions. Uncomfortable consumers are dissatisfied with the financial products they have chosen, with the financial information they have received, with their financial advisor, and with their overall financial game plan.
• Limited Financial Knowledge. They also tend to be more confused about financial products and services and how to convert these products and investments into a retirement income stream.
• Generally Pessimistic. Consumers' lack of comfort is furthered by tending not to look on the bright side of difficulties. This lack of optimism also applies to health issues in that they believe they currently do not possess the best of health and do not expect good health throughout retirement.
• Want Guarantees. Finally, Uncomfortable consumers do not desire flexibility to manage and change their investments. Rather, it is more important to them to have guaranteed monthly income payments for life.

These characteristics, in DSG's opinion, make the Uncomfortable consumer a much better target for capturing retirement assets. Discomfort coupled with dissatisfaction are much more likely to result in action, and the data in our study confirms that opinion, as shown on the following chart (Chart 3).

If a company or its distribution arm is looking to capture retirement assets away from existing financial relationships, finding Uncomfortable consumers will clearly facilitate that process.

Conclusion

From this DSG study, we now know that a person's sense of comfort or discomfort regarding their financial future can be a key determinant of how they react to product offerings, financial advice, marketing messages, and in general, how they wish to be helped with a retirement income solution.

While attitudes are not the complete answer to segmenting the retirement income marketplace, combining attitudes with key demographic screens can be an especially powerful approach. Not only can this aid financial service providers in designing a more customized portfolio of retirement income and asset protection solutions, but can also assist their distribution teams in forging more successful client/advisor relationships through more appropriate and relevant communication strategies and planning processes.DSG

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