Dynamic Segmentation: Maximizing Opportunities as A Black Swan Event Unfolds

One of the most useful tools that marketers, product developers, and thought leaders have is the ability to understand the composition of the markets and distributors they serve and be able to target strategies, products, and communications to the most responsive and valuable segments.  Today’s investment climate is so complex and difficult and has changed so significantly in such a short period of time, that we believe that an enhancement to that venerable tool is now required of companies offering investments, including annuities.  We call it “dynamic segmentation,” which is the tracking of segments over time and identifying newly developed segments: the re-segmentation of the market. 

This need is caused by the intense nature of the change we are undergoing, in both the investment climate and, probably, investor psychology.  Many investors and advisors are anxious and confused.  They are eager for guidance, education and advice from investment and insurance companies. This is a good time to act.  But, especially in this time of heightened concern, it is important to communicate effectively.

Twin Crises

We are now confronting, as you know, two related crises at the same time: a health crisis and an economic crisis.  To a significant extent, these twin crises have been about risk.  The media have besieged us all with information on the risk of becoming infected, the risk of becoming ill, the risk of dying, the risk of a Great Depression, the odds of the stock market reaching specific levels. 

Also, the stock market has experienced its steepest decline ever.  My company completed a survey of consumers and advisors one day before the first major coronavirus-related stock market decline.  Very few consumers, or even advisors, saw this stock market decline coming, even though cases of the novel coronavirus had been increasing in China for a while.  The fact that this change was so unexpected magnified the impact and reduced people’s sense of being able to prepare in advance.  This steep decline in the market certainly affected people’s feelings about stock market risk, while the health crisis probably changed views toward risk in general and investment risk in particular.

Issues Affecting Investor and Advisor Decision-Making

Investors and advisors are reacting to three related issues, which are ultimately causing them to re-evaluate their investment strategies.  The first is the very feeling and assessment of risk and tolerance for risk.  As the risk of death goes up, as the risk of job loss, a Great Depression and food shortages rise, the way people assess the value of taking investment risk can also change.  The strong focus on risk and the range and severity of the risks we face are quite likely to affect tolerance for investment risk, beliefs about risk, and responsiveness to solutions.

The second issue is the low interest rate environment.  Importantly, this is all occurring in an extremely low interest rate environment. In the past, there was often a reasonable place for investors to park money that was safe but still provided a reasonable return. This is certainly less true now.  This makes dealing with investment risk more complex.

The third issue is the equity market climate and outlook.  Before these crises financial advisors tended to take one of three approaches:

  • Diversify portfolios and ask clients to tolerate volatility in the expectations of higher returns over the long term
  • Use hedging, uncorrelated assets and other tactics to provide a “smooth ride” with less volatility, even at the expected cost of lower long-range gains
  • Use guarantees, such as annuities with downside protection and (for pre-retirees and retirees) guaranteed lifetime income to increase certainty and provide greater protection against loss.

During the over decade long bull run the first strategy worked very well.  But it is not working well now.  This will likely lead many advisors to consider new strategies and be receptive to new approaches.  They may well fall into different and, perhaps, new segments.

Why is Dynamic Segmentation Important Right Now?

The way investors and advisors are segmented, and the very composition of the segments has likely changed.  If you want to effectively identify and understand key markets, we submit that you should not depend on former segmentation models.

Communicators are most effective if they understand the viewpoints, concerns, beliefs, and attitudes of the people they are communicating to and tailor messages to specific segments.  A good marketing or thought leadership effort will be pertinent to all, but it will be most effective with a specific group and companies should be very tactical in selecting which groups to target. 

Companies that conduct new segmentation studies will identify the characteristics of investors, and advisors, who present the highest potential.  Importantly, they will have insights on how to approach key segments and what proof points and types of support will be most meaningful. 

It is obvious that the twin crises are far from over and that the range of possible outcomes is extremely wide.  During the period ahead investor and advisor views will be further impacted. Indeed, new segments may emerge as investors and advisors react differently to these further changes.  Successful companies will be cognizant of the degree of change and implement a new segmentation study when the level of change demands it, which unfortunately may be in a year or before. In this climate, segmentation must become dynamic.