The Research Committee’s View Across The Silos: RIIA’s Market Segmentation

Francois Gadenne has graciously agreed to cover for me until my return on May 16. He will be contributing a variety of essays addressing contemporary and future retirement income opportunities and challenges.

We all use familiar facts and ideas to filter our understanding of reality. RIIA creates value for its members by asking questions that are not easily asked when one resides in a specific business. In particular, the Research Committee identifies and sponsors cross-silo research members would not usually fund with their own budget. Our research is important to help members answer strategic issues in these times of rapid, outside-the-box changes.

RIIA believes that retirement income trends and issues concern all customer segments and all industry participants: distributors, intermediaries, investment product manufacturers, and insurance product manufacturers. We illustrate the diversity of RIIA’s membership with a three-by-three matrix called the Opportunity Matrix.

riia_matrix1This map associates American households, from the wealthiest on down, with the types of firms who primarily serve their saving, investment, and protection financial needs.

The rows segment the investors markets using traditional investable asset metrics. Affluents range from more than $100,000 and less than $1 million.

The columns in RIIA’s Opportunity Matrix represent the industry’s value chain in three categories based on the form of their revenue sources:

  • Industry participants who earn commissions, typically distributors such as full service brokers and insurance agents.
  • Industry participants who earn fees, such as intermediaries including consulting firms and record-keepers.
  • Industry participants who earn basis-points (or premiums) on assets under management (AUM), including investment companies and insurance companies.

Since RIIA’s membership spans nearly every type of financial services firm, we use this map to identify and balance our membership across the nine resulting market segments.

RIIA recognizes that all segmentations are trade-off between accuracy of insights and precise classification. Accordingly, our map accommodates industry participants whose level of business diversification prevents the identification of a “center of gravity” that would fit reasonably into one of the nine cells. We label such participants: bundled vendors.

RIIA’s Regular Members are presidents, CEOs, P&L owners, and project managers for the retirement income initiatives or businesses in their respective companies.

RIIA also has Associate Members drawn from companies who provide services to the members that are building retirement income businesses. Such Associate Members include strategy consulting firms, market research companies, and law firms.

RIIA offers separate, and more limited, membership types for Plan Sponsors, Financial Advisors, and Affiliated Associations. Affiliated Associations are product, tools, process or industry-silo focused associations that want to address broad retirement income issues while remaining true to their core mission. RIIA provides the necessary retirement income focus, while the affiliated associations retain their traditional mission. In this way, RIIA is developing a federation of associations that benefits all parties.

This initial representation of RIIA “View Across the Silos” was formalized by the Research Committee’s first report: RIIA’s Retirement Typology; Charting the Landscape: The Retirement Income Market.

Exhibit 2: RIIA’s Revised Opportunity Matrix

riia_traditionThe revised rows show American households by different levels of financial well-being. We measure financial well-being by the total assets that American households own—stocks, bonds, mutual funds, retirement products, business interests, homes, other real estates, cars, etc.

The “Wealthy” households are the top five percent of American families in terms of their total assets. “Affluent” households are the next highest 15% of households in terms of their total assets. The “Mass” households are the 50% of families and individuals below the Wealthy and Affluent households.The remaining 30% of households are the Marginal whose minimal assets leave them as difficult potential markets for the financial industry.

Together the Wealthy, Affluent and Mass households comprise the 70% of American families and individuals who purchase the various accumulation and income generation products that our member firms offer.

Moving beyond the Revised Opportunity Matrix, RIIA’s research also determines the affluence of a household not simply by the amount of assets that it holds, but also by the head of household’s age. For example, in order to determine if a household is among the elite 5% of Wealthy households, we must first know the age of the householder. The accompanying chart shows the total assets for Wealthy Households delineated by the age of the head of household.

min_assets1Households under age 35 are in the elite 5% if they have $408,700 or more in total assets. At the same time, retired households are in the top 5% when they have $1,453,000 or more in total assets. This distinction makes sense since the young Wealthy household, with years yet to save and invest, should be on par with the retired Wealthy households with more assets but shorter horizons. This staggered way of dividing the market is superior to establishing a single, arbitrary threshold for wealth at say $1.5 million, because such a one-dimensional measure eliminates many elite households who are excellent candidates for providers’ services.

Because RIIA sees that future retirement income solutions will impact many, if not all, customer and industry segments, not only should industry participants incorporate retirement income as part of their existing business models, they also need to reach across traditional business silos to create innovative retirement income solutions and new business models. Through RIIA, interested industry participants can connect with one another to define the future of retirement wellbeing.

If you have an interest in RIIA’s research, please check to connect directly with Kathleen Beichert (OppenheimerFunds), the Chair of RIIA’s Research Committee.