RIAs are facing numerous management challenges today as they grapple with a fragmented industry undergoing profound structural shifts. Capital Group’s RIA Advisory Board was created to help RIA leaders collaborate constructively in order to build more robust practices and drive growth. We examine three areas of strategic importance in the RIA industry today — portfolio construction, human capital and enterprise management — and how three members of our RIA Advisory Board are addressing them.

1. Portfolio construction: A more thoughtful investment process

Ensuring that clients have appropriate and effective investment portfolios is one of the most important and multifaceted responsibilities RIAs have.

At the outset, RIAs must decide whether they have the sufficient skill and bandwidth to build and manage portfolios internally, or whether it makes more sense to outsource the process. If a firm opts for internal management, it faces an array of priorities that range from measuring and assessing client risk tolerance to asset allocation, security selection, portfolio maintenance and risk balancing.

Board member Jayman Yi, cofounder and CIO of Roehl & Yi, an independent wealth management firm based in Eugene, Oregon, faced this exact challenge. 

Building a scalable process

Many RIAs start by creating customized investment portfolios for their clients. As the variety of clients they serve grows and evolves, it becomes more challenging but still vitally important to sustain this approach. The process needs to be streamlined and systematized to create customization at scale.

“As our business has grown, we have become more formal about how we approach portfolio construction,” says Yi. For example, his firm has begun working with model portfolios as a foundation for customization. 

Key assumptions to drive asset allocation

Credible market assumptions are essential for thoughtful asset allocation. They should be forward-looking — not solely based on history — since markets are in a constant state of change. They should focus on how different asset classes are likely to perform in the future from both a risk and return standpoint.

Yi says that working with Capital Group has helped him to adjust his approach. “They bring extensive data and a rigorous process to the task,” he notes, “and it has been really valuable to have a partner with Capital Group’s credibility and institutional knowledge.”

Tools needed to critique and stress test portfolios

To run an effective investment process, portfolio analytics can help RIAs perform a range of important tasks. These could include providing insight into risk and sources of return, stress-testing existing portfolios and experimenting with new strategies before they are implemented.

Yi had the opportunity to run his firm's client portfolios through Capital Group's proprietary portfolio analytics tools. He says the process gave him new insight into risk and ideas on how to improve his approach. “For example, I was able to test new bond strategies to see how they might complement our existing lineup, and I tapped into Capital Group’s investment specialists to analyze strategies for international investing.” This helped Yi to refine the mix of customization and scalability that his firm could offer clients.

Giving clients a spectrum of suitable asset classes

Not all asset classes are appropriate for all clients, but flexibility is the name of the game. If an RIA wants to serve a broad range of clients in the most effective way possible, it should be able to work with a spectrum of investable asset classes. These could include private equity, private credit, private real estate, commodities and other alternative investments alongside the more standard public equity and fixed income options.

Capital Group recently announced a strategic partnership with KKR to bring new ways for more clients to access alternative investments. The addition of these hybrid public-private markets investments to Capital’s wide array of offerings — including ETFs, SMAs and mutual funds — will provide RIAs even more flexibility in constructing portfolios.

“Working with Capital Group has enriched our ability to offer more thoughtful portfolio construction to our clients,” Yi shares.

2. Human capital strategy: Diversity drives the bottom line

Many RIAs are seeking to create advisor teams that reflect their changing client bases. This can be challenging, because diversity in the industry does not yet match diversity in America at-large.

This was the problem faced by board member Damon White, COO and cofounder of Evermay Wealth Management, a full-service financial advisory firm based in Arlington, Virginia. “When going through the traditional recruiting avenues,” he says, “we weren’t finding the candidates we wanted. It required doing things differently and thinking outside the box.”

As a result, White worked with Capital Group and its RIA Advisory Board to develop a program that any RIA can use to attract and retain diverse talent. His firm, Evermay, is currently road-testing the program under Capital Group’s direction, and is one of the first firms to implement it.

The program has three major elements which serve as guideposts to any RIA firm that wants to undertake this type of initiative, whether under the Capital Group program or of its own accord.

Make the business case

The first step, as identified by White, is to make the business case for a diverse workforce — why it is important and likely to be helpful to your firm and its owners and leaders. Nothing speaks louder than facts. To help him in his efforts, White turned to Capital Group. White was able to use a variety of Capital Group’s analytical tools and other thought leadership in this element of the program to present the case in a powerful, evidence-based way.

Locate candidates

The second step is to recruit employees that represent the diverse client base that your firm is targeting. How do you find those candidates? How do you attract, train and retain them?

In developing this component of the program, White leveraged Capital Group’s industry relationships, notably with Quad-A (the Association of African American Financial Advisors), and with BLX, the internship program for aspiring Black and Latinx financial planners. Along with other board members, he met with leaders and participants at both organizations. “It surprised me how many aspiring advisors are unaware of our industry,” says White. “They may know the big wire house names, but they tend to have little idea about the RIA side of the industry. So just providing visibility and education helps to grow the talent pool.”

Stay on track

Implementing this type of initiative is a long-term project, and it requires commitment to see it through. White says that as he and other board members developed and formalized the program; they considered whether it would be sufficient just to provide written materials that an RIA could use to get started. “In the end, we felt that if you didn’t shepherd a firm through the program, it would be less effective. So we opted for a more hands-on approach,” he adds.

In Evermay’s case, they worked with Capital Group as part of a pilot program. “We have calls with them every three weeks or so, and they keep us accountable.” says White. “Capital Group is a leader in workforce diversity, and they have shared the challenges they faced and allowed us to tap the experience of their senior recruiters,” he says. “To get that level of help from an organization like this was extremely valuable in building this program.”

3. Enterprise management: Scaled for size and road-tested

Larger RIAs have specific challenges related to their size and the difficulty of managing an enterprise that may be geographically distributed with multiple business lines and hundreds of advisors. Board member Nick DeCenso, senior director of wealth management solutions at CAPTRUST, one of America’s largest financial advisory firms, has direct experience with these challenges. Four areas in particular are at the top of mind.

Expanding services

As a firm grows, either organically or through M&A, there is an innate pressure to add services to meet the needs of an ever-expanding and increasingly varied client base. A key question is whether to mount the required skills and resources internally or to work through partnerships with subject matter experts. CAPTRUST, for example, added tax preparation and consulting capabilities in the past few years. However, the firm finds it more cost-effective to turn to partnerships for other areas of expertise.

“We aren’t afraid to partner with specialists to serve our clients’ needs,” says DeCenso. “For example, we don't write estate planning documents or serve as trustees, but we have trusted partners that we can connect our clients to.” CAPTRUST will also partner with a third-party service provider if a client wants to get in-depth on a specialized area, like family governance or cybersecurity. “We've had great success with this approach,” adds DeCenso.

Attracting talent

Another issue for RIAs is attracting talent. CAPTRUST has approached this challenge from both acquisition and organic growth perspectives.

It has grown its advisor force dramatically through the acquisition of culturally aligned firms. On the organic side, CAPTRUST has a robust program for new advisory hires, which includes training, lead generation and referral networks. It also looks to recruit internally. “As a larger enterprise, we have a substantial pool of non-advisor talent to draw on,” says DeCenso. “These are folks who know the business, know the industry, know our clients. We’ve had success transitioning them to various advisory roles.”

Managing technology

Large firms are under constant pressure to ensure they have the technological tools needed to manage the firm and all its business lines in the most efficient way. This can be a daunting task since there is a steady stream of new fintech applications coming into the market.

DeCenso notes that CAPTRUST sees a lot of new technology through its many acquisitions, including performance reporting systems, CRMs, financial planning systems, risk tolerance tools, portfolio management systems and more. Its advisors also bring in new tech ideas, but there are caveats. “Technologies need to be scaled for size and road-tested,” says DeCenso. “We can’t be the first customer.” An even bigger challenge is integration. “If a new technology doesn't work with our other systems, or if we must build the integration from scratch, it can be a non-starter,” he adds.

Strategic development

Strategic development involves a range of issues, notes DeCenso. These can include how to expand the enterprise strategically, maintain operational excellence, scale up investment without losing client focus and constantly raise the level of your advisor teams.

Recognizing these unique challenges, Capital Group recently launched its Strategic Relationship Management (SRM) team to serve the largest RIA enterprises. This is a dedicated group with capabilities, programs and experienced specialists needed to help larger firms continue to grow and thrive.

The SRM team is heavily invested in its RIA partner firms across a range of enterprise management issues. These could include market penetration, acquisition support, innovation leadership, process optimization, technology integration, talent development, portfolio resilience, model construction, growth management and culture enhancement.

For additional insights and resources, please contact your Capital Group representative.