Strategic Asset Allocation: How an OCIO Contributes to RIAs Success

Strategic Asset Allocation: How an OCIO Contributes to RIAs Success

Today’s blog will explore why strategic asset allocation best suits clients with long-term investment goals. Unlike its counterpart, tactical asset allocation, this approach emphasizes a disciplined, long-term perspective. It sets a framework that guides portfolio construction based on the client’s objectives, risk tolerance, and time horizon.

As an outsourced chief investment officer (OCIO), the Cornerstone Portfolio Research team helps independent RIAs and IARs develop strategic asset allocation plans for their clients. 

Following are just a few of the primary reasons why a strategic asset allocation strategy may be appropriate for your clients:  

  1. Your clients understand their long-term financial goals and are committed to those objectives while avoiding emotional reactions to short-term market fluctuations.
  2. In general, their time horizons are long enough to ride out the volatility of specific asset classes, allowing the portfolio to benefit from a history of rising markets following falling markets.
  3. Many investors prefer a set-it-and-forget-it approach, so the portfolio does not require frequent adjustments, minimizing turnover costs and work.
  4. The client seeks to balance risk and return by diversifying across multiple asset classes, such as stocks, bonds, and real estate, according to their predetermined allocation percentages and capacities to take risk.

What is Strategic Asset Allocation?

Think of strategic asset allocation, like creating an ultimate fantasy football team. Just as you’d select players based on their positions, strengths, and how they complement each other to form a winning team, strategic asset allocation involves choosing a mix of different investments (stocks, bonds, cash equivalents, etc.) that work together to pursue a long-term financial goal.

You wouldn’t pick your team based on last week’s performance. You want a track record of consistent results in various market conditions. In like manner, using strategic asset allocation, you’re not influenced by short-term market fluctuations. Instead, you focus on the big picture, drafting a diversified team of skilled players at each position so your team can produce competitive results in various conditions.

Strategic Asset Allocation Models

An OCIO can help design and implement strategic asset allocation models that are both robust and flexible. These models serve as a guide, outlining how assets should be allocated to meet the firm’s objectives while considering other needs – liquidity, risk management, etc.

Here are three frequent examples:

A conservative allocation model is tailored for investors with a low-risk tolerance, those nearing retirement, or those in the late stages of retirement, and there may be no need to take risks. This model typically relies on a higher proportion of fixed-income securities like bonds and a smaller allocation to more volatile asset classes like stocks. The goal is to preserve capital while providing modest growth and income opportunities.

A more balanced asset allocation is best suited for investors with moderate risk tolerance. This model aims to maintain a reasonably close balance between risk and reward. For example, this model usually relies on a  40/60, 50/50, or 60/40 split between stocks and bonds, respectively. The stock portion provides the opportunity for growth, and the bond portion offers stability and income. In particular when the bond component is short to intermediate governments or high-quality corporations. 

A growth allocation model serves investors with higher risk tolerances and longer investment horizons, so there is plenty of time to recover from down markets. This model focuses on using stocks, sometimes allocating 80% or more of the portfolio to equities, with the remainder in fixed-income securities. The focus is on capital appreciation over the long term, accepting higher volatility for the potential of greater returns.

Dynamic Strategic Asset Allocation

While strategic asset allocation is intended to focus on long-term investing, it shouldn’t be static, especially during volatile market conditions. This is where the services of an OCIO can be invaluable because this professional will ensure client portfolios are performing the way they should based on market conditions, your firm’s goals, and the client’s needs. OCIOs will help you strike the right balance between stability and upside potential.

Why Partner with an OCIO for Strategic Asset Allocation Assistance?

You likely already wear several hats as the owner or principal of an RIA/IAR. Given the industry’s complexities, new technologies, and market volatility, it may be the right time to consider transferring strategic asset allocation processes to a team of highly experienced financial professionals who can do the heavy lifting for you.  

Think of it this way: You can leverage the specialized expertise and resources of a firm like Cornerstone Portfolio Research vs. hiring one full-time professional for substantially more overhead.  

A partnership with an OCIO can help you focus on what you do best, such as client relationship management and financial planning, while the OCIO manages complex investment decisions and asset allocation strategies. Doing so allows you and your firm to access a broader array of investment options and sophisticated strategies beyond your current capabilities. 

Get to Know Cornerstone Portfolio Research

At Cornerstone Portfolio Research, we’re a dynamic team of seasoned CFA ® professionals with over 70 years of shared experience in the financial markets. 

When we formed Cornerstone, our mission was to provide independent RIAs and IARs to enhance their investment management and research services without taking on the overhead of a full-time CIO. We realized there was a severe competitive gap for smaller advisory outfits struggling to compete with more prominent firms competing for clients with more significant asset amounts.  

Our “secret sauce” is tailoring our portfolio research to fit in seamlessly with your current firm’s investment philosophy and strategies. 

We specialize in working collaboratively with our clients through frequent and open communications. We’re designed to blend into your current philosophy, workflows, and technologies. 

We are also open to meeting prospective and current clients to discuss their questions and concerns.  

And, because we are custodian neutral, you won’t be required to make unnecessary changes that need changes and new paperwork.  

If you want to learn more about our OCIO services for our RIA/IAR, connect with us to schedule an introductory call.

An OCIO Can Help Your RIA

More about the author: Thomas Balis

Thomas holds a Bachelor of Science in Business from Ohio State and has since earned the Chartered Financial Analyst® (CFA®) designation as well as the Accredited Portfolio Management Advisor (APMA®) and Chartered Mutual Fund Counselor (CMFC®) certifications.