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Portfolio > Portfolio Construction

RIA Bucks Perceived Trends

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Industry gurus preach that advisory firms providing only investment management are playing a loser’s game. After all, we know few active managers actually deliver alpha, while cheap beta vehicles are widespread, right?

The rise of robos using ETFs to build portfolios online, rebalancing and tax-loss harvesting along the way, are removing those forms of ‘alpha’ from the advisor-client relationship, correct? If you’re a small advisory firm, how can you compete with the scale and intellectual capital of the asset management companies? Plus, if you’re focused on investing, you’re not focused on serving existing clients or finding new ones.

But Mark Vasquez and his partners at Red Spruce Capital beg to differ with those nostrums. Their Berwyn, Pennsylvania-based RIA firm is doing just fine, growing its AUM and client base by researching and then building custom portfolios for clients based on their objectives and risk tolerance. It provides detailed statements. It charges a 1% AUM fee.

And Red Spruce doesn’t ask its clients for referrals — another prescription from the gurus. You’ve heard about — and maybe conduct — events to bring your clients together for a wine tasting or baseball game, asking clients to bring along their friends?

Red Spruce would never do that, says Vasquez, because “we never disclose who our clients are.” Clients, he says, want their advisors to service them, “not attract new clients.” So Red Spruce focuses its efforts, he says, “on the clients we have, not the ones we don’t have.”

The genesis of Red Spruce Capital is similar to many independent firms. Several professionals who had worked with each other at the same companies in an allied field — in their case, institutional money management — came to believe that a certain need wasn’t being met by existing advisory firms. They thought they could do better.

That insight was prompted by requests for assistance from friends and family who were spooked by the painful bear market of 2008–2009. “Maybe they were getting bad advice,” recalls Vasquez.

But he and soon-to-be partners Amish Desai, Mark Kennedy and Rahul Shah realized that the bigger issue was that “from every angle, there’s a huge disconnect” between how institutional and individual clients were being treated. “We built the firm,” says Vasquez, to address the unmet needs of the retail client.

They embraced their inner entrepreneurial spirit, quit their salaried jobs and hung out their RIA shingle in 2011 on Philadelphia’s Main Line.

It was that focus on the individual client that became the foundation of Red Spruce’s business model. “Amish [Desai] and I said, ‘We will be each other’s first client’,” then explored what would be most important to them. They realized they were ‘hiring’ each other primarily for their investment research and portfolio management expertise. So, says Vasquez, “we built the model to serve clients like ourselves.”

But they also realized what they wouldn’t provide to clients. “If you need help gathering your finances together, we’re not for you,” Vasquez says, so they don’t provide financial planning. What they do provide is research on public companies that then informs the bespoke portfolios they create out of publicly traded stocks and bonds.

As the firm’s website puts it: Typical advisors are middlemen. Not us. No mutual funds. No insurance products. No hedge funds.

Each client, Vasquez says, has different liquidity needs and tax issues, but with investing, Red Spruce believes that “the further away that capital is from the investor,” the more layers, fees, complexity and potential conflicts of interest are added to the equation.

“We add value microscopically at every stage” of the investment process, he says, which adds up in aggregate as Red Spruce’s portfolio managers are the ones conducting the research and buying and selling the investments on behalf of each client.

Finally, Vasquez et al. believe that “if we’re doing this right, we don’t have to market; if our clients succeed, our reputation will precede us.”

James J. Green, a former editor of this magazine, is editor of Jamie Green Reports, an advisor-focused writing, editing and shepherding service. He can be reached at [email protected].


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