RIA aggregators, broker/dealers and TAMPs are showing a growing preference for custom model portfolios—and asset managers that offer model portfolios are making it a priority, according to the July issue of Monthly Product Trends of the US by market research firm Cerulli Associates.
The report defines custom asset allocation model portfolios as those created by asset managers for unique wealth management clients, including RIA aggregators, broker/dealers, large independent advisor practices or TAMPs . These portfolios differ from the off-the-shelf model portfolios that asset managers are selling or the custom portfolio models created by the advisors themselves, although wealth managers can often further modify these custom models created by asset managers for end investors. .
According to Cerulli, many wealth managers are looking for adaptations in open architecture requirements that match their existing capital market assumptions and their specific fund preferences. The firm's 2024 survey of asset managers and third-party model providers found that 30% of model portfolio AUM is allocated to custom model portfolios, while 70% of total model portfolio assets are still allocated to assets of the off-the-shelf model.
At the same time, almost 60% of survey respondents identified offering custom model portfolios as one of the top three most important initiatives for their firms today.
Brendan Powers, director of product development with Cerulli and one of the report's authors, noted that as the RIA industry consolidates, some of the resulting companies and RIA aggregators want to centralize certain functions, including investment management. In the process, they are increasingly looking to asset managers for custom model portfolios.
“Historically, when you think about the opportunity for a custom mandate at an enterprise level, it would be a B/D home office that would come in and ask an asset manager, 'Hey, we want something custom to made available only to our advisors. Can you do that?' And that's still where most of the opportunity lies, according to our survey data,” Powers said. However, given the wave of consolidation in the RIA space, “the opportunity for custom models is expanding beyond just the broker/dealer , even in some of these enterprise RIAs”.
At the same time, broker/dealers see offering custom model portfolios as a way to gain advisor loyalty to their platform by offering them something not available anywhere else, added Matt Apkarian, associate director of product development.
“Broker/dealers want something that is custom, that is only available to their advisors; this is one reason why the advisor wants to stay with that broker/dealer, because otherwise advisors would have the ability to access, say, Blackrock or Vanguard model portfolios through any given platform they want. That gives the broker/dealer some stickiness with the advisors, and they can have a little bit of their investment philosophy incorporated into that product as well,” Apkarian said.
Looking at the types of custom model portfolios currently offered, the easiest to find are those that focus on target risk or conservative allocation with a 60/40 model. In addition, 70% of Cerulli asset managers surveyed said they offer these and 12% said they offer more than 40 versions of such custom model portfolios. Custom, results-oriented model portfolios were the second most common strategy, with 50% of respondents offering them. These were followed by model portfolios focused on the investment objective completion model, which would include alternative, fixed income and thematic products, with 27% of respondents offering these to their wealth management clients.
Cerulli surveyed 36 third-party asset management and strategy firms that provide model portfolios for this year's survey, which, according to Apkarian, represent about 85% to 90% of the industry's model assets.