Cerity Partners, an independent RIA firm with a 15-year history, has been on a growth streak.
Just this week, the firm announced plans to acquire Fishman Block + Diamond, an accounting, tax and business advisory firm in Encino, Calif. Earlier this year, it struck a deal to buy Agility, the OCIO division of Perella Weinberg Partners Capital Management. In more recent months, it has also picked up Janiczek Wealth Management, a Denver-based firm that specializes in serving high-net-worth and ultra-high-net-worth clients, and SBC Wealth Management, an Indianapolis-based firm catering to affluent individuals and businesses. Altogether, Cerity now has approximately $103 billion in AUM and serves clients ranging from individual investors to non-profits and corporations.
WealthManagement.com spoke with Tom Cohn, deputy chief investment officer and partner with the firm, to discuss how Cerity builds its model portfolios for different types of clients, where it sees the most opportunity for outsized returns in coming years and how it picks the asset managers it works with.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: What’s in Cerity Partners’ model portfolio? Can you give us a breakdown by asset class?
Tom Cohn: At Cerity Partners, we have a number of model portfolios, based on the clients’ appetite for risk and size. Generally, for all the model portfolios we build, there are essentially five risk portfolios, ranging from a conservative portfolio to a balanced portfolio to an aggressive portfolio. We are trying to balance the return needs of our clients vs. their ability and willingness to take risks. An aggressive portfolio will be more heavily weighted to equities and less so to fixed income. Conversely, a conservative portfolio will be more heavily weighted toward fixed income and less so to equities.
Within all those portfolios, we will have pretty consistent exposure in the equity portfolios to international and emerging markets equities, so that the weights within them will be constant even though the equity allocation will vary and go up as you take more risk. They will also have exposure to REITs, and we include that now as part of our overall equity exposure. On the fixed income side, we’ll have allocations to core fixed income, which provides a ballast against equities for taxable clients. In most instances, that will be municipal or tax-exempt bonds. And we’ll complement that with exposure to riskier fixed income. That could be high-yield bonds, publicly-traded leveraged loans or emerging market debt. Today, that’s mostly in the form of high-yield bonds.
WM: Who are your typical clients?
TC: Our typical client—and they can span a range—is generally an active wealth creator. They are either an executive at a corporation, a small business owner or a private equity principal. They tend to be high-net-worth or ultra-high-net-worth, have complex financial situations that require not only investment management but financial planning, estate planning and tax prep. And our differentiator is the ability to provide comprehensive financial planning across all of those domains with one team.
WM: Do clients gravitate toward one of these portfolios more than others, or is it evenly dispersed across the five?
TC: I wouldn’t say it’s evenly dispersed. It will certainly depend on a number of factors as we build a financial plan. If you look at the percentage, most of our clients fall somewhere between a balanced and a growth portfolio. To give you some numbers on that, these will generally have somewhere between 50% to 65% in equity exposure. We find those are the two most popular portfolios overall.
WM: What differentiates your firm’s investment philosophy and your portfolios from your competitors?
TC: I believe, increasingly, the differentiation is within private markets. We think about the ability to potentially generate excess returns above what you can get from the public markets; we believe it is in the private markets. Our allocations to private markets reflect that. We’ve been increasing those over time. It’s also where we’ve built out a very robust team. We have now 35 colleagues in our investment office. Roughly half of those colleagues are devoted to activities within alternatives. Those colleagues are responsible for building the model portfolios, developing the capital markets outlooks, working with our advisors to come up with the strategic allocations, but also doing the research. And that research is more and more focused on private markets.
WM: We are obviously in a changing economic climate right now. We’ve seen some interest rate cuts in recent months, we are going to have a new administration coming into the White House. Have you made any big investment allocation changes in the past six months to any of those portfolios to respond to what’s happening?
TC: We’ve been pretty consistent across the last year and a half to have exposure to equities and away from fixed income on a relative basis. The way we build our portfolios is we have a strategic asset allocation to all those portfolios. In general terms, we’ll make what we call tactical tilts around the strategic asset allocation. We never want to significantly deviate away from those strategic weights. We want to have those quite consistent, so they match our clients’ risk profiles and the financial plan.
But we will make slight changes, including overweighting equities over the past 15 months. We’ve moved from having pure market exposure to moving into small-cap and equal-weight exposure. We’ve also taken on exposure within high-yield bonds.
WM: In terms of the strategic allocations, how often do you change those?
TC: Our strategic changes is an annual review process. We just started this process where we come up with our own capital markets assumptions, we review every asset class on an annual basis and then our investment committee reviews those risk/return assumptions. Those will ultimately drive changes to strategic asset allocations for our portfolios.
WM: Within the current annual review process, what are the biggest concerns you are discussing?
TC: Our main concerns are around the persistence of inflation. We try to think about further ways in which we can protect portfolios overall from all market environments. Part of that historically has been by having a low weight to fixed income. We believe that equity markets over the long run protect you against sustained inflation because of the cash flow nature of equities. Whereas fixed income, being generally fixed to the coupon rate over the long term in terms of your return profile, will not do as well in an inflationary environment.
The second way is within the real asset bucket or real estate. Private real estate, we believe, can be a very good protection vehicle against an inflationary environment.
WM: Do you have some exposure to alternatives and private markets within each of the five model portfolios you mentioned? Is it tilted more toward clients with a higher appetite for risk?
TC: We build portfolios both with and without private markets, depending on the client size and the appetite to take illiquidity risk. Increasingly, more and more clients because of the increased access points into private markets through certain vehicles, will have private market allocations.
We think about private markets in four ways. We have traditional private equity strategies, which will include buyout and growth equity. We have venture capital. We have real assets or private real estate. And, finally, private credit, which has been a big allocation for us. That can include direct lending, asset-based loans, as well as distressed debt. The primary way in which we have invested over the last several years has been within direct lending, which is also, in my opinion, a good protection against inflation and rising interest rates due to the floating nature of those securities.
WM: Can you give an idea of how much of a client’s portfolio could be dedicated to private markets?
TC: It depends on client size, but in general it will range anywhere from 10% to 30% across those asset classes for larger clients. For clients who don’t have as much experience within private markets or whose portfolio isn’t able to access every asset class available, it will be closer to that 10% to 12% range. For the larger clients, we will spread it depending on the risk profile anywhere from 25% to 30%.
WM: Do you have any allocations to Bitcoin ETFs or the crypto market in general?
TC: We have looked at both the public market exposure to cryptocurrency and private markets, and actually made a couple of investments on the venture capital front that have exposure there. We do not have any model allocation to cryptocurrency. It’s been an ongoing discussion with our investment committee. We ultimately found that the volatility of that asset class is difficult to put within a model portfolio.
WM: Which asset managers do you work with, particularly within private markets? How do you choose them?
TC: Speaking in broad terms, we work with a number of managers. The way we think about that, depending on the asset class, we try to think about where the competitive advantage is. In some markets, there is an increasing benefit to scale, and I would put that with direct lending, where building out a really dedicated team of underwriters and individuals who have deep experience within the capital markets is hugely beneficial. And scale also helps with the sourcing of really high-quality investments within those markets because you are a consistent provider of capital.
In other markets, like venture capital, the return distribution is much different than in direct lending. We may work with more niche or harder to access managers within venture capital or other markets that are similar in nature. It really depends. All that is driven by our research team, those roughly 17 market colleagues I mentioned whose primary responsibility is sourcing and vetting private market opportunities.
WM: What types of structures do you use when it comes to investment vehicles?
TC: Within the public markets, we’ll generally use a combination of ETFs, mutual funds and SMAs. For larger clients, that tends to be weighted more toward SMAs. We have the ability to negotiate fees and structures based on our size and scale, which I think is a differentiator.
Within the private markets, we’ll invest in typical drawdown structures, so limited partnerships as well as evergreen structures, such as non-traded REITs and non-traded BDCs. That will be determined by our clients’ ability to access those. The access point for private markets will look different for an accredited investor than a qualified purchaser and we want to make sure we have available options for all clients.
WM: Do you hold any cash?
TC: We will use cash as a strategic and tactical allocation. We found over the long run that we generally want to minimize the amount of cash we hold strategically because over the long run, owning asset classes that participate in the growth of the economy both here in the U.S. and globally is beneficial. Therefore, we want exposure, where appropriate and based on the risk to the client. We recognize though that cash is an important component of our clients’ financial lives. So we will model that into our financial plan in terms of how much cash we hold and where we hold it, but we try to minimize the amount where possible.
WM: Do you use any direct indexing?
TC: We do. We found that to be beneficial for transitioning client portfolios, getting broad exposure into the markets, primarily the equity market, and also as a tool to offset gains elsewhere in the portfolio.
WM: Where do you see the most and the least risk in the market right now?
TC: Where we like risk today is particularly on the private market side. We have broad-based exposure in the general equities market. While on the margin, we change some of our positioning, we continue to feel good about the U.S. economy and the equity market.
We continue to find opportunities in private credit. Our viewpoint is, we are in the early innings of the expansion of private credit. We believe it’s critical to the functioning of the U.S. economy, and we continue to allocate there.
We’ve also allocated into more emerging areas of the private markets; that would include GP stakes and GP secondaries. Those are two areas that we think play to a large theme, which is private markets will increasingly play an important role in private wealth portfolios, much like they’ve done on the pension and endowment side. Those are two areas of the market where you can get diversified broad-based exposure in the case of GP stakes, and in the case of GP secondaries, the way those are structured allows companies to stay private for longer. We think that will be an accelerating trend. Those are two areas that we continue to like.
WM: Do you incorporate ESG preferences into your model portfolios in any way or cater to clients who have those preferences?
TC: We do. Our portfolios aren’t specifically built with the ESG overlays, but we have the ability. We have a number of strategies that allow us to tailor the portfolio to the preferences of our clients. I know there is a number of SMA strategies where we can create and remove or overweight certain types of investments. And then we have dedicated strategies on the equity and fixed-income side to play the larger trend of ESG.
