RIA aggregators, broker/dealers and TAMPs are displaying a growing preference for custom model portfolios—and asset managers offering model portfolios are making this a priority, according to the July issue of U.S. Monthly Product Trends from 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 off-the-shelf model portfolios the asset managers are selling or model portfolios customized by advisors themselves, though wealth managers can often further tweak these asset manager-built custom models for end investors.
According to Cerulli, many wealth managers are looking for customization in open architecture requirements that align with 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 portfolios’ AUM is allocated to custom model portfolios, while 70% of total model portfolio assets are still allocated to off-the-shelf model assets.
At the same time, almost 60% of survey respondents identified providing 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 enterprises and RIA aggregators want to centralize certain functions, including investment management. In the process, they are increasingly asking asset managers for custom model portfolios.
“Historically, when you think about the opportunity for a custom mandate on an enterprise level, it would be a B/D home office that would come and ask an asset manager: ‘Hey, we want something custom made available to only 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 to even some of these enterprise RIAs.”
At the same time, broker/dealers see offering custom model portfolios as a way to gain loyalty from advisors on their platform by offering them something that’s not available everywhere else, added Matt Apkarian, associate director of product development.
“The broker/dealers want something that’s custom, that’s only available to their advisors; that’s a reason why the advisor wants to stay with that broker/dealer because, otherwise, the advisors would have the ability to access, for example, Blackrock’s or Vanguard’s model portfolios through any given platform that they want to. It gives the broker/dealer a bit of stickiness with advisors, and they might have a bit of their own investment philosophy incorporated into that product as well,” Apkarian said.
Looking at the types of custom model portfolios currently offered, the ones that are easiest to find are those focusing on target risk or conservative allocation with a 60/40 model. In addition, 70% of the asset managers Cerulli surveyed said they offered these, and 12% said they offered more than 40 versions of such custom model portfolios. Outcome-oriented custom model portfolios were the second most common strategy, with 50% of those surveyed 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 46 asset management and third-party strategist firms offering model portfolios for this year’s survey, which, according to Apkarian, represent about 85% to 90% of the industry’s model assets.
