Custom models and alternatives are reshaping the advisor toolkit

Custom asset allocation models are taking center stage in the model portfolio market, as providers respond to growing demand for tailored solutions across advisor channels.

That's according to the latest research from Cerulli Associates, which finds that two-thirds (65%) of model provider firms now list custom models among their top three priorities for product development this year.

Cerulli’s analysis shows that 71% of asset managers view custom models as a large opportunity, while 18% see them as a medium opportunity.

And although custom models initially emerged as bespoke solutions for broker-dealer platforms, the focus is increasingly shifting toward independent RIA practices and RIA aggregators. Roughly one-third of industry model assets are now in custom model arrangements, with adoption among RIAs on the rise.

"While these opportunities are likely to require more effort and resources up front, there may be more scalable growth if they receive favorable positioning among the firms’ financial advisors," Brendan Powers, director at Cerulli Associates said in a statement.

The report also highlights a surge in the integration of alternative investments within model portfolios. More than half – 53% – of model providers surveyed are currently offering, or considering offering, asset allocation model portfolios that include semi-liquid or illiquid alternatives. Slightly more, 56%, also agreed that partnerships with alts investment tech providers will be required to blend those strategies into asset allocation models.

Read more: Spiffed up BDCs, REITs, are pricy, lean on leverage: Morningstar

While 44% of model providers seeing significant advisor demand for asset allocation portfolios with semi-liquid or illiquid alternatives, Cerulli says advisors are also increasingly seeking guidance.

Cerulli’s data shows that the presence of model portfolios with semi-liquid or illiquid alternatives is expected to unlock new segments of demand, particularly among affluent and high-net-worth clients. Financial advisors surveyed cited the need for education on discussing alternatives with clients, portfolio construction guidance, and market strategy as key requirements for adoption.

“It is this level of client experience that can help differentiate model solutions beyond just performance, price, and investment philosophy,” said Kevin Lyons, senior analyst.

As of year-end 2024, Cerulli says total model portfolio assets climbed to $2.5 trillion, up from $2.1 trillion in 2023. Broker-dealer home offices and advisory TAMPs account for more than $1.8 trillion of that total, while asset managers and third-party strategists manage $679 billion. The top 25 providers control 86% of all model portfolio assets, reflecting a high degree of market concentration.

Providers are also focusing on tax efficiency and technology-driven customization. Many are working with managed account sponsors to improve tax outcomes, including mapping the tax impact of transitioning into model portfolios and ongoing tax-loss harvesting. Technology advancements are enabling custom models at scale, often with asset minimums between $100 million and $150 million over a 12-month period.