Custom asset allocation model portfolios are gaining traction

Custom asset allocation model portfolios are emerging as a priority for asset manager model providers, according to recent data from Cerulli Associates.

Nearly 60 percent of respondents in a recent 2024 Cerulli survey ranked custom models as one of their top three initiatives, the firm said in a new report, outpacing other common areas of focus such as enhancing tax efficiency for taxable accounts (43 percent) and expanding customization potential (39 percent).

As Cerulli explained in its latest US Monthly Product Trends report, custom asset allocation model portfolios are tailored to meet the specific needs of various wealth manager clients, including broker-dealer home offices, registered investment advisor aggregators, turnkey asset management providers, and large independent advisor practices.

Cerulli's survey indicates that a full 30 percent of assets in asset allocation model portfolios are in custom models, with asset managers reporting a slightly higher figure of 34 percent. In contrast, third-party strategists see just 3 percent of their AUM in custom models.

The data show demand for unique models is particularly strong among larger broker-dealer home offices and other influential wealth managers, such as RIA aggregators and TAMPs. These entities seek customizations that align with open architecture requirements, existing capital market guidelines, and specific manager or fund preferences.

Despite the availability of numerous off-the-shelf offerings, many wealth managers prefer the tailored approach.

"Individual RIA aggregators tend to be unique, but a segment of them are influencing their advisors to leverage centralized services, including portfolio construction and custom asset allocation model portfolios," noted the report.

Cerulli found that 45 percent of asset managers and 33 percent of third-party strategists deliver custom model portfolios through unaffiliated broker-dealer platforms and marketplaces. Another 30 percent of asset managers deliver their custom asset allocation models through other distribution methods, which includes numerous firm types such as RIA aggregators.

The current landscape shows most firms offering custom model portfolios focus on target-risk or risk-based segments. According to Cerulli, 69 percent of providers offer one or more custom target-risk/risk-based models, while 28 percent provide more than ten such models.