$2.9T in Model Portfolio Assets by ‘26
in recent years, model portfolios have become an ever-compelling solution for wealth managers. The trend of outsourcing portfolio construction is expected to continue to grow, as it frees up time for financial planning with clients or prospecting to expand their practice, in addition to offloading investment management obligations.
Customized model portfolios are developed by considering the distinct needs of each client, in conjunction with a thorough analysis of macroeconomic data. This methodology guides the decision-making process in portfolio construction, ensuring it is specifically tailored to fulfill the client’s needs.
“A skilled financial advisor can adeptly pull the necessary levers to ensure the model accurately reflects the client’s investment philosophy and risk appetite,” said Chris Shuba, founder and CEO of Helios Quantitative Research.
Cerulli Associates’ most recent report, U.S. Asset Allocation Model Portfolios 2024, supports this growing trend. The report revealed that 13% of advisor assets were managed by firms that identified as “model users” at the end of the previous year. That figure represents 18% of all advisors and 22% of all advisor practices.
Meanwhile, 34% of outsourced advisors anticipate that their utilization of model portfolios will increase within the next year. Most model assets, roughly $1.6 trillion, were in portfolios managed by broker-dealers, which included the four major wirehouses and TAMPS. The remaining $503 billion was in models managed by asset managers and third-party strategists, both of which are known to compete for advisory clients.
The Boston-based consultant projected that model portfolio assets will reach $2.9 trillion by 2026. This represents an increase from $2.1 trillion, or 40%, recorded at the end of 2023, although the report revealed that “there is known to be significant levels of model assets outside of identifiable sources, such as paper model users who may become identifiable in the future as they migrate to platforms that ease model portfolio implementation.”
Cerulli estimates that the entire “model target opportunity” was $7.3 trillion at the end of 2023, accounting for 23% of advisor-managed assets, 40% of advisor headcount, and 55% of advisor practices. The firm acknowledged that this encompasses practices that are anticipated to become model users in the future, even though the transition will require a significant amount of time.
“On the client side, model portfolios offer transparency into their underlying holdings, fostering a stronger sense of trust between the advisor and the investor. Additionally, as clients become more informed and engaged, the advisor-client relationship deepens, enhancing the potential for long-term collaboration and referral business,” added Shuba.
The construction of model portfolios is evolving as well: Cerulli indicated that although most assets are presently allocated to proprietary-only products, advisors utilizing model portfolios are progressively seeking options that leverage a diverse array of managers, which the firm anticipates would stimulate demand for open-architecture model portfolios.
To that end, 30% of asset manager model providers are planning to expand their nonproprietary investment options, according to Cerulli. The company also indicated the way providers operate is likely to change as well.
“While building out a model’s business may not fit the capabilities and resource constraints of an investment product provider, seeking placements within models should be one of the top distribution opportunities being targeted by a provider of model building blocks,” Cerulli associate director Matt Apkarian said.
Increased guide use and reliance on model portfolios undoubtedly has far-reaching ramifications for the industry. Model portfolios enable advisors to establish scalable businesses while focusing more on clients.
