Tax optimization and investment vehicle substitution are top demands
November 3, 2022, BOSTON—As model portfolios continue to gain traction among financial advisors—the size of the model target segment increased to $8.0 trillion in 2021, up from $7.2 trillion in 2020—demands from broker/dealer (B/D) home offices and individual registered investment advisor (RIA) practices for customized products are beginning to increase. Model providers that can meet this demand have an opportunity to create sticky relationships with clients, offering flexibility and personalization uniquely tailored to their financial picture, according to The Cerulli Report—U.S. Asset Allocation Model Portfolios: Model Customization and Tax Optimization.
Cerulli estimates the model target segment represents 26% of industry advisor assets, 46% of advisors, and 61% of advisory practices. For financial advisors evaluating the benefits of model portfolios, tax efficiency is among the top requests—60% of model providers report receiving at least some requests from advisors surrounding this objective. “This aligns with a broader industry trend regarding the importance of effective tax management as a way to add value to client portfolios,” says Matt Apkarian, associate director. “Advisors want to be able to effectively tax-loss harvest, and to be able to reduce the tax impact of changing investment solutions.”
Further Custom Model Requests
Other top requests from individual RIAs include substitution of investment vehicles and substitution of investment tickers or managers. One-third (33%) of model providers report receiving many requests for ticker or manager substitution. “These are considered some of the most basic offerings from custom model providers, which are an expectation from advisors who want to feel unique and to be able to say they are the only ones using a particular portfolio,” adds Apkarian.
Broker/dealer home offices have similar demands when it comes to custom models—investment vehicle substitution (71%) and tax awareness (64%) are two of the most frequent requests. Nearly half of model providers also report receiving requests from B/D home offices for thematic tilts and changes to investment architecture.
Overall, Cerulli believes custom models represent not only an opportunity for model providers, but something that will be necessary to retain and grow model assets going forward. “Demands from RIAs and B/D home offices will increase over time in response to evolving investor preferences, and model providers retain the job of determining the scope of customization requests that can be managed at scale,” says Apkarian. “Investing in capabilities and expertise now will ensure that model providers can solidify their position in an industry that will benefit from advisor adoption and the scale that will follow,” he concludes.
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