Cerulli Estimates the Potential Asset Allocation Model Opportunity at $7.2 Trillion

October 21, 2021 — Boston

Asset allocation model portfolio assets total $1.9 trillion as of year-end 2020 in advisor practices. Fees, perceived customization needs, and differences in investment management philosophies stand in the way of advisor adoption

New research from Cerulli Associates finds the potential future market opportunity for asset allocation models stands at $7.2 trillion. While the opportunity among these model targets is vast, myriad factors impede advisor adoption according to findings from the report, U.S. Asset Allocation Model Portfolios 2021: Improving the Advisor Experience.

Currently, there are 16,104 advisor practices that indicate their primary portfolio construction process involves model portfolios created outside their practice. These practices represent $1.9 trillion (or 7%) of all advisor-intermediated assets and typically cede discretion to an off-the-shelf home office, clearing/custodial firm, or asset manager/third-party model portfolio and make no adjustments. On an intra-channel percentage basis, they tend to concentrate in the insurance broker/dealer (B/D), retail bank B/D, and independent broker/dealer (IBD) channels.

While asset allocation model portfolios are advantageous to many advisor segments, there is a cohort of advisor practice—representing $11.5 trillion in assets—that should continue to create their own models in practice or build custom portfolios for clients (or insource investment management). Brendan Powers, associate director, attributes this to their expertise and resources. “Asset allocation models may not be a solution for every firm. There are firms that specialize in investment management with the sophistication and training to construct client portfolios. Their value proposition lies in the ability to customize investment management to the unique needs of their clients.”

Excluding this portion of the market, there are 67,229 advisor practices that represent model targets. However, the full model opportunity set has yet to be realized as advisors shy away from models over concerns that they don’t meet unique client needs (55%) and that model portfolios add a layer of fees (33%). “To boost adoption among model targets, model providers need to address these concerns while also presenting the scalability benefits of model portfolios,” adds Powers. “For advisors who don’t buy into outsourcing entirely, model providers should consider positioning models as a small account balance solution. By starting with small accounts and seeing the benefits themselves, advisors can get to greater adoption on their own.”

Asset managers seeking to participate in model expansion opportunities without offering their own model portfolios will benefit from the increased focus on model providers offering open-architecture solutions. Most B/D home-office and third-party strategist model providers employ open-architecture strategies, while many asset managers are also starting to do the same. This means asset managers with individual mutual funds and ETFs can look to their models and the assets they control as a viable distribution channel. However, firms seeking this opportunity should be prepared to complete demanding due diligence requirements. “B/D home-office models will require the most rigorous and thorough due diligence process, with style fit becoming an important element alongside more traditional due diligence metrics,” adds Powers. “Additionally, while platforms are gatekept primarily by due diligence teams, model portfolios also involve meetings with investment committees. Model creators need to ensure optimal levels of resources and support to address access points along the way to advisor adoption,” concludes Powers.

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