Cerulli: Model Portfolios Emerge as Key to Boosting Alternatives Adoption
New research from Cerulli Associates explores how model portfolios are rapidly becoming the preferred solution for financial advisers looking to overcome hurdles and effectively implement private market alternative investments in client portfolios.
Researchers note that leading model providers are including alternative strategies – semi-liquid and illiquid funds – alongside traditional public equity and fixed-income exposures.
According to Cerulli, asset allocation model portfolios act as a powerful tool to address the challenges advisers face when incorporating alternatives, ultimately helping to boost adoption across the industry.
The survey found that 53% of model providers are currently offering or considering offering asset allocation model portfolios that include semi-liquid or illiquid alternative investments. These models are increasingly being implemented through unified managed account, or UMA, programs to streamline the process.
“The ultimate goal is to simplify the burden of access and the process for advisers determining the right allocations and which funds to select,” the report states.
Cerulli outlines two main ways that alternatives are being integrated:
- Models of alternatives can serve as a building block in a “model of models” structure or as a specific sleeve within a portfolio.
- Alternatives in models involves incorporating evergreen registered alternative funds or other illiquid alternative assets directly into existing multi-asset-class model portfolios, often within a UMA framework.
For these strategies to succeed, Cerulli reported that model providers must focus on the informational ecosystem and overcoming market perception.
Model providers must equip advisers with the necessary knowledge to effectively use these tools. Advisers surveyed placed high value on educational content that helps them: prepare for client conversations about alternative investments; gain guidance on portfolio construction and market strategy; and develop baseline asset-class-level coverage for areas like private credit.
Model provider distribution and marketing functions need to actively “break the perception that model portfolios are just a small account balance solution.”
Differentiation Through Customization
To tap into new pockets of opportunity, model providers are leaning into custom solutions. They are focusing on creating custom models that align with specific home-office clients or large registered investment adviser firms. Providers are also working to improve the tax efficiency of their model portfolios to appeal to these wealthier client segments.
As the availability of private market strategies continues to grow within the wealth management market, model providers are, according to Cerulli, having to consider how their model portfolios will interact with and include these new private market allocations.
Headquartered in Boston, Cerulli Associates is an international research and consulting firm that provides financial institutions with guidance in strategic positioning and new business.
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