Juice 'worth the squeeze': Custom model portfolios take hold as SMA market matures

The next generation of model portfolios are here, and they’re increasingly taking on the specific, idiosyncratic qualities wealth managers and institutional providers desire as custom solutions become increasingly available.

The rise of custom model portfolios has not come suddenly, with researchers and investment consultants increasingly hedging their product provision bets by offering custom-made or white-labelled managed account investment solutions on top of the traditional, off-the-shelf separately managed account (SMA) packages.

In recent years, however, the move to customised SMA provision has gathered pace. As the market has matured, the cohort that sell managed account options – including everyone from sub-scale licensee groups with big ambitions to growing researchers like Lonsec and large-scale wealth providers like AMP – have been catering to an increasingly sophisticated set of requirements.

For institutions, customised solutions were basically the default option from day one. These days, however, with more options available at better price points, a tailored set of investment ‘baskets’ based on standard risk profiles is an option for most wealth managers in the country.

In the US, researchers Cerulli Associates report that 60 per cent of survey respondents say customer asset allocation models are one of the three most important initiatives for their firm. Custom model portfolios now make up around 30 per cent of total model portfolios in the lucrative US market.

“While there is a plethora of off-the-shelf offerings now available, many broker/dealers, registered investment advisor aggregators, and turnkey asset management platforms want customizations related to open-architecture requirements, alignment to existing capital market guidelines/assumptions, or manager/fund preferences, among others,” the Boston-based group says. “As this demand has manifested, more than half (55 per cent) of asset managers say there is a large opportunity for custom models.”

The trend is becoming similarly pronounced closer to home, says Atchison Consultants principal Kev Toohey (pictured). But for those considering the switch, he tells The Inside Adviser, there is a lot to consider.

“Key to the successful delivery of customised solutions is the ability to identify where it makes sense on the investment strategy decision tree for a given investment group to focus their time, effort and resources,” he says. “For most groups there is a trade-off between customisation and the realities of resourcing the decision process, governance framework and client communication requirements of a bespoke solution.”

Cerulli provides a similar warning, noting that wealth management firms need to act as partners when taking on the services of a customised portfolio provider. “Model providers considering custom asset allocation model portfolios must be prepared for a longer relative sales cycle, higher-resource spend, and input from the distribution partner on model construction,” Cerulli stated.

“The juice often can be worth the squeeze, as custom model mandates can be very lucrative opportunities that may require fewer resources and commitment to sell to the individual advisor.”