Name: Model Portfolios: How Innovation Is Driving Variety
Uploaded: 2025-12-12T17:46:00Z
Duration: 15 min 16 s
Description: Learn how today’s customization capabilities, active strategies, and private-market investments are creating differentiated portfolios and new opportunities for growth for model asset managers and advisors.

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Learn how today’s customization capabilities, active strategies, and private-market investments are creating differentiated portfolios and new opportunities for growth for model asset managers and advisors.

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Model Portfolios: How Innovation Is Driving Variety

Thank you and welcome. Jeff, Alessio, we're happy to have you with us.

Great to be here.

Thank you for having me.

Well, today, we are talking about model portfolios, what they are, how they're evolving, and where the next growth opportunities lie for investors and financial advisors. Let's start with you, Jeff, and let's talk about the evolution. Can you walk us through that trajectory from being differentiators at conception to becoming industry standard because of widespread popularity. I believe custom model assets nearly quadrupled just in the last three years. So now just building these models is no longer enough What makes this next generation of model portfolios different?

Let me start by defining model portfolios for our viewers. They're not more complicated than a combination of mutual funds, ETFs, with the associated weight in each security, combined together to make a portfolio that advisors deliver to their clients. The evolution you described has been happening fairly rapidly as advisors shift from a brokerage relationship to an advisory relationship. And as they do that, they find that model portfolios are a very efficient way to deliver for their clients. Ultimately, it's a defined investment process. Institutional equality, it can be documented. Advisors find they save over 200 hours per year, and ultimately, there's a cost savings benefit as well. You are correct. Advisors' adoption of model portfolio sits today around $4 1/2 trillion, according to Cerulli, and that amount and that size is expected to triple over the next 10 years. As advisors embrace model portfolios, the trend is towards customization, whether that being embedding legacy positions clients already own into the portfolio construction process or increasingly using separately managed accounts and alternatives.

And so Alessio, Jeff talked about the evolution of model portfolios, but what is changing in the landscape that is driving this evolution?

What is changing is that we are going from pre-built, one size fits all to customization being a must-have in model portfolios. What is driving that change? A couple of real important shifts. Number one, the complexity, the sophistication, the proliferation of products has risen exponentially in the investment landscape. So financial advisors are dealing with a much more complicated investible universe to navigate. And secondly, financial advisors need to really differentiate their practice in an ever-competitive asset management world.

So Jeff, let's talk about customization. Let's break that down further. When it comes to customization, what are today's growing high-net worth clients segment looking for beyond traditional tax overlays and vehicle swaps?

You hit it on the head. The evolution from mass affluent clients to high net worth is the fastest growing category for advisors, and ultimately, as they're trying to properly serve these high net worth clients, deeper degrees of customization are really important. The number one degree of customization is tax efficiency, both at the model creation level, the instruments that are used in the model itself, and the transition of that portfolio over time, particularly around things like tax loss harvesting. Specific to instrument selection and customization, separately managed accounts continue to be very important. If you're a high net worth client and taxes are a consideration, these are municipal bond separately managed accounts, perhaps direct indexing, a tax efficient way to gain equity exposure, and ultimately, the inclusion of private markets fits in as well.

Jeff, let's stay with you. In your recent paper, "Seizing the Next Model Moment," where you outline the next wave of growth for model portfolios, you mentioned a fundamental shift in the investor mindset and skepticism toward traditional stock and bond returns or what we know as 60/40. How are you seeing that traditional allocation shifting in model portfolios today?

I think advisors and their clients, but particularly of a younger generation of clients that are inheriting some of this wealth, haven't experienced that high degree of return in equity in fixed income markets. And I think they're wondering are there other ways to access higher rates of return and are quickly concluding those opportunities still remain available, but increasingly, it's in the private equity markets. It's in the private credit markets. Ultimately, it's in real estate, as an example of a third asset class, and accessing the return streams and the diversification available in those asset class turns out to be a great fit for these high net worth clients.

Alessio, when integrating private market assets, a top wishlist of advisors, as Jeff mentioned, is driven by investors looking for yields that exceed what they're getting in the public markets. How would you advise an FA on the best approach for managing the practical liquidity risks associated with funding from liquid public markets into less liquid private ones?

As Jeff explained, the introduction of private markets makes complete investment sense in terms of improving the efficient frontier, enhancing returns, reducing risk, and improving diversification. But what is important for financial advisors is that in doing so, we don't increase the complexity of the management of that portfolio and model portfolios remain what they were intended to be, a turnkey solution. So the best way to access private markets and fund those exposures is through multi-asset, multi-manager, private evergreen structures. such as interval funds, for example, that allow financial advisors to have easy access with low minimum investment requirements, quarterly liquidity, and immediate capital deployment. In funding those exposures from the public markets book, that's where the asset manager really adds value, understanding how to finance, how to fund those private equity and private credit exposures through a combination of growth equities, value equities, and public credit in order not to alter the investment objectives and the risk profile and the risk exposures of the original portfolio.

And Jeff, when it comes to private markets, integration is key, right? How do you implement them to enable access in a single unified managed account?

I think a combination of two things. Alessio touched on one, which is understanding, ultimately, to fund these investments, you need to pick a security to sell and decomposing the risk of the private market exposure to understand which public market exposure you'll need to sell to fund that. The second piece is really around technology and the use of a newer technology that allows, as Alessio said, a unified account approach using public and private market securities to deploying into the private markets. That technology solution enables scaled onboarding for advisors, the documentation process effectively, and then the delivery of the alternative investments into the client portfolio.

Alessio, let's talk active strategies and other top wish list of investors. With models that primarily feature active strategies outpacing others in launches in 2025, how do you balance active and passive components within the blended model to manage costs while seeking differentiated returns?

Active strategies, particularly active ETF strategies, are the fastest growing share in model portfolios. But in growing this proportion, investors, financial advisors are still key on having a balanced exposure to all of the asset classes and a very conscious cost management. So we tend to bifurcate investible universe between efficient and less efficient asset classes. In efficient and liquid asset classes, we tend to deploy capital more to systematic premium smart beta-type strategies, whether indexed or active, but that offer alpha at very effective price points, combined with pure beta exposures that really give access to the asset class at very reduced cost and very effective price points. Conversely, in less efficient segments of the market, such as international equities, small and mid-cap equities, international markets, high yield, lower rate of fixed income securities, that's where fundamental active management has a documented ability to add value over time and add value over passive, cost-effective solutions. So that is the type of balance that we seek to achieve using return considerations and cost considerations.

And, Jeff, how are you approaching that balancing act between active and passive components?

I think Alessio covered it well. The key innovation that's happened more recently is just the elements available in active format with an ETF wrapper, I would say active strategies themselves, but also the precision exposure you're seeking and some of those less liquid, excuse me, less liquid or less efficient markets that Alessio talked about. And inside that ETF wrapper, more often, you can combine equity and fixed income attributes. One trend most people are familiar with is the ability to write options inside an equity or fixed income strategy as a way to both enhanced return and create a diversified exposure in the portfolio.

Jeff, sticking with you. Only a small percentage of third-party models hold alternatives today, even though your research shows that 90% of advisors plan to increase exposure, so there's a disconnect there. Can you explain that, and how firms should be thinking about addressing them?

Sure. Without a doubt, we are having more conversations than ever with advisors around adding alternatives in private markets to client portfolios and certainly model portfolios. Without a doubt, the number one request from those advisors is more education, the different asset classes, the vehicles, how they fit into portfolios, and increasingly, end client education. So two layers of education we're hard at work on. And the final step is just making it easier, where we can scale the onboarding process for advisors and their clients, scale the documentation process so it's much quicker and more efficient, and ultimately, getting them access sooner to these private market investments.

Alessio, let's bring some of the macroeconomic dynamics into the conversation. We are in a structurally higher inflation environment with a stock-bond correlation that has become increasingly unreliable and has redefined fixed income's role in portfolios. Can you talk about specific innovations in bond ETFs for this new era?

Well, today, advisors have a much wider investible universe to address the challenges that you just mentioned. For example, in fixed income., we see a very exciting evolution in terms of product offerings, strategies that cover specific duration intervals, specific maturities, specific sectors across the fixed income universe, both in the core and in the non-core fixed income markets, allowing financial advisors to really address the challenge of inflation, capital downside protection, and rising inflation environments in a very precise way. Similarly, as Jeff mentioned, we are seeing very creative income solutions that provide a hybrid exposure to equity and fixed income through option derivatives income strategies that really are aiding investors in creating much more diversified income solutions.

Jeff, "The future of model portfolios lies not just in innovation but in collaboration." What do you mean by that when you say collaboration, and how is technology enabling this?

It's really a key partnership. As advisors adopt model portfolios, we need to make sure their workflow is optimized, that the engagement with their clients and model portfolios is scalable, it's efficient, it saves them time. And ultimately, we found one of the best ways to do that is work with a variety of different TAMPs, turnkey asset managers, who provide a full suite of technology tools that plug into advisor workflows and enable the scaling of model portfolios across their client base. There's a great thing going on here where there's tremendous amount of research, development, innovation, and new technologies and strategies that are being brought to market that really provide significant benefits for advisors, ultimately, their end clients, and save significant time and cost.

So Alessio, Jeff, I wanna close on this for both of you. Model portfolios are no longer simply there to generate risk-adjusted returns, as you've discussed, but have evolved to become part of a broader, more holistic financial plan. So do you see this consumer-centric view driving more adoption of model portfolios, especially in the current environment? Alessio, let's start with you, and Jeff, you can close.

Thank you. Client centricity is at the very center of the value proposition for custom model portfolios. Today, asset managers, to be successful, have to consider themselves, have to become an extension of the team of financial advisors. By providing a holistic client service experience through custom market commentaries, portfolio and risk performance attribution, risk reports, trade rationales that are customized to the specific portfolio, and ultimately aid the financial advisor to create that conversational alpha with their client alongside performance alpha. In other words, asset managers need to be part of the investor journey alongside the financial advisor.

Jeff.

Alessio covered it well. The client experience is critically important. We like to call our approach working with advisors, Surround Sound is the term we use. It's everything from the fact sheet to the podcast to the webinar to the personalized client updates, the customizations. It's really speaking to clients about their journeys and ultimately making advisors look great in front of their clients. Making it simple, what do I say, what do I do, and being timely when we deliver that Surround Sound.

Thank you Jeff, Alessio. We will have to leave it here. Conversational alpha, Surround Sound, I love it. Thank you so much for sharing your insights into the next wave of differentiated model portfolios.