Asset Allocation Model Portfolios Expected to Reach $2.9 Trillion by 2026, Says Cerulli

A new report from Cerulli Associates predicts that asset allocation model portfolios will surge to $2.9 trillion by 2026, driven by a shift in how financial advisors structure client portfolios. The findings, detailed in The Cerulli Report—U.S. Asset Allocation Model Portfolios 2024, highlight the growing trend of advisors outsourcing portfolio construction as they increasingly prioritize financial planning services.

As of the end of 2023, 13 percent of assets managed by advisors were allocated to model portfolios, with 18 percent of financial advisors and 22 percent of practices utilizing them. Adoption is expected to grow, with 34 percent of advisors planning to increase their use of model portfolios in the coming year. Notably, 41 percent of modifier advisors and 26 percent of insourcers also aim to expand their reliance on these models.

“The opportunity is evident in the asset allocation model portfolio landscape for investment product providers to capitalize on the rising trend of outsourced portfolio construction,” said Matt Apkarian, associate director at Cerulli Associates. One significant trend identified in the report is the movement towards open-architecture models that incorporate a diverse array of third-party investment options. Currently, proprietary products dominate the market, but 30 percent of asset managers plan to incorporate more nonproprietary options to meet advisors’ demand for diversified management.

The outsourcing trend is also beneficial for ETF issuers; in 2023, 31 percent of ETF distribution occurred through model portfolios, with 57 percent of that volume coming from models outside the issuers’ firms. Cerulli highlights the use of third-party strategists or asset allocation models as a key driver of ETF asset growth.

Custom model portfolios are emerging as a significant focus for asset managers, particularly among broker-dealer and RIA home-office clients. Fifty-five percent of asset managers see custom models as a major opportunity, compared to 42 percent who favor off-the-shelf options. Building custom models was identified as the most important product development initiative for 2024 by 57 percent of model providers, surpassing the focus on tax-efficient models and enhanced customization.

“While developing a models business may not align with the capabilities of every investment product provider, targeting placements within models should be a top distribution priority for those offering model-building solutions,” Apkarian added.