How Custom Models are Driving Growth, Personalization, and Firm Valuation for RIAs

Building portfolios from scratch can be complex and time-consuming. But we are now seeing a significant rise in the use of custom models, offering RIAs a powerful way to scale their expertise efficiently.

Fueling this trend is an increasingly sophisticated technology backbone, including Vestmark’s platform; demands by clients who expect more customization and advisors who want to stand out by offering investments that reflect their unique perspective; and carefully calibrated business models that provide the right level of customization to make custom models profitable. 

I believe that increased custom model adoption offers benefits to RIAs that might not be obvious at first glance. It’s a strategy that moves beyond simple time savings, offering the promise of enhanced client service, operational efficiency, client retention, and even increased firm valuation. By partnering with the right provider, RIAs can optimize their investment operations and spend more time in front of clients. 

The Power of Customization is Realized by a Team 

Custom models aren’t going to be the best solution for everyone, but when approached by an advisor or (more often) a larger RIA with sufficient AUM, asset managers are willing to create custom models and subsidize most or all of the costs. Wealth tech platforms such as Vestmark make the connections, implement the portfolios, execute tax management strategies, and deliver and rebalance the models across the portfolios using the model. 

The secret to the success of this approach is balance. The RIA isn’t literally creating a different custom model for each client, but will have one or a dozen or some number of models that bear the RIAs thumbprint, reflecting their unique strategy and giving clients greater personalization. With multiple custom models, the RIA can segment clients, directing different types of investors or different size portfolios to models that fit. 

The model offers a great deal of flexibility in how fees are managed. We have seen some asset managers who are willing to subsidize some or all of the costs of developing the model, performing maintenance, and offering additional value-add services because it secures guaranteed “shelf space” at the RIA. Terms of these arrangements can be negotiated between the RIA and asset manager depending on the size and complexity of the model and what assets are included. 

How RIAs Can Benefit: Driving Growth, Minimizing Costs and Increasing Firm Valuation 

The obvious benefit of using models is time savings, and that’s true of custom models as well, but the benefits to RIAs go much deeper than that. 

First, custom models can help an RIA stake out its own space in the market. It moves them from commoditized investments that people can get anywhere to something that isn’t available elsewhere. If an RIA has a good story to tell in how it approaches investments and personalizes its service to clients, custom models help back that up. 

Second, it allows for faster growth. Advisors create recurring advisory fee-based revenue that is not dependent on managing portfolios and handling custom work. They can do more with less, pursue and serve new clients, and increase their book of business efficiently. 

Third, RIAs can move upstream in terms of the clients it serves. Clients with millions of dollars expect customization, and these custom models give advisors a way to deliver it efficiently. 

Fourth, offering third-party custom models can add a great deal of value to an advisor’s services. Through the custom model provider, advisors get dedicated support, global asset allocation advice, market commentary and rationales for asset allocation changes that they can share with clients – essentially, a full suite of outsourced CIO services. 

Finally, the custom model approach described above not only streamlines operations, it takes costs out of the business. It’s not just paying to outsource. In this case asset managers are willing to invest in the custom model in exchange for the business sent their way, improving the RIAs bottom line. 

All of which can lead to the ultimate benefit: Increased firm valuation. Whether a firm is making acquisitions or looking to be acquired, outsourced turnkey custom models can help make the business leaner and more efficient, increasing value for firms that are bought and enabling firms that are buyers to more quickly realize value from their acquisitions. 

Vestmark’s Role in Enabling True Customization 

Vestmark's platform is well designed to serve custom models. Vestmark provides efficient account rebalancing at scale, so as asset managers tweak their models, changes flow through to the accounts managed by participating RIAs seamlessly and automatically. Our tax overlay capabilities let advisors deliver their clients the reassurance of optimized tax impact. Our ability to incorporate full UMA capabilities allows advisors to offer more complex solutions desired by higher-end investors, such as alternative investments or fixed income, all within the same account. And our excellent working relationships with top asset managers help form a bridge between RIAs and their custom model partners. 

The move toward custom models represents a strategic evolution for RIAs. It's a shift that leverages a firm’s best ideas efficiently and benefits the business from top to bottom. By embracing this approach, firms can deliver more personalized service to more clients, operate with greater efficiency, and build a more valuable, enduring business. Through custom models, an RIA can turn its unique investment philosophy into its most powerful and scalable asset.