Cerity Companions, an impartial RIA agency with a 15-year historical past, has been on a progress streak.
Simply this week, the agency introduced plans to accumulate Fishman Block + Diamond, an accounting, tax and enterprise advisory agency in Encino, Calif. Earlier this 12 months, it struck a deal to purchase Agility, the OCIO division of Perella Weinberg Companions Capital Administration. In newer months, it has additionally picked up Janiczek Wealth Administration, a Denver-based agency that focuses on serving high-net-worth and ultra-high-net-worth shoppers, and SBC Wealth Administration, an Indianapolis-based agency catering to prosperous people and companies. Altogether, Cerity had roughly $120 billion in AUM as of November 30 and serves shoppers starting from particular person traders to non-profits and companies.
WealthManagement.com spoke with Tom Cohn, chief options officer and accomplice with the agency, to debate how Cerity builds its mannequin portfolios for several types of shoppers, the place it sees essentially the most alternative for outsized returns in coming years and the way it picks the asset managers it really works with.
This Q&A has been edited for size, fashion and readability.
WealthManagement.com: What’s in Cerity Companions’ mannequin portfolio? Are you able to give us a breakdown by asset class?
Tom Cohn: At Cerity Companions, now we have a lot of mannequin portfolios, primarily based on the shoppers’ urge for food for threat and dimension. Usually, for all of the mannequin portfolios we construct, there are basically 5 threat portfolios, starting from a conservative portfolio to a balanced portfolio to an aggressive portfolio. We are attempting to stability the return wants of our shoppers vs. their skill and willingness to take dangers. An aggressive portfolio will probably be extra closely weighted to equities and fewer so to fastened revenue. Conversely, a conservative portfolio will probably be extra closely weighted towards fastened revenue and fewer so to equities.
Inside all these portfolios, we may have fairly constant publicity within the fairness portfolios to worldwide and rising markets equities, in order that the weights inside them will probably be fixed despite the fact that the fairness allocation will range and go up as you’re taking extra threat. They may even have publicity to REITs, and we embrace that now as a part of our total fairness publicity. On the fastened revenue facet, we’ll have allocations to core fastened revenue, which gives a ballast towards equities for taxable shoppers. In most situations, that will probably be municipal or tax-exempt bonds. And we’ll complement that with publicity to riskier fastened revenue. That may very well be high-yield bonds, publicly-traded leveraged loans or rising market debt. Immediately, that’s principally within the type of high-yield bonds.
WM: Who’re your typical shoppers?
TC: Our typical consumer—and so they can span a variety—is mostly an energetic wealth creator. They’re both an government at an organization, a small enterprise proprietor or a personal fairness principal. They are typically high-net-worth or ultra-high-net-worth, have complicated monetary conditions that require not solely funding administration however monetary planning, property planning and tax prep. And our differentiator is the power to offer complete monetary planning throughout all of these domains with one workforce.
WM: Do shoppers gravitate towards considered one of these portfolios greater than others, or is it evenly dispersed throughout the 5?
TC: I wouldn’t say it’s evenly dispersed. It can definitely rely upon a lot of components as we construct a monetary plan. In case you have a look at the share, most of our shoppers fall someplace between a balanced and a progress portfolio. To provide you some numbers on that, these will typically have someplace between 50% to 65% in fairness publicity. We discover these are the 2 hottest portfolios total.
WM: What differentiates your agency’s funding philosophy and your portfolios out of your opponents?
TC: I imagine, more and more, the differentiation is inside personal markets. We take into consideration the power to probably generate extra returns above what you will get from the general public markets; we imagine it’s within the personal markets. Our allocations to personal markets mirror that. We’ve been rising these over time. It’s additionally the place we’ve constructed out a really strong workforce. We’ve got now 35 colleagues in our funding workplace. Roughly half of these colleagues are dedicated to actions inside alternate options. These colleagues are answerable for constructing the mannequin portfolios, growing the capital markets outlooks, working with our advisors to provide you with the strategic allocations, but in addition doing the analysis. And that analysis is increasingly centered on personal markets.
WM: We’re clearly in a altering financial local weather proper now. We’ve seen some rate of interest cuts in current months, we’re going to have a brand new administration coming into the White Home. Have you ever made any massive funding allocation adjustments up to now six months to any of these portfolios to reply to what’s taking place?
TC: We’ve been fairly constant throughout the final 12 months and a half to have publicity to equities and away from fastened revenue on a relative foundation. The way in which we construct our portfolios is now we have a strategic asset allocation to all these portfolios. Normally phrases, we’ll make what we name tactical tilts across the strategic asset allocation. We by no means wish to considerably deviate away from these strategic weights. We wish to have these fairly constant, in order that they match our shoppers’ threat profiles and the monetary plan.
However we are going to make slight adjustments, together with overweighting equities over the previous 15 months. We’ve moved from having pure market publicity to shifting into small-cap and equal-weight publicity. We’ve additionally taken on publicity inside high-yield bonds.
WM: When it comes to the strategic allocations, how typically do you modify these?
TC: Our strategic adjustments is an annual assessment course of. We simply began this course of the place we provide you with our personal capital markets assumptions, we assessment each asset class on an annual foundation after which our funding committee critiques these threat/return assumptions. These will in the end drive adjustments to strategic asset allocations for our portfolios.
WM: Inside the present annual assessment course of, what are the most important issues you’re discussing?
TC: Our principal issues are across the persistence of inflation. We attempt to consider additional methods through which we are able to defend portfolios total from all market environments. A part of that traditionally has been by having a low weight to fastened revenue. We imagine that fairness markets over the long term defend you towards sustained inflation due to the money move nature of equities. Whereas fastened revenue, being typically fastened to the coupon charge over the long run when it comes to your return profile, won’t do as effectively in an inflationary setting.
The second approach is inside the actual asset bucket or actual property. Non-public actual property, we imagine, is usually a superb safety automobile towards an inflationary setting.
WM: Do you’ve gotten some publicity to alternate options and personal markets inside every of the 5 mannequin portfolios you talked about? Is it tilted extra towards shoppers with the next urge for food for threat?
TC: We construct portfolios each with and with out personal markets, relying on the consumer dimension and the urge for food to take illiquidity threat. More and more, increasingly shoppers due to the elevated entry factors into personal markets via sure autos, may have personal market allocations.
We take into consideration personal markets in 4 methods. We’ve got conventional personal fairness methods, which is able to embrace buyout and progress fairness. We’ve got enterprise capital. We’ve got actual property or personal actual property. And, lastly, personal credit score, which has been a giant allocation for us. That may embrace direct lending, asset-based loans, in addition to distressed debt. The first approach through which now we have invested during the last a number of years has been inside direct lending, which can be, in my view, a superb safety towards inflation and rising rates of interest because of the floating nature of these securities.
WM: Are you able to give an thought of how a lot of a consumer’s portfolio may very well be devoted to personal markets?
TC: It is determined by consumer dimension, however usually it should vary anyplace from 10% to 30% throughout these asset lessons for bigger shoppers. For shoppers who don’t have as a lot expertise inside personal markets or whose portfolio isn’t in a position to entry each asset class obtainable, will probably be nearer to that 10% to 12% vary. For the bigger shoppers, we are going to unfold it relying on the danger profile anyplace from 25% to 30%.
WM: Do you’ve gotten any allocations to Bitcoin ETFs or the crypto market usually?
TC: We’ve got checked out each the general public market publicity to cryptocurrency and personal markets, and truly made a few investments on the enterprise capital entrance which have publicity there. We wouldn’t have any mannequin allocation to cryptocurrency. It’s been an ongoing dialogue with our funding committee. We in the end discovered that the volatility of that asset class is troublesome to place inside a mannequin portfolio.
WM: Which asset managers do you’re employed with, notably inside personal markets? How do you select them?
TC: Talking in broad phrases, we work with a lot of managers. The way in which we take into consideration that, relying on the asset class, we attempt to consider the place the aggressive benefit is. In some markets, there’s an rising profit to scale, and I’d put that with direct lending, the place constructing out a very devoted workforce of underwriters and people who’ve deep expertise throughout the capital markets is massively useful. And scale additionally helps with the sourcing of actually high-quality investments inside these markets as a result of you’re a constant supplier of capital.
In different markets, like enterprise capital, the return distribution is far totally different than in direct lending. We may fit with extra area of interest or tougher to entry managers inside enterprise capital or different markets which can be related in nature. It actually relies upon. All that’s pushed by our analysis workforce, these roughly 17 market colleagues I discussed whose main accountability is sourcing and vetting personal market alternatives.
WM: What kinds of buildings do you employ in the case of funding autos?
TC: Inside the public markets, we’ll typically use a mix of ETFs, mutual funds and SMAs. For bigger shoppers, that tends to be weighted extra towards SMAs. We’ve got the power to barter charges and buildings primarily based on our dimension and scale, which I feel is a differentiator.
Inside the personal markets, we’ll put money into typical drawdown buildings, so restricted partnerships in addition to evergreen buildings, similar to non-traded REITs and non-traded BDCs. That will probably be decided by our shoppers’ skill to entry these. The entry level for personal markets will look totally different for an accredited investor than a certified purchaser and we wish to ensure that now we have obtainable choices for all shoppers.
WM: Do you maintain any money?
TC: We are going to use money as a strategic and tactical allocation. We discovered over the long term that we typically wish to decrease the amount of money we maintain strategically as a result of over the long term, proudly owning asset lessons that take part within the progress of the economic system each right here within the U.S. and globally is helpful. Due to this fact, we would like publicity, the place applicable and primarily based on the danger to the consumer. We acknowledge although that money is a crucial part of our shoppers’ monetary lives. So we are going to mannequin that into our monetary plan when it comes to how a lot money we maintain and the place we maintain it, however we attempt to decrease the quantity the place attainable.
WM: Do you employ any direct indexing?
TC: We do. We discovered that to be useful for transitioning consumer portfolios, getting broad publicity into the markets, primarily the fairness market, and in addition as a instrument to offset positive factors elsewhere within the portfolio.
WM: The place do you see essentially the most and the least threat out there proper now?
TC: The place we like threat in the present day is especially on the personal market facet. We’ve got broad-based publicity within the common equities market. Whereas on the margin, we alter a few of our positioning, we proceed to be ok with the U.S. economic system and the fairness market.
We proceed to seek out alternatives in personal credit score. Our viewpoint is, we’re within the early innings of the growth of personal credit score. We imagine it’s crucial to the functioning of the U.S. economic system, and we proceed to allocate there.
We’ve additionally allotted into extra rising areas of the personal markets; that would come with GP stakes and GP secondaries. These are two areas that we predict play to a big theme, which is personal markets will more and more play an essential function in personal wealth portfolios, very similar to they’ve executed on the pension and endowment facet. These are two areas of the market the place you will get diversified broad-based publicity within the case of GP stakes, and within the case of GP secondaries, the way in which these are structured permits firms to remain personal for longer. We predict that will probably be an accelerating pattern. These are two areas that we proceed to love.
WM: Do you incorporate ESG preferences into your mannequin portfolios in any approach or cater to shoppers who’ve these preferences?
TC: We do. Our portfolios aren’t particularly constructed with the ESG overlays, however now we have the power. We’ve got a lot of methods that enable us to tailor the portfolio to the preferences of our shoppers. I do know there’s a lot of SMA methods the place we are able to create and take away or obese sure kinds of investments. After which now we have devoted methods on the fairness and fixed-income facet to play the bigger pattern of ESG.