Cerity Companions, an unbiased RIA agency with a 15-year historical past, has been on a progress streak.
Simply this week, the agency introduced plans to amass Fishman Block + Diamond, an accounting, tax and enterprise advisory agency in Encino, Calif. Earlier this yr, 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 firms.
WealthManagement.com spoke with Tom Cohn, chief options officer and associate with the agency, to debate how Cerity builds its mannequin portfolios for various kinds of shoppers, the place it sees probably 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, type 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 primarily 5 threat portfolios, starting from a conservative portfolio to a balanced portfolio to an aggressive portfolio. We are attempting to steadiness the return wants of our shoppers vs. their capacity and willingness to take dangers. An aggressive portfolio will probably be extra closely weighted to equities and fewer so to mounted revenue. Conversely, a conservative portfolio will probably be extra closely weighted towards mounted revenue and fewer so to equities.
Inside all these portfolios, we can 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 though the fairness allocation will range and go up as you’re taking extra threat. They will even have publicity to REITs, and we embrace that now as a part of our total fairness publicity. On the mounted revenue facet, we’ll have allocations to core mounted revenue, which offers a ballast in opposition to equities for taxable shoppers. In most cases, that will probably be municipal or tax-exempt bonds. And we’ll complement that with publicity to riskier mounted revenue. That may very well be high-yield bonds, publicly-traded leveraged loans or rising market debt. Right now, that’s largely within the type of high-yield bonds.
WM: Who’re your typical shoppers?
TC: Our typical consumer—they usually can span a variety—is mostly an energetic wealth creator. They’re both an govt at a company, a small enterprise proprietor or a personal fairness principal. They are usually 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 flexibility to supply complete monetary planning throughout all of these domains with one group.
WM: Do shoppers gravitate towards certainly 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 is going to actually rely on a lot of components as we construct a monetary plan. In the event you have a look at the proportion, most of our shoppers fall someplace between a balanced and a progress portfolio. To provide you some numbers on that, these will usually 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 rivals?
TC: I consider, more and more, the differentiation is inside non-public markets. We take into consideration the flexibility to doubtlessly generate extra returns above what you may get from the general public markets; we consider it’s within the non-public markets. Our allocations to non-public markets mirror that. We’ve been growing these over time. It’s additionally the place we’ve constructed out a really sturdy group. We now have now 35 colleagues in our funding workplace. Roughly half of these colleagues are dedicated to actions inside alternate options. These colleagues are chargeable for constructing the mannequin portfolios, growing the capital markets outlooks, working with our advisors to provide you with the strategic allocations, but additionally doing the analysis. And that analysis is increasingly centered on non-public 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 large funding allocation adjustments prior to now six months to any of these portfolios to answer what’s occurring?
TC: We’ve been fairly constant throughout the final yr and a half to have publicity to equities and away from mounted 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. Typically 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’ll 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 usually do you alter these?
TC: Our strategic adjustments is an annual evaluation course of. We simply began this course of the place we provide you with our personal capital markets assumptions, we evaluation each asset class on an annual foundation after which our funding committee critiques these threat/return assumptions. These will finally drive adjustments to strategic asset allocations for our portfolios.
WM: Throughout the present annual evaluation course of, what are the largest considerations you might be discussing?
TC: Our fundamental considerations are across the persistence of inflation. We attempt to consider additional methods during which we will defend portfolios total from all market environments. A part of that traditionally has been by having a low weight to mounted revenue. We consider that fairness markets over the long term defend you in opposition to sustained inflation due to the money movement nature of equities. Whereas mounted revenue, being usually mounted to the coupon charge over the long run by way of your return profile, is not going to do as nicely in an inflationary surroundings.
The second approach is inside the actual asset bucket or actual property. Non-public actual property, we consider, generally is a superb safety car in opposition to an inflationary surroundings.
WM: Do you’ve got 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 non-public 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 non-public markets by sure autos, can have non-public market allocations.
We take into consideration non-public markets in 4 methods. We now have conventional non-public fairness methods, which can embrace buyout and progress fairness. We now have enterprise capital. We now have actual property or non-public actual property. And, lastly, non-public 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 during which now we have invested during the last a number of years has been inside direct lending, which can be, in my view, safety in opposition to inflation and rising rates of interest because of the floating nature of these securities.
WM: Are you able to give an concept of how a lot of a consumer’s portfolio may very well be devoted to non-public markets?
TC: It will depend on consumer dimension, however generally it’s going to vary wherever from 10% to 30% throughout these asset courses for bigger shoppers. For shoppers who don’t have as a lot expertise inside non-public markets or whose portfolio isn’t capable of entry each asset class accessible, will probably be nearer to that 10% to 12% vary. For the bigger shoppers, we’ll unfold it relying on the chance profile wherever from 25% to 30%.
WM: Do you’ve got any allocations to Bitcoin ETFs or the crypto market generally?
TC: We now have 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 do not need any mannequin allocation to cryptocurrency. It’s been an ongoing dialogue with our funding committee. We finally discovered that the volatility of that asset class is tough to place inside a mannequin portfolio.
WM: Which asset managers do you’re employed with, notably inside non-public 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 growing profit to scale, and I’d put that with direct lending, the place constructing out a very devoted group of underwriters and people who’ve deep expertise inside the capital markets is vastly helpful. 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 completely different than in direct lending. We may match with extra area of interest or tougher to entry managers inside enterprise capital or different markets which are comparable in nature. It actually relies upon. All that’s pushed by our analysis group, these roughly 17 market colleagues I discussed whose major duty is sourcing and vetting non-public market alternatives.
WM: What sorts of constructions do you employ in the case of funding autos?
TC: Throughout the public markets, we’ll usually use a mix of ETFs, mutual funds and SMAs. For bigger shoppers, that tends to be weighted extra towards SMAs. We now have the flexibility to barter charges and constructions primarily based on our dimension and scale, which I feel is a differentiator.
Throughout the non-public markets, we’ll put money into typical drawdown constructions, so restricted partnerships in addition to evergreen constructions, comparable to non-traded REITs and non-traded BDCs. That will probably be decided by our shoppers’ capacity to entry these. The entry level for personal markets will look completely different for an accredited investor than a professional purchaser and we wish to make sure that now we have accessible 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 usually wish to reduce the amount of money we maintain strategically as a result of over the long term, proudly owning asset courses that take part within the progress of the financial system each right here within the U.S. and globally is helpful. Subsequently, we wish publicity, the place acceptable and primarily based on the chance to the consumer. We acknowledge although that money is a vital element of our shoppers’ monetary lives. So we’ll mannequin that into our monetary plan by way of how a lot money we maintain and the place we maintain it, however we attempt to reduce the quantity the place potential.
WM: Do you employ any direct indexing?
TC: We do. We discovered that to be helpful for transitioning consumer portfolios, getting broad publicity into the markets, primarily the fairness market, and likewise as a instrument to offset positive aspects elsewhere within the portfolio.
WM: The place do you see probably the most and the least threat available in the market proper now?
TC: The place we like threat at present is especially on the non-public market facet. We now have broad-based publicity within the basic equities market. Whereas on the margin, we alter a few of our positioning, we proceed to be ok with the U.S. financial system and the fairness market.
We proceed to seek out alternatives in non-public credit score. Our viewpoint is, we’re within the early innings of the enlargement of personal credit score. We consider it’s crucial to the functioning of the U.S. financial system, and we proceed to allocate there.
We’ve additionally allotted into extra rising areas of the non-public markets; that would come with GP stakes and GP secondaries. These are two areas that we predict play to a big theme, which is non-public markets will more and more play an vital function in non-public wealth portfolios, very like they’ve accomplished on the pension and endowment facet. These are two areas of the market the place you may 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 corporations to remain non-public for longer. We expect 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 flexibility. We now have 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 will create and take away or chubby sure sorts of investments. After which now we have devoted methods on the fairness and fixed-income facet to play the bigger pattern of ESG.