Why over a fourth of advisors are holding off on model portfolios

While model portfolios have become a mainstay for many advisory practices, more than one-fourth of advisors are still opting not to offer them, according to new research from Morningstar.

In a new report, it highlighted the features and forces supporting model portfolio adoption, including advisors' desire to outsource at least some of their investment management and focus more on managing client relationships and financial planning services.

But despite the benefits of model portfolios, 27 percent of advisors Morningstar surveyed said they're not ready to completely relinquish control of investment decisions to a model provider.

"The biggest reasons given for not offering models was a preference for customized portfolios and a desire for control over investment decisions," the Morningstar report said.

All told, 41 percent of advisors not using model portfolios said they prefer customized portfolios, far ahead of the 27 percent within that group who perceive a lack of control over investment decisions. Another 25 percent rejected model portfolios over higher costs associated with them, and 24 percent cited the limited flexibility in investment options within model portfolios.

Still, the top challenge holding advisors back from model portfolios may be solved. Drawing from a survey of leading model portfolios providers, Morningstar noted that as of September 30, 2024, assets in custom model portfolios have topped $125 billion, nearly 50 percent higher than where they were on June 30, 2023.

"Customization enables advisors to adjust third-party model portfolios to align with both their personal preferences and clients' needs," Morningstar said. The research defined "custom" as models managed outside a provider's off-the-shelf offerings with some combination of shifting asset allocations, additional asset classes, or swapping funds or vehicles.

Among the 11 providers Morningstar surveyed, Wilshire and BlackRock were the dominant players, which respectively reported more than $50 billion and $45 billion in custom model assets. Taken together, they accounted for nearly three-fourths of the assets in Morningstar's survey.

While still a minor player, Invesco appeared to be emerging as a rising star, posting 536 percent growth in its custom model portfolio assets. T. Rowe Price and State Street also showed notable increases, more than doubling their assets over the period.

"We expect custom models to continue to grow in popularity as more model providers extend their services to meet the growing demand from advisors," Morningstar said.