Morningstar: Advisor Use of Custom Model Portfolios RisesMorningstar: Advisor Use of Custom Model Portfolios Rises
The firm estimates that assets in custom models increased by nearly 50% between mid-2023 and late 2024.
As part of the broader trend of increased adoption of model portfolios, advisors are increasingly working with asset managers to build custom models to offer to clients, according to new research from Morningstar. Morningstar estimates that custom model assets have grown to more than $125 billion as of Sept. 30, 2024, up almost 50% from June 30, 2023, based on a survey of leading model portfolio providers.
“That growth comes from client demand,” said Stephen Margaria, a Morningstar manager research analyst who co-authored the report. “Advisors want portfolios that are more tailored to their clients’ needs. Custom models are a middle ground between off-the-shelf models and do-it-yourself portfolios built by advisors. Custom portfolios can offer the best of both worlds. You’re still working with an asset manager to outsource the investment management, but advisors have some say in the investment decision-making.”
In a custom model, an advisor can work with an asset manager, BlackRock, for instance, and take an existing model portfolio and make substitutions such as allocation tweaks, adding new assets (such as crypto or private markets), changing the active/passive fund mix, switching some of the managers if the advisor has preferred partners, or changing how often the portfolio is rebalanced.
The custom market is dominated by two players—Wilshire and BlackRock—who Morningstar estimates account for 75% of the assets in custom models. But Margaria said he expects other players to enter the fray, given the growth in interest.
Advisors “get the industrial power of BlackRock coupled with their brand and how they want to talk about their business,” Joe DeVico, co-head of BlackRock's U.S. wealth advisory business, told WealthManagement.com in a recent interview. “We’ve had a lot of success there and because of our scale, we are able to do these custom models across our platform.”
The Morningstar report cautioned, however, that advisors should not go too far when making their tweaks.
“At some point, if you do too much, it becomes your model,” Margaria said. “What is the point of partnering with an asset manager if you’re just doing something that you could have done yourself?”
Generally, asset managers suggest that advisors do not adjust allocations by more than 5% from the base portfolio, for example.
In terms of future growth, Morningstar found about 73% of advisors it surveyed currently use third-party model portfolios. Of the 27% that don’t, however, the two top reasons identified for not using model portfolios were a desire for customization and a perceived lack of control over investment decisions—two things that custom models could solve.
“That’s a middle ground, and it could address those concerns offered by advisors,” Margaria said.
