Model Portfolios Gain Popularity: Advisors, Take Note

Model portfolios, which provide financial advisors with a prebuilt framework for investment portfolio design, are surging in popularity. Assets in third-party model portfolios surpassed $645 billion as of March 2025, according to the financial services firm Morningstar. ¹ That’s an estimated increase of 62% from June 2023. Here’s what financial advisors should know about the model portfolio landscape and the pros and cons of these financial vehicles. 

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What Is a Model Portfolio?

Model portfolios typically provide a framework for asset allocation based on clients’ risk tolerances. Financial advisors may use models to outsource some investment management duties, freeing up time to focus on other client needs. Characteristics of model portfolios may include: 

• Asset allocation or fund selection recommendations for multi-asset portfolios
• Security selections in specific asset classes to complement preexisting portfolios
• A focus on tax-efficient investing

Advisors access model portfolios through a variety of channels, including wirehouses, broker-dealers, independent technology platforms, model marketplaces and paper portfolios. The level of diversification and overall quality of model portfolios is largely influenced by the channel that offers them. 

Model portfolios can hold a variety of assets, though some prove more popular than others. Some of the assets getting the most attention from model portfolio managers include:

• Active bond exchange-traded funds (ETFs)
• Active equity ETFs
• Separately managed accounts
• Interval funds
• Defined outcome ETFs
• Cryptocurrency

According to Morningstar, model portfolios that primarily rely on active ETF strategies captured $165 billion of inflows through the first five months of 2025, significantly outpacing other types of assets. Meanwhile through the first three months of the year, 44% of model portfolios included at least one active ETF. Interval funds, meanwhile, are increasingly offering investors access to private markets through model portfolios. 

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Rising Popularity of Model Portfolios

One type of model portfolio in particular is gaining ground among investors. Custom model portfolio assets totaled just over $184 billion in March 2025, according to Morningstar. Two firms, Wilshire and BlackRock, dominate the competition with 66% of surveyed assets held between them. 

What are custom model portfolios? Morningstar defines them as models that are managed outside a provider’s off-the-shelf offerings. Customization options include:

• Substituting funds or investment vehicles
• Incorporating additional asset classes
• Consolidating fund lineups
• Adjusting asset allocations or trading frequency

Many advisors surveyed by Morningstar said they charge no additional fees for custom model portfolios, which may add to their appeal for investors. The Chicago-based financial services company says that custom model portfolios offer a middle ground where advisors could “still reap the benefits of models while retaining some discretion over investment decisions.”

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The Tradeoffs of Using Model Portfolios 

For financial advisors eyeing the pros and cons of model portfolios, here are five common factors to consider. 

Costs: Low fees may give model portfolios a competitive advantage over peer mutual funds. In 2024, the average model portfolio cost 38 basis points, compared to 53 basis points for the average unbundled mutual fund. 

Outsourcing: By outsourcing some or all of their investment management responsibilities, financial advisors may focus on other aspects of their businesses. That may mean more time to direct toward client communications, marketing, compliance and other time-consuming tasks. 

Tax efficiency: Because model portfolios offer individual ownership of their underlying holdings, advisors can manage a client’s tax bill by making trades. This is not available through asset-allocation mutual funds, Morningstar says. This approach, however, can be difficult to implement at scale. 

Additionally, portfolio providers may have offerings that focus on tax-efficient holdings. Approximately 12% of the models in Morningstar’s database focus on tax efficiency. 

High-net-worth clients: On the flip side, advisors may be wary of outsourcing the important task of investment management. They may need to take a more customized approach with certain high-net-worth clients, integrating private equity or hedge fund investments, for example. 

Implementation vs. customization: Morningstar notes that more assistance in rebalancing, trading and monitoring can “hamper” a model portfolio’s ability to offer customization. 

Bottom Line

Model portfolios continue to gain traction due to ease of use, low fees and time-saving characteristics. As they grow, advisors should keep an eye on the upsides and downsides of using these financial tools and stay ahead of emerging trends.

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