Within the wealth management space, the primary role of a financial advisor is to work with clients to achieve their financial objectives. In doing so, as part of the financial planning process, the financial advisor selects investments that can help reach those goals. One approach to investing the advisor may offer is to build a customized portfolio, which involves individualized portfolio construction, selection of underlying investments, and ongoing monitoring. On the opposite end of the spectrum are model portfolios designed and monitored by asset managers, investment strategists, or, in some cases, the advisor’s home office. The third broad type of portfolio is in between, where the advisor can take off-the-shelf models and tailor them in a variety of ways.

Each of the three types of portfolios vary in terms of the amount of customization available, the level of effort required to design the asset allocation, and the time spent on ongoing monitoring. Models are composed of a blend of active or passive mutual funds, exchange-traded funds, and, in some cases, alternative investments.

Though model portfolios themselves are not registered products, it is important that fund independent directors understand the potential, and possibly growing impacts these products could have on an adviser’s business as well as the funds underlying the portfolios—including flows, fees, and strategic prioritization.

This article will focus on models built and managed by third parties, specifically those offered by asset managers, and include questions directors can be asking to get—and stay—up to speed.

Third-party, or off-the-shelf, models can be designed as “open architecture” portfolios that include a variety of mutual funds and ETFs, both active and passive ingredients from different fund managers. The mix depends on objectives, risk profiles, and fee structure. Portfolios can also be constructed solely with the investment strategies of the asset manager developing the offering. There is typically no additional overlay fee added to model portfolios to compensate the investment teams for their design and monitoring services.

Model managers offer suites of portfolios where the asset allocation array ranges from total equity to total bond and blends in between that span the full risk spectrum. For example, a suite may contain five to 10 portfolios that sit along the asset-allocation and risk continuum. Additionally, depending on the portfolio construction philosophy of the oversight team, mini suites of models can be offered that include thematic benefits such as tax management, retirement income solutions, an emphasis on domestic or global allocation, ESG, and more.

Once the model lineup is market-ready, the model provider’s strategic accounts teams work with wealth management firms’ home office research groups and model marketplaces. Platform placement often involves an intensive investment review by the home office research team in partnership with approvals by the product and business groups. The model provider also prepares marketing materials, trains the sales force, and develops a plan to launch the portfolios into the marketplace.

To make the models available on wealth management platforms, the model provider transmits the portfolio allocation to the platform through a process called model delivery. The advisor selects a portfolio aligned to the client goals, time frame, and risk profile, then invests into the model that resides on the fee-based platform. When an advisor places a client into the portfolio, the investor is buying shares of the underlying funds/ETFs at the determined allocation. The model provider is responsible for the ongoing monitoring of the portfolio. If a decision is made to modify the portfolio allocations, the new allocation will be transmitted to the platform, and the client’s allocation will be adjusted.

Model Portfolio Trend

During the proposal periods for the Department of Labor’s fiduciary standard and the Securities and Exchange Commission’s Regulation Best Interest, demand for model portfolios grew. While the DoL fiduciary rule was vacated in 2018, the essence of elevating broker-dealers from the “suitability” to fiduciary standard has become an indelible element of the industry. What’s more, Reg BI, which became effective in 2020, imposed a higher conduct standard on broker-dealers, requiring them to act in a retail customer’s best interest. The primary outcomes included an accelerated advancement in the secular shift from commission-based brokerage to fee-based advice, and lower-cost, more transparent fee structures and share classes. Subsequently, wealth management firms expanded their advisory platforms and invested heavily in compliance, monitoring, and disclosure.     

During this DoL/Reg BI regulatory environment, financial advisors began to evaluate how they were managing their practices, including where their time was best spent. Advisors were seeking scale in their increasingly complex practices and began turning to practice management services that could help improve efficiency and reduce risks. Considering the three primary responsibilities within financial advisor practices of client management, portfolio management, and business management, advisors began to turn to trusted third parties that could provide scale—particularly within portfolio management.

From the wealth management firm home office vantage point, the concept of offering advisors professionally managed portfolios on their platforms brought numerous advantages, including risk mitigation, additional choice, and consistency of client outcomes.

Finally, asset managers were eager to deliver suites of models to the marketplace during this regulatory shift.

Industry Outlook

During this regulatory shift, the confluence of advisor demand, home office support, and asset managers expanding their product lines to include model portfolios led to a sharp rise in model portfolio adoption over the past five years.

Morningstar estimates that third-party model portfolios totaled more than $646 billion in assets as of March 31, 2025¹. Today, asset managers like BlackRock, Capital Group, Vanguard Group, and Pimco are among the leading model providers.

Demand for model portfolios remains high, and model providers are responding by continuing to innovate. While ETF models have been available for many years, mutual fund-focused models are increasingly including ETFs to harness the benefits of tax-efficiency, lower cost, and diversification. Firms entering the ETF space can offer ETF models alongside their individual ETFs.

Additionally, the advancement of mainstream access to private equity, debt, and real estate asset ownership is being displayed in models through vehicles such as interval funds, providing investors with additional diversification to alternative investments.   

The bottom line is off-the-shelf model portfolios can deliver scale to financial advisor practices because outsourcing portfolio management can free them up to spend more time with clients. Home office teams can find value in adding professionally built models to their investment lineup because they understand the appeal to advisors and the consistency on the platform. And fund managers have found success in delivering suites of model portfolios to the marketplace.

However, this trend has ultimately been fueled by financial advisors, wealth management firms, and model providers all aiming to deliver on the best interests of the end investor. The clients that purchase these models become shareholders of the mutual funds and ETFs, and delivering on their investment objectives is the end goal for all the participants in this emerging product ecosystem.

In my view, model portfolios have become a highly valuable investment solution within our industry, and I believe they are here to stay for the foreseeable future. For many fund managers, model portfolios have become a core part of the product lineup. And we are seeing innovation in this area, including new ETF models and the emergence of portfolios featuring alternatives. In many ways, as the investment industry goes, so go model portfolios.

Potential Benefits, Pitfalls

From the lens of a mutual fund or ETF manager, offering a suite of model portfolios can come with both benefits and challenges. On the positive side, models can drive an increase in sales and assets. Additionally, accounts that are established in a model portfolio tend to have lower turnover, thus higher retention of assets, making model portfolios a high-value product to the organization. Fund managers that offer models can also see increased utilization of more of their funds because a full spectrum of asset categories are often incorporated into portfolios. Offering models also elevates the conversation in the field from one of individual ingredients (funds/ETFs) to the total portfolio level, which involves portfolio construction philosophy, methodology, and the role the funds/ETFs play in the portfolio.  

On the downside, pitfalls can include the amount of resources model providers need to dedicate to support and service a model portfolio business. To operate a model business, resources are needed within the investment teams, national accounts, sales, marketing, compliance, legal, data analytics, operations, and of course product management. Additionally, having models as a strategic priority could lead to challenging trade-off decisions when considering competing initiatives.

From the wealth management firm perspective, there is limited shelf space and firms are very selective about which model managers are approved, even though most advisory platforms have a robust model menu. So just because a model manager aims to launch a suite of models does not guarantee platform placement. There are also resource considerations such as priorities within the broker-dealer research teams to conduct the intensive due diligence process to review, approve and monitor the portfolio lineups, and evaluate and expand platform operational capabilities to support models and ongoing field oversight.

Finally, from the financial advisor’s angle, model portfolios provide a value-add service that can improve efficiency within their practice, enabling them to spend more time with their clients or on other high-value activities. Models can also strengthen advisor loyalty and deepen relationships with model managers. That said, not all financial advisors are interested in handing portfolio construction over to a third party. In many cases, advisors use a mixture of pre-built and custom-built models within their practice; that mixture depends on the client and account type.

Boardroom Discussions

While not a registered product, model portfolios can have a meaningful impact on mutual funds, ETFs, and alternatives within an asset management firm because the funds serve as the underlying investments within the models.

If the adviser already offers model portfolios, fund independent directors may be familiar with the offering and impacts to shareholders. If not, below are a few questions to consider:

• Is the adviser offering model portfolios?
• If so, what are the business results?
• If not, what considerations led to the decision?
• What does management believe has been the impact on the existing shareholders of the mutual funds and/or ETFs because of adding model portfolios to the product suite?
• Where does the model portfolios business reside in the adviser’s strategic priorities? Will there be an increase, decrease, or stable level of focus in the coming years?

Kris Spazafumo spent her 32-year career at Capital Group, home of American Funds, where she was the head of wealth management product management and led Capital Group’s Portfolio Solutions and Services business, which included model portfolios. She holds deep expertise in investment product management and distribution, mutual fund governance, product oversight, and risk management.

¹ Stephen Margaria, Morningstar, The Rapid Growth of Model Portfolios and What Comes Next (June 17, 2025)