More financial advisors are teaming up with model portfolio providers to use their models as a foundation for customization. Custom model portfolios can be adjusted to meet the specific preferences of advisors and/or investors. Morningstar estimates custom model portfolio assets have grown to more than USD 125 billion as of Sept. 30, 2024, up almost 50% from June 30, 2023, as detailed in Morningstar’s Guide to Customizing a Model Portfolio.
Model portfolios offered by asset managers and third-party strategists have become the backbone of many financial advisors’ practices. Outsourcing some, or all, of their investment management responsibilities lets advisors focus on more holistic financial planning and on managing their business.
Despite the advantages of model portfolios, Morningstar’s Voice of the Advisor Market Research Program noted that 27% of advisors do not offer them. A preference for customized portfolios was by and far the largest sticking point, followed by a perceived lack of control over investment decisions. Custom model portfolios provide advisors with a middle ground where they still reap the benefits of models while retaining some discretion over investment decisions.
Custom Model Assets Are Growing
Currently, a few asset managers dominate the custom model portfolio arena, led by Wilshire and BlackRock. Since Morningstar’s 2023 US Model Portfolio Landscape report, the top custom model portfolio providers have all notched gains in assets. For instance, Invesco’s custom model business swelled 536% to just over USD 8 billion while BlackRock grew by 84% to USD 45 billion. But Wilshire remains the largest player with over USD 50 billion in custom model assets.

Asset managers are extending their services to meet the growing demand from advisors for custom model portfolios, and we expect that growth to continue. The sector should keep getting more competitive as more model providers enter the fray and expand their services.
Custom Model Portfolios: What They Are, and How They Work
Custom model portfolios are developed by modifying an off-the-shelf provider’s portfolio to accommodate an advisor’s preferences and/or a client’s needs. Advisors work with asset managers, using their model portfolios as starting points for customization. Custom can mean different things, but some of the most common customization options include fund substitutions, additional asset classes, lineup consolidation, strategic asset-allocation adjustments, and trading frequency.
For example, an advisor may want to add an index exchange-traded fund to a model composed of actively managed funds to lower fees. You could substitute an index ETF (or ETFs) for the actively managed fund you want to replace.

Some Tips for Customizing Models
There are lots of ways to customize a model, but advisors should be mindful of how each modification could change the portfolio’s composition and risk profile. It’s important to think about the portfolio impacts before implementing changes to avoid unwanted exposures or shifting the portfolio away from its objective. That’s why it may be a good idea to keep strategic asset-allocation changes to within a reasonable band, such as a 5-percentage-point loss or gain around the baseline portfolio.
If substituting funds in and out, pay attention to the asset-class and sub-asset-class allocations. For example, if you are substituting in a concentrated, actively managed growth stock fund in place of a broad stock market index fund, the portfolio’s equity sector allocation will likely shift, and it could develop a growth bias in the equity sleeve. That kind of bias is likely to change the total portfolio’s risk profile. This is another thing to keep in mind when modifying the portfolio to include riskier areas of the market like growth stocks or high-yield bonds.
Morningstar’s Guide to Customizing a Model Portfolio explores various scenarios of how portfolios can change, or not, through customization. In one instance, we examined a scenario where an advisor wanted to get more income from the portfolio. That led to swapping in a flexible actively managed global bond fund for an index-tracking global bond fund and a high-yield index fund for a long-term bond fund. Those shifts, among others, added considerably more credit exposure to the portfolio. In a recessionary environment, the extra credit risk may lead to steeper drawdowns that could make it hard for the client to stick with the portfolio to reach their goals.

Note: The portfolios in Morningstar’s Guide to Customizing a Model Portfolio use off-the-shelf models reported to Morningstar as a starting point and are for illustrative, educational, or informational purposes only. This information should not be relied upon as investment advice, research, or a recommendation by Morningstar. Only an investor and their financial professional know enough about their circumstances to make an investment decision.