Advisors’ reliance on model portfolios nears the $1 trillion mark, Morningstar finds

With advisors looking for ways to diversify clients’ investments without having to pick individual stocks, bonds and other assets, it’s little surprise that model portfolios provided by third parties now hold nearly $1 trillion.

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What is slightly astounding, however, is how fast the approach to that benchmark number has come.

In a recent report, the research firm Morningstar found that assets held in model portfolios provided by firms like BlackRock, Capital Group, Vanguard, Goldman Sachs and Morningstar itself have more than tripled since 2021 to hit $943 billion this year. Last year alone, Morningstar found, $42.6 billion flowed into model portfolios offered by third parties to financial advisors.

That’s according to survey results from 32 providers of model portfolios, along with asset-under-advisement totals reported by more than 50 others in regulatory filings.

Model portfolios owe much of their popularity to their ability to meet key needs of both clients and advisors. For clients, they provide an avenue for investing in a wide variety of assets including stocks, bonds, index funds and, increasingly, private markets and other alternatives. For advisors, they offer an easy means of diversifying investor portfolios without having to take the time and risks associated with selecting individual investments.

Gathering 2,000 online responses from a survey of advisors in March, Morningstar reported that the most common reason for using model portfolios was their ability to streamline the investment process (cited by 40% of those polled.) Next in accounting for their popularity was how they provide overall time savings (37%) and then how they allow advisors to concentrate on client relationships and planning (35%).

The research firm Cerulli Associates has noted similar time-saving advantages to third-party model portfolios. In a report last year, it found that advisors who use model portfolios built by outside firms or other partners spend only 10.6% of their work hours on investment management, whereas those who build portfolios on their own spend roughly a quarter of their time on that task. 

Although model portfolios are increasingly delving into the opaque and sometimes risky world of private markets, their standby investment remains exchange-traded funds, or ETFs, often low-cost investment vehicles tracking the performance of widely cited stock indexes like the S&P 500, make up 55.4% of model portfolios on average this year, Morningstar found.

Tracking behind ETFs in the composition of model portfolios were mutual funds (34% on average) and stocks (8.2%).

But, as mentioned, investments in private equity, private credit and other alternatives are starting to appear with greater frequency. Of 29 third-party providers polled by Morningstar, 20 said they plan to, or already do, offer private investments in their model portfolios. Only eight said they have no such plans, while one said the possibility is under consideration.