Model Portfolio Growth Stalling While SMAs Gain Favor: Report

Model portfolios may be losing their appeal for financial advisors serving affluent clients, while separately managed accounts appear to be gaining ground, according to a recent report.

Fewer advisors expect to increase their allocations to model portfolios in the year ahead, while advisors plan to increase allocations to SMAs, according to data from a Cogent Syndicated report by Escalent, a data analytics and advisory firm.

Only 22% of advisors surveyed anticipate relying more on model portfolios in the next year, a drop of 5 percentage points from 2022, according to the report. Concerns about underperformance and fees, combined with the need for customization and more comprehensive fund options, are causing model portfolio growth to stall, Escalent found.

Meanwhile, advisors plan substantial increases in their SMA holdings over the next two years, with average allocations expected to reach 26% in 2025, up from 18% today. The trend is greater among advisors serving high-net-worth clients, who expect their average allocations to climb to 31% in 2025 from 23% in 2023.

The findings come from Cogent Syndicated’s Advisor Use of Model Portfolios and SMAs report, which tracks advisors’ use of model portfolios and SMAs, as well as perceptions of leading model portfolio providers and SMA managers. The report examines the competitive landscape for third-party model providers and asset managers and how providers can encourage broader model portfolio adoption.

“The extent to which advisors employ model portfolios and SMAs has the potential to significantly impact how asset managers operate within the wealth management industry,” said Meredith Lloyd Rice, vice president at Escalent. “Despite expectations that advisor reliance on model portfolios would grow, we’re seeing a leveling off in adoption. Advisors are reevaluating whether model portfolios offer the performance and sophistication their more-affluent clients demand.”