New study shows advisors choosing SMAs over model portfolios

Fewer financial advisors expect to increase allocations to model investment portfolios over the next year, opting for SMAs instead.

Models are growing less super lately – at least when it comes to advisor investment portfolios.

According to data released Tuesday from analytics and advisory firm Escalent Financial Services, fewer financial advisors expect to increase allocations in model investment portfolios over the next year, but instead are opting for separately managed accounts. The report attributes this shift to advisors seeking increased customization and their desire to align investment strategies with client expectations.

“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,” Meredith Lloyd Rice, vice president at Escalent, said in a statement.

The report showed only one in five (22 percent) advisors anticipates relying more on model portfolios in the next year, a five-percentage-point drop from 2022. Concerns about underperformance and fees, in addition to the demand for greater customization and increased fund options, are behind the stalling growth of model portfolios, the report said.

Meanwhile, the study shows advisors anticipate substantial increases in their SMA holdings over the next two years, with average allocations projected to reach 26 percent in 2025, up from 18 percent currently. The report revealed that this trend is even more pronounced among advisors serving high-net-worth clients, who expect their average allocations to climb from 23 percent in 2023 to 31 percent in 2025.

“Despite expectations that advisor reliance on model portfolios would grow, we’re seeing a leveling off in adoption,” Lloyd Rice said. “Advisors are reevaluating whether model portfolios offer the performance and sophistication their more affluent clients demand.”

Despite the fact that only three in 10 (29 percent) advisors using model portfolios reported increasing their use over the last year, those who did reportedly said they appreciated “having more time to focus on engaging with clients and building relationships.”

“For advisors serving high-net-worth clients, customization and tax management is key, and this is one of the factors fueling the growth of SMAs and direct indexing,” Lloyd Rice added.