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Advisors Favor SMAs Over Model Portfolios, Citing High Fees, Limited Customization

The adoption of model portfolios hasn’t become as widespread as the industry expected when they came on the market.

Financial advisors are focusing more of their efforts on growing separately managed accounts, while putting model portfolios on the back burner, according to a study by data analytics and advisory firm Escalent.

An Escalent survey of 403 financial advisors found they expect to increase average SMA allocations from 18% to 26% between now and 2025. Advisors who serve high-net-worth investors expect to increase SMA allocations from 23% to 31% over the same period.

The share of advisors who said they will rely more on model portfolios over the next year fell by five percentage points since 2022, to 22%.

As model portfolios become more sophisticated, the expectation in the financial services industry was that advisors would rely on them in order to have more time to build relationships with clients and grow their books of business, said Meredith Lloyd Rice, vice president with Cogent Syndicated, a division of Escalent that conducted the study.

“What’s interesting to us is we haven’t necessarily seen that happen yet, there’s been a plateauing in adaption of these model portfolios,” Lloyd Ride noted. “There seem to be continued barriers to use among advisors—concerns about underperformance, about value for the money, about the quality and breadth of investment options.”

Advisors cited lower fees, more investment options, including alternatives, and greater customization among the top improvements that would entice them to use model portfolios for more affluent clients, Lloyd Rice said. Tax management might be among the biggest advantages of using SMAs vs. model portfolios, but personalization also tends to be important for more affluent and sophisticated investors, she noted.

Zephyr, a subsidiary of Informa plc (the parent company of that provides financial technology software for investment professionals, has been seeing the same trend within its database, according to Market Strategist Ryan Nauman.

“Clients are demanding a more personalized service from their advisors, including customized investment solutions,” he said. “While model portfolios offer scalability, SMAs offer a more customizable investment solution which better aligns with the growing trend of increased personalization.”

Research firm Cerulli Associates, which specializes in asset management, previously forecast that assets managed through SMAs would surpass $2 trillion in 2024.

Escalent’s survey was conducted online between October and November 2023. Advisors whose responses were included in the survey had an active book of business with at least $5 million in assets.

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