For Bloomberg, Nir Kaissar shares his thoughts on why Blackrock’s model portfolio business is lagging in terms of adoption, and why he believes this will continue. The purpose of model portfolios is to simplify the investing landscape for investors and advisors given the abundance of funds to build a portfolio. 

Now, Kaissar believes that there are too many model portfolios which is creating additional unnecessary complications for advisors. Some advisors will stick to model portfolios from a major asset manager like Blackrock or Vanguard given a strong brand name and lower costs. 

Currently, model portfolios account for about $4.2 trillion in assets, and this is expected to double over the next 5 years. While Kaissar sees this as a positive for investors due to lower costs and more transparency, he doesn’t share the industry’s optimism about the growth trajectory of model portfolios since many advisors don’t have a financial interest in recommending the product for clients. 

In fact, many advisors would be giving up revenue if they moved all their clients into model portfolios. This is also reflected in mutual funds having an average annual expense ratio of 1.3% per year,, while model portfolios’ average expense ratios tend to be between 0.15% and 0.3% per year. Given the incentives, Kaissar believes that growth in model portfolios will fall short of expectations.

Finsum: Model portfolios are a booming part of the wealth management industry. Yet for many advisors, the incentives don’t support full adoption.