For the past decade, the asset management industry treated the active-versus-passive debate like a religious war. On one side stood the champions of traditional active management, clinging to five-star mutual funds, legacy OEICs, and the gospel of manager discretion. On the other stood the passive purists, brandishing market-cap weighted index trackers and racing fees down to the zero bound.
While the industry was busy debating that false dichotomy, the ground shifted beneath their feet. The most disruptive trend sweeping wealth management across the US and the UK today is not the triumph of passive investing over active. It is the silent, systemic repackaging of the entire active management complex into exchange-traded structures, driven almost entirely by the relentless rise of Model Portfolio Services (MPS). Active ETFs are not merely a retail novelty. They are the Trojan Horse that model portfolio managers are using to quietly dismantle the traditional fund architecture.
The Trillion-Dollar Supply Chain
To understand where the UK market is heading, one only needs to look at the gravitational pull of the United States. The US asset-allocation model portfolio market is on track to breach $2.9 trillion according to Cerulli Associates. Behind that astronomical headline lies a radical transformation in the plumbing of portfolio construction. Asset managers did not launch hundreds of actively managed ETFs over the past twenty-four months because retail day-traders suddenly developed an appetite for fundamental equity analysis or dynamic factor tilts. They launched them because model portfolio gatekeepers demanded them.
According to Morningstar data, 44% of US model portfolios now hold at least one active ETF, a figure that was negligible just five years ago. Discretionary model allocators managing billions across turnkey asset management programs (TAMPs) and mega-RIAs simply refuse to accept the operational friction, sluggish end-of-day pricing, and opaque holdings disclosures of legacy mutual funds.
They wanted active management, unconstrained credit, dynamic duration management, concentrated equity alpha – delivered as a low-cost, liquid, and digitally tradable building block. The active ETF was engineered to solve that exact operational brief. It is the institutional engine powering the multi-trillion-dollar model boom.
The UK’s 7.4% Asymmetry: A Dam Ready to Burst
Now turn your gaze to the UK wealth management landscape. According to Platforum's UK Wealth Management: Platform MPS report, the UK platform MPS market has been compounding at an extraordinary 27% CAGR over the past five years. Model portfolios now control between 16% and 20% of all discretionary wealth assets in the UK, becoming the undisputed default recommendation for nearly a third of financial advisers. The operational logic of outsourcing portfolio management to risk-targeted models has completely conquered the advisory market.
Yet beneath that triumph sits an astonishing anomaly: ETFs still account for only around 7.4% of total UK MPS holdings. While US model managers build multi-trillion-dollar portfolios almost exclusively out of ETFs, British MPS providers remain tethered to traditional open-ended investment companies (OEICs) and unit trusts. Why? Not because OEICs are superior investment vehicles, they carry higher operational drag, opaque settlement timelines, and administrative overhead. The delay has been driven entirely by legacy plumbing: UK wrap platforms historically struggled with real-time settlement, intraday liquidity aggregation, and fractional share trading.
That institutional inertia is rapidly vanishing. Platform tech stacks are modernising, fractional trading is rolling out across major wealth conduits, and the UK’s active ETF roster on the London Stock Exchange has surged. The UK is sitting on the edge of a structural repricing. When the floodgates open, that 7.4% figure will not gently drift upward - it will violently re-rate to match global norms.
While the US has modernised its plumbing with T+1 settlement, the operational chasm in the UK remains stark. Legacy UK OEICs lock advisers into once‑daily forward pricing and T+2 to T+4 settlement, turning platform model rebalancing into a multi‑day grind.
The FCA itself has warned that UK fund settlement is ‘out of step with modern markets’, leaving allocators stuck with idle cash while trades crawl through outdated infrastructure.
When an allocator tries to re-balance a model using these dinosaur wrappers, they are forced to endure days of uninvested cash drag while waiting for trades to clear. Worse still, they are flying blind on portfolio transparency, relying on summarized factsheets that are often 30 to 90 days out of date, while paying sticky fees historically propped up by platform unbundling.
Contrast that with the brutal efficiency of the active ETF building block. It arms model providers with intraday continuous pricing and deep secondary market liquidity, enabling near-instant execution across underlying accounts the moment a rebalance is triggered. Instead of delayed summaries, allocators receive high-frequency or daily look-through disclosures, all delivered at a compressed, transparent, and clean all-in cost. The settlement is still not instant but will move from T+2 to T+1 from late 2027 onwards.
The Squeeze on Legacy OEICs
For traditional fund managers, the implications of this convergence are sobering. When a model portfolio provider rebalances away from a legacy UK OEIC into an active UCITS ETF, they do not just switch funds, they pull hundreds of millions of pounds of sticky adviser capital in a single trade. As advisers demand lower total expense ratios (TER) under intense regulatory scrutiny and Consumer Duty mandates, model managers are systematically stripping out 75-basis-point active mutual funds and replacing them with 30-basis-point active ETFs that offer identical or superior manager access.
The traditional active mutual fund is being written out of the script. Active management is not dying; it is migrating into a wrapper that satisfies the brutal efficiency requirements of modern model portfolios.
Advisers who continue to view ETFs solely through the narrow prism of ‘cheap passive trackers’ are misreading the market. The active ETF is not competing with passive indexing; it is evicting the traditional active fund from the model portfolio shelf.
The Look-Through Dilemma
There is, however, an uncomfortable truth that model providers must confront as this revolution accelerates: active ETFs introduce active complexity. When an MPS relies on plain-vanilla passive trackers, portfolio behaviour is bound by index rulebooks. Risk models can predict factor drift, geographic weightings, and sector limits with mechanical precision. But the moment an allocator introduces three, four, or five active ETFs into a discretionary model to juice performance or mitigate duration risk, the portfolio ceases to be static.
Active managers trade. They tilt. They run concentrated high-conviction lists. If an active ETF manager decides to rotate aggressively into mega-cap technology or semiconductor hardware to chase alpha, while an unconstrained fixed-income active ETF extends duration into an unexpected yield curve shift, the model portfolio’s overall risk budget can warp in a matter of weeks. The allocator who believes they are running a balanced, moderate-risk model may suddenly find themselves holding dangerous factor concentrations they never signed off on.
In an active ETF world, line items are dynamic. Factsheet-level due diligence completed six months ago is obsolete today.
Moving Beyond the Wrapper
The collision between rapid Model Portfolio growth and the active ETF explosion represents the biggest operational shift in wealth management since the Retail Distribution Review. It solves fee compression, unlocks intraday portfolio execution, and gives advisers access to elite active strategies at institutional price points.
However, scaling this new model requires more than just replacing tickers on a platform. It demands continuous, forensic transparency. To safely harness the active ETF boom, wealth managers need diagnostic look-through analytics that can x-ray multi-asset models in real time- monitoring true factor breadth, detecting hidden manager overlaps, and ensuring that active precision does not inadvertently trigger structural drift.
The Trojan Horse is inside the gates. The question for modern wealth firms is whether their analytics and governance systems are ready to command what comes out of it.
Until next time.
Allan Lane