If you select to keep your existing models during the update, then they shoud be left alone, and not replaced. If you choose to replace them then, yes, the Custom models will be replaced.

My practice is to be safe, and take advantage of any updates to the factory set of models. So I generally use Workbench to back up my existing bundle (all models/presets) before updating the firmware, then I choose to replace all existing models during the update. After doing this I can restore any of the previous models that I want, again using Workbench. The Save/Restore process is simple and fast.