Models and actors have been having their photographs retouched since the very beginning. Retouching is not something that started with photoshop and digital cameras. It took a lot more skill in ye olden days (no undo button

) but it still happened.
The key is retouching the right way. There are many things you should and shouldnt retouch in a portfolio picture. Bad photography is one of the things you definately can and should sort out in photoshop. A modelling portfolio should reflect how photogenic the model is, how well they pose and how varied their range is - not how much money they spent on the photographer.
There are many ways to improve a portfolio image, without making it unacceptable to a modelling agency. With the actual model, remember to only retouch non-permanent blemishes - eg zits, cracked lips, eye bags (only if they're due to a late night, not a permanent feature)