Is there any way to edit or replace the portraits or avatars?

You can replace the hero's portrait with any bmp file of 98x98 size and 24-bit. Here's how:

1) Download an xcr extractor.
2)Use it to open wbc3/assets/heroes/portraits.xcr
3)Replace PortraitXX.bmp with your bitmap (of same name)

Here is a helpful link: http://wbc3.forumotions.net/t12-wbc-3-hero-editors-xcr-editor-and-army-editor

Thanks!

I have written a step by step tutorial (with images!) on how to do just this thing here: http://www.moddb.com/mods/the-protectors/tutorials/how-to-add-your-own-hero-portrait