With Us or Against Us?

Long-time advisor partner Morningstar is getting i

Long synonymous with mutualfund star ratings, performance statistics, and fund analysis, Morningstar Inc. has provided advisors and consumers with information to aid them in choosing mutual funds. While Morningstar would inform them about potential ingredients for their portfolios, it was up to investors to write their own recipes and concoct the right stew.

Starting in November, however, the firm will try its hand at home cooking. The Morningstar Managed Portfolios program, offered by the firm's RIA subsidiary, Morningstar Investor Services, will provide an array of mutual fund portfolios for financial planners to offer clients. Led by Art Lutschaunig, who previously managed more than $11 billion in portfolios at Fidelity, and Tom Florence, previously of PBHG and Fidelity, the program is designed to help planners make the most of mutual funds. "So much of the innovation of the last couple of years has begun with the premise that the problems with the investment markets are mutual funds and professional advisors, and if you can get them out of the way, you'll have a better solution," says Don Phillips, managing director of Morningstar, who cites Foliofn and E*Trade as examples of such innovation. "We think mutual funds and professional advisors are part of the solution, and we wanted to build a program that highlighted the benefits of both."

Phillips is quick to point out that the program isn't for everyone, acknowledging that diehard number crunchers will probably sniff with disinterest. "There will be advisors who say, 'Hey, that's nice, but it's not for me,' and we recognize that," he says. Not everyone realizes just how diverse the investment community has become, he notes; on the heels of the advisors who joined the industry because they loved picking investments is a new generation that has expertise in other areas, such as banking, estate planning, or taxes, and is now being asked to offer comprehensive financial planning services. "We're reaching out to the planner who is looking to farm out the investment part of their overall services the same way an investment-oriented planner might farm out the tax or estate planning work," he says, adding that some investment-oriented planners have suggested they might use the program for smaller accounts.

The price tag for the program starts at 35 basis points on the first $100,000 in the portfolio, decreasing to 15 bps on anything over $2 million. The managed portfolios are not funds of funds; rather, clients will have direct ownership of the funds in their portfolios. Clients who so desire will be able to customize their holdings according to their tax needs, time horizons, or personal wishes. While use of Morningstar's Advisor Workstation, the online version of Principia Pro (see page 36), won't be required, the programs will be built so they can be integrated with Workstation.

While critics argue that managing money while also publishing fund analyses poses a conflict of interest for Morningstar, Phillips dismisses the notion. "If an analyst says favorable things about a fund, that can't influence the price of the fund--if it affected anything, it would only affect the inflows or outflows," he says. "So there's no way an analyst can try to prop up the performance of the managed portfolios by saying favorable things [that aren't true]."

As for the argument that the managed portfolios will make life harder for advisors by improving their competitors, Phillips responds, "I've heard the criticism that 'Gee, you're sort of arming my competition; now these other people are going to have these services.' And while I'm sympathetic to that, what it really boils down to is, 'Gee, now bad advisors can give good advice, too.'" And, stepping past the concern for one's own market share, that wouldn't be such a bad thing at all.--Karen Hansen Weese


Paper Pushed

Three Senators claim the SEC is overworked and underfunded

Wall Street's watchdog has become a mangy mutt in need of grooming with a fine-toothed comb. The General Accounting Office, at the behest of Senators Paul Sarbanes (D-Md.), Jon Corzine (D-N.J.) and Christopher Dodd (D-Conn.), is investigating whether the Securities and Exchange Commission is adequately funded and staffed.

In a letter to the GAO, the senators cite technology, the Internet, and the Gramm-Leach-Bliley Act as just a few of the developments that have added to the SEC workload. Specifically, the senators say they want the GAO to study how the SEC's resource levels are impacting its ability to regulate, examine, and review broker/dealers, investment companies, investment advisors, corporate filings, and securities markets.

"Internet fraud continues to be prosperous, and we have seen the SEC being forced to reduce headcount," says John Baker, a securities lawyer with Stradley, Ronon, Stevens & Young in Washington, D.C. "Some people have argued that the SEC has been underfunded for decades, but the disparity has become glaring within the past few years. The SEC's fees have raised billions of dollars, but its budget has stayed relatively stable in the face of a much larger financial market for it to regulate."

The GAO report is due by December 31. Baker says that date will be too late to affect the SEC's budget for fiscal year 2002, which begins October 1, 2001, but it could affect funding levels for the following fiscal year.

The SEC also referred to resource limitations when it rebuffed the Investment Company Institute's (ICI) request that folios be regulated as mutual funds, which was one of new SEC Chairman Harvey Pitt's first actions. "The SEC letter suggests that the folio programs are new and few in number and that folio sponsors already are subject to regulation as broker/dealers, and, in some cases, investment advisors," Baker says. The letter ultimately states, however, that the SEC has limited resources and must balance competing priorities.

Chris Wloszczyna, an ICI spokesperson, says the fund industry's trade group has no plans to re-petition the SEC in the near term.

While folios, baskets of stocks that can be traded online, may not pose significant competition for mutual funds now, new folio entrants are cropping up every day. But consumers haven't embraced folios as quickly as their sponsors expected. And the shaky markets have spelled disaster for at least one nascent folio provider. Netfolio announced last month that it was closing its doors to individual investors.--Melanie Waddell


A Working Workstation

As promised, the Advisor Workstation from Morningstar is in full swing. Workstation is a beefed-up version of Principia Pro that is available to anyone who is running Internet Explorer, preferably with a high-speed Internet connection, and is willing to pay the price.

We decided to do a test run to find out what the new Web-based application can do that the CD-ROM-based Principia cannot. With the help of Chris Boruff, president of Advisor Business at Morningstar, to guide us, here's what we found.

First of all, as Boruff explains, "Morningstar has taken everything that's available in Principia and moved it online." In addition, Boruff says that Workstation's tools are more client-centric. "When you first launch the Workstation you land on a page that presents your book of business, and all of the activity branches out from there. Advisors can do analysis of a particular client's portfolio and holdings. They can take a look at or revisit a client's target asset mix that has been established. They can generate statements or proposals for clients. The focus has moved from the research-based focus of Principia to a primary focus on client management."

One major feature of Workstation is its report builder tool. In Principia you can print out reports, but you have to staple them together to make a complete package. Workstation has streamlined this process. "In Workstation you can go to Report Builder and move one or multiple clients into the report tool," Boruff explains. "You can build a report by selecting different pages you want to include for one or many clients." And Boruff says a multi-goal planner will be added to Workstation's asset allocation tool in November.

Some 1,400 advisors have taken advantage of Morningstar's free 30-day trial, Boruff says. But Workstation doesn't come cheap. Full Workstation capabilities cost $5,000 per year, although you can pick it up for $4,000 for a limited time. This is a substantial increase from Principia, which can be run with the basics for $400 per year and costs up to $2,500 for the loaded version.--Josh LeBaron

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