Morningstar Inc., familiar to independent advisors for its software analyzing mutual funds, has some work to do before its new separate accounts database is taken seriously. That’s the opinion of several advisors we asked to install the software and give it a run.
“It will need to be drastically improved to be considered an institutional level product,” says Scott Brewster, a CFP licensee who works at Glowacki Framson Financial Advisors in Los Angeles.
“It’s weak at best,” says Clark Blackman of Post Oak Capital Advisors in Houston.
“There are many shortcomings in the software when compared to both its sister Principia database and to its competition,” says Matt Crutchmer of Universal Advisory Services in Albuquerque.
But before giving you the detailed evaluation of this separate account add-on to Principia, it’s best to examine the broader picture of what has been happening at Morningstar. The company has been re-inventing itself in recent years. While it has long been a favorite among more sophisticated independent financial advisors, in the last few years Morningstar has been trying to capitalize on its good name and expand its reach.
The Chicago-based firm, which Joe Mansueto started in his apartment in 1984, raised $91 million in July 1999 from Softbank, intent on expanding its Internet presence. Its retail Web site, which Morningstar spokeswoman Martha Conlon Moss says has about 100,000 subscribers paying about $109 a year, is often cited as a top personal finance portal for individual investors, and its mutual fund performance data is made available to consumers through hundreds of newspapers and Web sites. The company has 600 employees in the U.S. and 300 more in its Japanese, Austra-lian, and European offices.
Its Principia core product, with its mutual fund, stock, and variable annuity databases, and its research, analysis, and reputation for integrity, has made Morningstar a favorite among fee-only financial planners and RIAs as well as financial journalists. However, Morningstar has faced significant challenges in the advisor market.
For years it has run a distant second in terms of professional users to a mutual fund software product called Investment View. Formerly known as HySales and owned by Thomson Financial, Investment View historically has been more of a selling tool for brokers, and has been sold to wirehouses, insurers, banks, and B/Ds for use by their entire field forces.
Morningstar, which until recently focused on the fragmented independent advisor business, trailed in selling to the enterprise market. For Morningstar, that is where the most growth is now–with large brokerages, banks, and insurance companies with captive brokers and agents, or with independent reps tied by the home office to proprietary technology platforms.
Use of the Internet–and growing acceptance of software applications hosted on the Web–has given Morningstar a way to grow its business in selling its data, research, and analytical applications to large enterprises with national sales forces. That is the strategic linchpin of selling its Web-based product, Advisor Workstation.
Workstation is a suite of investment analytical tools that is integrated with Morningstar’s mutual fund database. An advisor can give a client a risk tolerance questionnaire, perform a Monte Carlo simulation on the client’s asset mix, and pick mutual funds–all using one tool. Morningstar also has incorporated stock, exchange-traded funds, and variable annuity databases into Workstation. The new separate account manager database is a part of this grand scheme.
Put another way, Morningstar over the past three years has moved from being a company whose main professional customer was the sophisticated independent advisor, specifically the fee-only planner, to become a company whose primary target advisor is the registered rep. If you look at the company’s press releases this year, versus 2001, 2000, and 1999, this pattern emerges clearly, with recent press releases about deals with Nationwide Retirement Solutions, Scudder Investments, Aegon, and Merrill Lynch.
With this strategic business backdrop, the release of a weak separate accounts management product is a bit disconcerting. Advisors should be happy that Morningstar is actively pursuing more sales-oriented professionals to grow its business because that can help lower prices for independent advisors if Morningstar can increase market share, and it will strengthen its products. However, if expanding its market means that the products will be dumbed down, it’s a bit scary.