Morningstar To Acquire Ibbotson

Morningstar sells a fee-based money management program through financial advisors, and it also sells a managed account service program through employers and retirement plan providers. Morningstar investment professionals can select mutual funds or other investment options for plan participants, Morningstar says.

Morningstar emphasizes in the prospectus that it goes to great lengths to protect the independence of its investment research. Sales reps, for example, may not contact analysts directly, Morningstar says.

But Morningstar also says in the prospectus that New York Attorney General Eliot Spitzer has sent it a subpoena asking it about the investment consulting services that the Morningstar Associates unit “offers to retirement plan providers, including fund lineup recommendations for retirement plan sponsors.”

The SEC and the U.S. Labor Department have asked for similar information, Morningstar says.

Morningstar representatives were not immediately available to comment on the Ibbotson deal or efforts to protect the independence of the company’s stock and mutual fund research.

Ronald Duska, chairman of ethics at The American College, says companies that combine research with investment management services can avoid problems by disclosing potential conflicts of interest and by using “Chinese walls” to separate research from other departments.

“Sometimes [the walls] work and sometimes they don’t,” Duska says.

Edward Siedle, president of Benchmark Financial Services Inc., Ocean Ridge, Fla., a firm that investigates financial services fraud, says he believes Morningstar may be emulating other firms that started out offering objective advice to investors but eventually increased their revenue by transforming into money managers. “You’re never going to get rich providing objective advice for a fee,” he says.

Siedle recommends that retirement plan fiduciaries look carefully for financial arrangements that may affect the independence of any advice services offered to plan participants.

Disclosing financial arrangements is a start, but “disclosure is not always a cure” under the Employee Retirement Income Security Act of 1974, Siedle says.

Instead of simply disclosing the possibility that conflicts might exist, employers and their retirement plan advisors should consider offering plan participants a choice of several different advice services, along with strong warnings about the possibility that financial considerations may affect the independence of the advice offered, Siedle says.