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Retirement Planning > Retirement Investing

Morningstar To Acquire Ibbotson

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Morningstar Inc., Chicago, says it has agreed to acquire Ibbotson Associates Inc., Chicago, an investment strategy firm, for $83 million in cash, “subject to adjustments for working capital and certain make-whole payments.”

Morningstar hopes to close on the Ibbotson deal by March 31, 2006.

“This acquisition is a logical move that will further strengthen Morningstar’s institutional and advisor businesses,” says Morningstar Chairman Joseph Mansueto.

Morningstar is best known for rating mutual funds, and, these days, Ibbotson is probably best known for giving individual investors advice about allocating assets.

But completing the Ibbotson deal also would make Morningstar one of the largest independent providers of managed retirement accounts in the industry, Morningstar says.

Morningstar, which went public in May, generated about $180 million in revenue in 2004. It has $226 million in managed retirement account assets and $1.3 billion in managed portfolios.

Ibbotson generates about $37 million in revenue per year, but it manages $3.5 billion in managed retirement account assets.

Financial services companies that recently have started using Ibbotson Associates to help customers allocate customers’ assets or actually allocate the assets include units of American International Group Inc., New York; MetLife Inc., New York; Nationwide Financial Services Inc., Columbus, Ohio; and Principal Financial Group Inc., Des Moines, Iowa.

Roger Ibbotson, a finance professor, founded the firm in 1977. Today, it has 150 employees and is known for efforts to help investors develop a long-term, allocation-based approach to investing.

Roger Ibbotson and Michael Henkel, president of Ibbotson Associates, plan to stay with Morningstar after the acquisition is completed, Morningstar says.

When Morningstar went public in May, it noted in its prospectus that three units–Morningstar Investment Services Inc., Morningstar Associates L.L.C. and mPower Advisors L.L.C.–are registered as investment advisors with the Securities and Exchange Commission.

The Morningstar Investment Services unit also is registered with the SEC as a broker-dealer.

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.


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