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Morningstar Launches Best-Interest Tool to Help Advisors Explain Rollovers

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Morningstar launched Thursday a Best Interest Scorecard, a comprehensive tool to help advisors explain to current and prospective clients portfolio and service offerings they propose via a rollover or other process.

The tool, available as an add-on feature in Morningstar Advisor Workstation, enables advisors to assess the client’s current investment plan, changes the client could make within their current plan, as well as the new portfolio and service offering that the advisor is recommending.

The Best Interest Scorecard “provides analysis of the proposed plan, once it’s assembled by the advisor, along three dimensions: Investment Value, Client Fit and Service Value,” Nicolas Owens, head of technical marketing at Morningstar, told ThinkAdvisor on Thursday. “I would describe it as a handy readout on the overall costs and benefits of the proposal, including the underlying investments, portfolio construction and the financial planning services provided.”

Owens said the scorecard was “inspired by” the Department of Labor’s fiduciary rule, “but we took the approach of designing it to be flexible for lots of different proposal scenarios.”

The No. 1 use of the scorecard for advisors will likely be for 401(k) to IRA rollovers, as rollovers are “where a lot of advisors find new customers,” Owens said.

While most folks “will inevitably say the [DOL fiduciary] rule is delayed, … if you want to do business in a fiduciary way, this is a helpful tool,” Owens added.

Tricia Rothschild, chief product officer at Morningstar, noted in a statement announcing the scorecard that “investors today are demanding a more collaborative and transparent approach to investment advice, which is driving advisors to better demonstrate and document the value of their advice.”

With the scorecard, “advisors now have a rigorous, convenient way to assemble the data they need to consider investment options, investors’ preferences and financial situations, and other factors to ensure their advice is in the best interests of prospective or actual clients,” she said.

David Blanchett, head of retirement research at Morningstar Investment Management LLC, further explained in the statement that “for the first time, advisors can provide investors with a clear, concise synopsis of how their proposal could benefit them.”

The benchmark methodology “is unique as it combines ratings and analytics from Morningstar’s comprehensive investment database with retirement plan data and aggregation capabilities to give advisors the most up-to-date and rigorous information we can get on retirement plan fees, lineups and participant portfolios.”

Morningstar described the three dimensions as follows:

  • Investment Value: The expected returns and costs of 97.5% of U.S. mutual fund and ETF assets, powered by [its] research team’s ratings and methodology.
  • Client Fit: Overall efficiency of the asset allocation relative to Morningstar Target Risk Indexes and the ability of the plans to deliver a portfolio that matches the client’s risk profile. In a sample of retirement portfolios, Morningstar found that 90% were aligned with the asset allocation and diversification embedded in the Target Risk Indexes and 10% were not.
  • Service Value: The net benefit of financial planning services provided, dynamically mapped to the investor’s needs. Morningstar research has revealed that these services can add more than 20% to an investor’s income in retirement before fees. Examples include life insurance advice, estate planning, behavioral coaching, rebalancing and annuity purchase decisions.

— Check out Making the Case for Strategic Beta as Fees Plunge on ThinkAdvisor.