Company announces new forward-looking fund rating systems but how to rate advisors still has puzzling aspects

June 13, 2011 — 2:36 PM UTC by Lisa Shidler


Morningstar excited advisors on Thursday when it announced at its conference that it will finally release a mutual fund rating system based on a forward-looking approach.

The move has a watershed quality to it because the company made itself famous — and earned itself some criticism — for its rearview-facing five-star system.

Mansueto says advisors are clamoring for quick, easy and informative analysis about funds and his company is constantly trying to reinvent itself to meet advisors needs.

“I think we’re trying to be responsive to the growing demands from advisors,” Mansueto says. (See details of the new system below.)

Ranking advisors

But Morningstar is also taking a good look at offering a more pioneering service: rating registered investment advisors, according to the company’s CEO, Joe Mansueto. This would be a wholesale change for the company that has always provided information for advisors — not about them.

The issue of helping consumers monitor their advisors took center stage recently when BrightScope began offering a free advisor-search system, Advisor Pages, to consumers. See: BrightScope’s huge advisor database is first search-engine friendly way to connect consumers, advisors

When it launched the program, BrightScope founder Mike Alfred predicted that other firms such as Morningstar would eventually try to craft a similar type of product.

While Mansueto says the company has no immediate plans for launch such a service, he believes BrightScope is on to something with its relatively simple approach of letting consumers learn about advisors.

“We’ve heard from clients that they want something like this,” Mansueto says. We’ve thought about it.”

Before the company could begin implementing such an idea, Mansueto says it needs to figure out the best way to rate advisors.

“There’s a need to find the right advisor for [the consumer] and to evaluate that advisor. There’s a consumer need. Could we help out with that need? The answer is, potentially.”

Rating a universe of fragmented and privacy-oriented RIAs is a complex undertaking and BrightScope experienced intense and immediate pushback from advisors. They argued that the information on the site wasn’t accurate and that they shouldn’t have to pay to correct information. BrightScope eventually said they would allow advisors to make changes for free — but not before raising the hackles of some people in the industry. See: BrightScope sticks to its guns as it responds to outspoken critics of its Advisor Pages

When Alfred talked about BrightScope’s new advisor search in April he was reluctant to discuss online visitors noting that he thought companies like Morningstar might come up with a similar product.

New system

For years, Morningstar has been criticized for its “star ratings” and this fall the company is introducing forward-looking analyst- driven global fund ratings. The company will still keep its star ratings, saying this new system will be a supplement.

As part of the new system, Morningstar will give funds one of five ratings – AAA, AA, A, Neutral or negative. If analysts give a fund an AAA, AA, or A, it means Morningstar thinks highly of the fund going forward and believes it will outperform its peer group. If the company gives it a neutral rating then Morningstar doesn’t believe it will deliver standout returns but doesn’t believe the fund will significantly underperform.

A negative rating means the fund has at least one significant flaw that will significantly hamper its future performance.

RIAs are optimistic about the company’s new program and can’t wait for Morningstar to launch it this fall. For years, RIAs complained about the star system and now that Morningstar is changing it, Matthew MacEachern, a portfolio manager at RIA Emerald Asset Advisors, LLC in Weston, Fla. says he may begin looking at Morningstar’s analysis.

“We never even used the Morningstar system to choose funds at all,” he says. “We didn’t even look at them.”

MacEachern’s firm (which manages two mutual funds) manages money for affluent clients who have at least $2 million in assets on average. His firm manages about $400 million in assets.

“I’d like to see the methodology behind it,” he says. “Everyone’s been so critical of their system. Even Morningstar didn’t believe in it. At least their trying to improve it and that’s a good thing.”

Don Phillips, president of fund research at Morningstar, says the new rating system will use the data from its global research team and will help advisors and investors better choose funds.

“Unlike many of our competitors, our ratings scale is unique because we’re not identifying good funds but mediocre and poor funds as well,” he said in a statement.

Other plans:

The company is also looking to introduce other new products later this fall, Mansueto says, which he believe will benefit the 250,000 advisors who work with Morningstar.

Advisors are constantly clamoring for more software products, he says.

As part of that endeavor, Morningstar intends to launch a new auto rebalancing product by the end of the year that will help advisors automatically rebalance a clients’ portfolio based on the tax lots and the most tax efficient strategy.

In addition, his firm is constantly looking for new ways to help advisors craft easier retirement income solutions for advisors, a hot topic with baby boomers.

Hanging with advisors

Mansueto says he loves to get the pulse of advisors by meeting with them at his firm’s giant conference, which had record-attendance of nearly 4,000 attendees last week.

The conference has grown so big that it can now longer be hosted at the downtown Hyatt and is now on Chicago’s South Side at the McCormick Place – a gigantic Chicago venue known for hosting the annual Auto Show later in the summer.

Only one hotel – the Hyatt – is close to McCormick Place and it fills up rapidly leaving many advisors no choice but to take over-flow rooms in hotels downtown. McCormick Place isn’t close to restaurants and many advisors take shuttles provided by fund-companies to attend evening dinners downtown.

Mansueto is often seen walking around the crowded exhibit hall. When he’s strapped for time, Mansueto encourages advisors to e-mail him so he can meet them for lunch after the conference. When asked by advisors if Mansueto reads their e-mail, he reassures them that he does and replies a timely fashion.

Mansueto and Phillips are mainstays at the exhibit hall and are frequently meeting with advisors and talking shop. He says those conversations have helped him to realize when it’s time to make changes.

“I really like talking to advisors because it helps us to figure out ways to add to our data content,” he says. “It’s more evolutionary than anything.”

Mentioned in this article:

Morningstar, Inc.
Top Executive: Joe Mansueto

BrightScope, Inc.
Data and ratings for RIAs

Share your thoughts and opinions with the author or other readers.


Bill Winterberg said:

June 13, 2011 — 3:02 PM UTC

I’m pleased to read Mansueto’s commitment to releasing a rebalancing software component to the Morningstar Office platform. It’s a needed function that will help Office catch up to its competition.


Jeff Spears said:

June 13, 2011 — 3:22 PM UTC

Rating RIAs will be very helpful to the growth and professionalization of the industry. This will force RIAs to take discretion on their client’s portfolios to allow Morningstar to compare their performance. All good news and hopefully the end of self reported non discretionary RIA performance!

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