Morningstar stomps into the 'risk score' game with big weapons, miniscule market share and 'love' from Aaron Klein
The Chicago manager of $244 billion -- and ratings whiz -- will de-nerdify FinaMetrica, use portfolio-side data and push out risk software to 180,000 desktops-- all for free
5 min read- Morningstar enters the risk software market by integrating FinaMetrica into its Advisor Workstation.
- Riskalyze welcomes Morningstar's entry, viewing it as validation of the risk-assessment software industry.
- Morningstar aims to differentiate by focusing on investor risk, not just investment risk.
- Riskalyze maintains a significant market share lead due to its first-mover advantage.
Brooke's Note: As a five-decade cyclist I have occasionally crashed my bicycle. I have sustained serious injuries ranging from a separated shoulder to a broken hip. Yet, no matter how many times I hit the pavement, my first reaction is to anxiously check my bicycle for damage. It's usually mostly fine. When I hear the growing chorus of ardent proponents of risk software, I am reminded of this materialistic bent. All the attempts to quantify the unquantifiable in finance have always centered around investments and products. Now we're quantifying people. Morningstar is finally getting around to it in 2021 after spending decades and infinite energies rating active mutual funds. Talk about chasing your tail. Now that index funds have largely made a mockery of active investing, software engineers and their product bosses are measuring people the way you might before assigning them a bike frame -- except with regard to their risk. It has a "soft discipline" feel to it because emotions and behaviors are fickle but so is your body. It deserves more attention than a bent brake lever.
Morningstar, Inc. jumped into the risk game last month but not without taking a risk; it could be too little, too late and too clunky to beat first movers.
The Chicago manager of $244 billion and financial scoring giant is taking long underachieving Aussie risk profiler FinaMetrica, giving it a complete Morningstar makeover and installing it on 180,000 Advisor Workstation and Morningstar Office desktops with hopes it can catch fire.
Morningstar last year purchased Plan Plus Global, a planning software company based in Toronto. Subsidiary FinaMetrica was part of the deal. Morningstar made substantial additional investments to improve quality and utility before it rolled out the risk profiler last month.
"Morningstar has made the Morningstar portfolio risk score available across 7.1 million client portfolios in Morningstar Advisor Workstation, enabling advisors to have deeper conversations with clients and build more targeted financial plans," the company says in a release.
Morningstar can take the "evidence-based," high-functioning FinaMetrica and give it user-friendly form, says Shawn Brayman, FinaMetrica founder and now Morningstar's director of financial planning methodology.
"Morningstar has 250 design people and I had 40 people worldwide."
Validation
Morningstar is one of the newest players rushing into the game of quantifying investors and their behaviors to dial in advice. The niche has long been dominated by Riskalyze, which claims about 85% of the estimated 30% of advisors who use risk software.
Morningstar's long-awaited arrival, however, validates the risk software industry, says Riskalyze CEO and co-founder and CEO Aaron Klein.
"We love seeing what was once a four-letter word – risk – now getting more attention in the industry," he says.
Orion buys HiddenLevers after a long collaboration to get an edge over companies like Envestnet in the hotly competitive risk analysis and analytics business
"It’s surreal to see large, established fintech players finally capitulate and start attempting to address risk, and it validates our 10 years of success with the quantitative framework behind the Risk Number and Riskalyze GPA.”
Riskalyze will not only benefit from it loyal installed base but also it's 10-year head start, Klein says.
"It’s time for our profession to move past the archaic 30-page report and shift to rich client engagement tools with deep methodology," he adds.
"That’s where we’ve been innovating for 10 years and that’s why we have 85% market share among advisors who have bought a risk solution for their business.”
How do you beat free?
But Morningstar doesn't see its belated effort as a handicap.
"The industry has, for too long, focused on measuring only the risk of investments within a portfolio, resulting in a commoditization of investment advice," said Jeff Schwantz, head of client advisor experience for Morningstar.
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That said, Morningstar is offering its risk software for a very commoditized price -- free.
There were already reasons for fee-paying Riskalyze customers of Office who also use Workstation to switch on Morningstar, says Brayman.
"Some people may ask: 'Do I need Riskalyze?" he says.
The ironic outcome of Riskalyze's negative advertising attack on Orion's risk subsidiary is a boost in fortunes for both, though the flare-up may also have unhelpfully awoken a sleeping Morningstar
"Traditional risk profiling is typically inadequate and does not meet the true needs of investors or advisors serving them."
"We prided ourselves on being the best but didn't have the leverage," he explains.
Morningstar Portfolio Risk Score measures a portfolio’s level of risk compared with Morningstar’s target allocation index family and will be applied to client portfolios, model portfolios, proposed portfolios, or individual managed investments, according to the company.
The "score" seems a nod to Riskalyze, which has famously used the "risk number" to set itself apart and give deep data weeds ther appearance of trimmed grass.
Morningstar's Risk Comfort Range is a methodology to align client expectations about the risk exposure of their portfolios based on their risk profile and investment objectives to an appropriate range of Morningstar Portfolio Risk Scores.
Shining through
Orion Advisor Solutions also made a big move into the industry when it acquired HiddennLevers in March. See: Orion buys HiddenLevers after a long collaboration to get an edge over companies like Envestnet in the hotly competitive risk analysis and analytics business
HiddenLevers ranks just behind Riskalyze followed by FactSet Portfolio & Risk Analytics, Smart RIA and Fiserv, according to one online ranking.
Brayman believes that his 25-year history will shine through in the current regulatory environment because Reg BI's strictures will make hard-core data backing invaluable.
"We always had the evidence," he says. "It's only now with client best interest rules that advisors have to demonstrate [risk assignment] with evidence.
"That's a game-changer for us. Morningstar is also very evidence based."
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