Morningstar is betting that the old adage that "free advice is worth what you paid for it" is wrong.
A standing-room-only crowd packed yesterday's
Pensions & Investments West Coast Defined Contribution/401(k) Conference to listen in on Morningstar's big announcement. The payoff was a description by Morningstar's
Jim Wironen of the company's plan to offer advice free to plans with more than 5,000 participants.
As a part of the new service Morningstar has also created a new subsidiary, a registered investment advisory firm called Morningstar Associates LLC. Its new advisory service, dubbed
ClearFuture will debut on January 24, 2000. It will be offered both as a retail product through the company's new premium Morningstar.com service and as an institutional product in the 401(k) market.
By targeting plans with more than 5,000 participants, Morningstar believes it is targeting the largest 1,500 companies in the country for the free service.
How Morningstar's entry into this now crowded market will effect other vendors' strategies is unclear. Today
Emergent Advisors (
401k Forum),
Financial Engines, and
Standard & Poor's (
Rational Investors) have made strong commitments to providing advice to 401(k) participants. In addition, Ibbotson Associates has made alliances to provide a similar service; Fidelity and Vanguard have also offered proprietary allocation tools. Other firms trying to enter the arena are
TeamVest, Investment Technologies, DirectAdvice.com, and Aslo.com.
Drake Mosier, chief executive officer at Emergent Advisors said after the presentation that he thinks Morningstar's efforts are a positive for the advice business. He added that he expects more companies to provide the market as time goes on. "There are 17,000 financial advisors today," said Mosier. "We count 19 advice providers in this space."
Wironen, senior vice president of the Chicago company, outlined five key areas of concern that Morningstar identified as critical when the firm first began exploration of entry into the advice arena last year. These included: objectivity, quality control, employee demand, fiduciary liability, and cost.
Although Wironen believes that Morningstar has covered all of the bases with the new offering, it was obviously Morningstar's solution to the cost issue that caught the attention of the crowd.
"We're going to spur the revolution by offering large plans access to our advice module for the first year, on us. That's right. It's free," he told the surprised audience.
In response to questions, he added that he expects the price of the product after the first year to fall below $15 per participant, for plans with less than 5,000 participants.
Only the Internet portion of the new advisory service will be free.
Morningstar will also deliver paper-and phone-based advice solutions at an unspecified cost.
Wironen told the MFWire.com that Morningstar will be adding staff to support the new product. Currently the company employees roughly 50 people for its institutional business, and 25 for its retirement business. Wironen expects to add the staffing over time to support all areas of the new product.
The product itself will be shown during an eight city media and client tour next month, said Wironen.
He described the product as taking a "goals-based approach." Users will define a retirement and an income goal that they would like to reach, he explained. "There will not be the typical risk-tolerance questions," he elaborated.
Wironen would not comment on the analytical part of the service other than to say that it is proprietary and was developed by
Paul Kaplan, recently hired from Ibbotson, and
John Rekenthaler at Morningstar.
ClearFuture will consist of four modules -- research, education, advice, and measurement. The service will also analyze funds on a holding basis rather than use performance-based attribution analysis, he said. This plays into Morningstar's long-term service as a collector of portfolio data for funds, he said, and will allow the creation of a more "robust" product.
Defined benefit assets, Social Security, IRA assets and 401(k) assets will be part of the Morningstar mix when developing advice for a participant. It will also make recommendations on holdings of employer stock in the plan.
The design of the new product will mark a departure for Morningstar. A former Disney illustrator was hired to design the "look and feel" of the web product. In a Disney-like touch it will feature a cast of three cartoon characters (Zack, Matrix, and the dog Maggie) who act as guides for investors.
Although Morningstar is focusing first on large plan sponsors, it has been approached by large bundled vendors who wish to offer the service to their clients, said Wironen. He added that the service is designed to be "open architecture" and that bundled vendors can make it part of a spectrum of advice offerings.
Next on the development list for the service is its integration with recordkeeping platforms to allow participants to easily implement the advice. Wironen expect to complete a tie-in with the first recordkeeper in the second quarter of 2000.
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