Morningstar adds its special sauce to PM software

Morningstar Inc. is trying to shake up the market for portfolio management and reporting software by offering something no one else can offer: its proprietary analytics databases.

Although the company began providing basic portfolio management and accounting tools on its platform five years ago, only in the last two years has it made improving that offering a priority.

It has made some relative minor tweaks, such as dropping the name Advisor Workstation Office Edition in favor of the simpler Morningstar Office.

But the integration of its well-known analytics databases into the rest of the platform will make it easier for advisers to bring investment research into the customer relationship management application, investment proposal software and client reports.

“I feel like we’ve crossed that threshold where we can put ourselves side by side with other providers,” said Chris Boruff, president of Morningstar’s adviser business unit.

In total, more than 1,500 client firms use Morningstar’s portfolio management software, which puts it firmly in the No. 3 spot, behind Advent Software Inc., which has about 4,000 firms using its portfolio management systems, and The Charles Schwab Corp.’s Schwab Performance Technologies subsidiary, whose PortfolioCenter platform is used by more than 3,000 firms.

The list price for Morningstar Office is $5,400 per year per seat, though Mr. Boruff said that there is room for negotiation with multiseat firms.

Since the fourth quarter of last year, Morningstar has completed 130 conversions from other PMS systems. Schwab’s PortfolioCenter represented 38% of those conversions and Advent’s Axys 16%, Mr. Boruff said.

Not surprisingly, Morningstar’s competitors were unimpressed.

“Those are relatively small numbers,” said John Memminger, Advent’s portfolio management product manager. “We have a large client base that is more interested in staying with us and looking at fully hosted solutions such as our Portfolio Exchange product.”

Michael Williams, sales director for Schwab Performance Technologies, said he welcomes the competition.

“It’s hard to see them as a competitor, though, because we share a lot of clients,” he said, noting that many firms using Schwab PortfolioCenter also use Morningstar Office, but only for its data and analytics.

In expanding the market for its product, Morningstar will find the broker-dealer market a challenge, said Darren Tedesco, vice president of innovation and strategy with independent broker-dealer Commonwealth Financial Network.

“While Morningstar has made a name for itself in mutual funds and analytics, many small broker-dealers have jumped on board with [PMS systems from other suppliers],” he said.

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COST BASIS REPORTING

In December, I wrote about how broker-dealers will have to implement cost basis reporting to customers and the Internal Revenue Service by Jan. 1, 2011.

Thus far, brokerage firms still have a ways to go in their preparations, according to consultant Celent Communications LLC.

In a survey it conducted this summer of 175 broker-dealers, investment advisers, mutual funds, banks, asset management firms, hedge funds and custodians,

Celent found that just 16% of the firms affected by the rule have allocated any part of their budgets to building or purchasing a solution.

The survey found that 54% plan to buy or build a solution, while 12% claim to have a solution in place. An alarming 34% aren’t sure what they will do.

“The vast majority of the compliance responsibilities will fall on the broker-dealer community to provide cost basis data to their customers,” said Celent analyst David Easthope.

With about 14 months remaining until the deadline, many brokerage firms have yet to select or implement a technology — even though the technology tends to require about 15 months to get up and running, Mr. Easthope said.

The chief reason for the delay, he said, is uncertainty over how broadly the rules will be applied across the industry. But additional clarity is unlikely to come before the deadline, he said.

“We try to emphasize that the rule has been passed by Congress,” which means that any extension likely will require congressional approval, an extremely unlikely event, Mr. Easthope said.

Estimates for implementing cost-basis-reporting technology range from $200,000 for small, self-clearing broker-dealers to millions of dollars for custodians. On the bright side, cost-basis-reporting technology will permit advisers to harvest losses more efficiently and reduce clients’ tax bills.

The Government Accountability Office and the IRS estimate that capital gains are underreported to the tune of $7 billion to $11 billion per year — a figure they expect will be reduced significantly if cost basis is widely reported.

E-mail Davis D. Janowski at [email protected].