Morningstar latest to launch investment model marketplace

Advisers have been slow to use the platforms, but that hasn't stopped vendors from offering them

May 6, 2019 @ 2:51 pm

By Ryan W. Neal

Morningstar is the latest company to offer advisers a digital marketplace of third-party investment models and strategies.

The new model marketplace will be available on Morningstar Office Cloud for no additional costs and will feature products from 13 asset managers. Morningstar is also embedding its database, ratings and analytics into the platform so advisers can research and screen models against a number of qualitative and quantitative factors.

[More: Product chief at Morningstar talks adviser technology and the holy grail of financial advice]

Morningstar head of software products Dermot O'Mahony compares the marketplace to an "app store of investment models" that will make developing and managing investment strategies easier and less time-consuming for advisers.

"[Model Marketplace] combines information and automation to empower advisers to truly think in their clients' best interests, by giving them more time to provide personalized advice while lowering costs and increasing transparency among choices," Mr. O'Mahony said in a statement.

For asset managers, it's an opportunity to get their products directly in front of advisers while advisers are researching and making investment decisions. Morningstar said it does not accept incentives from the participants.

The Department of Labor's fiduciary rule, which could be making a comeback, helped increase the popularity of investment models among advisers. Until recently, access to models was dominated by turnkey asset management platforms and custodians.

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Now technology vendors are providing new avenues for advisers to access these strategies. InvestEdge, Oranj, Orion Advisor Services and Riskalyze all have model marketplaces.

Despite the explosion of investment models and marketplaces to distribute them, adoption remains low among advisers. Many advisers still tie their value propositions to managing assets, and their current strategies have been working just fine since 2008, said Cerulli Associates director of advice relationships Scott Smith.

[More: What's keeping advisers from using investment model marketplaces?]

"[Models are] a better solution, but it's a solution that doesn't really have demand yet," he added. "Advisers have to be convinced that this will help them make their practice better."

So why are so many vendors producing a product that's in low demand? Morningstar didn't respond to a request for comment, nor did the other vendors.

Mr. Smith suggested fintech firms all want to be advisers' central hub, and providing a model marketplace lets them provide the starting point of portfolio construction for no additional cost.

"They want to provide as much value as they can for the tools they already have in place," Mr. Smith said.

For a company like Morningstar, which provides technology and investment research analytics, it also increases the value they provide to large asset managers. Even if Morningstar isn't accepting payments, each of the 13 firms on the model marketplace is probably a Morningstar client in another capacity, Mr. Smith said.

"It's more 'synergies with partnerships' rather than a direct revenue model," he added.

But even if advisers are slow to move, vendors are preparing for a future where advisers outsourcing portfolio management is the norm. The broker-dealers and wirehouses want advisers to focus more on financial planning, prospecting and managing client relationships, Mr. Smith said, especially when adviser-managed portfolios tend to perform worse than models.

"If they can get performance up, get people focused on gathering more assets, they are going to create more revenue," he said.

The tough part is just getting advisers to admit they aren't better at generating returns than a model.


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