Amid the proliferation of online investment options, should planners be worried about Morningstar’s portfolios for do-it-yourself investors and their stellar returns?

Since 2009, three of Morningstar Investment Services’ nine stock basket portfolios, which are separately managed accounts, have been available to individual investors who subscribe to the research giant’s DividendInvestor or Stock Investor newsletters. The returns for these accounts have been impressive, handily beating the S&P 500 over the same periods.

The Dividend Portfolio “invests in high-yielding stocks with the potential for dividend growth and capital appreciation,” Morningstar says. It touts a cumulative return of 124.8% for its DividendInvestor newsletter portfolio through April 11 since its Jan. 7, 2005, inception, compared to a return of 85.9% for the S&P 500 during the same period. A subscription to the Morningstar DividendInvestor newsletter is $189 per year online and $199 for print.

The Tortoise Portfolio, which “invests in the stocks of relatively stable businesses that are well-entrenched in the markets in which they operate,” according to Morningstar, has achieved a 223.4% cumulative return through April 30 since its June 18, 2001, inception. This compares to the S&P 500's 99.9% cumulative return during the same time.

The Hare Portfolio “invests in the stocks of firms that are experiencing rapid growth, emphasizing those that possess sustainable competitive advantages,” Morningstar says. As of April 30, the Hare portfolio posted a cumulative return of 211.8% since the portfolio's June 18, 2001, inception, compared to 99.9% for the S&P 500.

A subscription to Morningstar StockInvestor Newsletter, which includes both the Tortoise and Hare portfolios, is $125 per year online and $135 for print.

Each of the three Morningstar funds for DIY investors is managed by an investment team for a fee of 0.55% on the first $1 million with a downward sliding scale as assets increase. The expense is cheaper than a mutual fund but more pricey than an index fund. For comparison, the average large cap mutual fund charged 1.2% in 2013, according to Morningstar, while the expense ratio is 0.05% for Vanguard's Total Stock Market Index fund and 0.09% for the State Street Global Advisors' SPDR S&P 500 Index fund.


With relatively low expense ratios and impressive returns, should advisors be worried?

According to Jeff Ptak, president of Morningstar Investment Services, only 7% of the total number of investors in these SMAs are individual investors who have access because they’re newsletter subscribers. These investors are typically interested in investing themselves and don’t use advisors anyway, he says.

Instead, the majority of investors in Morningstar's Select Stock Baskets are clients of financial advisors who outsource some or all of their clients’ asset management to Morningstar’s turnkey asset management program. Morningstar declined to disclose total assets under management of its DIY investors.

“We have no plans to offer [our portfolios] to more people,” Ptak says. “We plan to continue working with RIAs – that’s our primary business.”

Even so, this has been a groundbreaking option for DIY’ers, according to Peter Somich, an investment analyst at Modera Wealth Management, a fee-only RIA based in Westwood, N.J. Though the offering represents a small segment of Morningstar’s clients, it allows investors to bypass advisors to use Morningstar’s SMAs directly.

The danger, some advisors note, is that investors, such as retirees increasingly eager for a steady stream of income, might flock to Morningstar’s dividend-focused portfolio, for example, without sufficient regard to alternative and possibly better strategies.

“Morningstar’s 0.55% management fee is certainly less than many actively managed mutual funds and separate accounts,” Somich says. “It’s also considerably higher than many index funds so investors should look at the investment and decide if they want to pursue an index approach or take an actively managed approach, and compare against all options available.”


Many advisors are skeptical of the benefit Morningstar’s portfolios have for investors. "Morningstar’s 0.55% fee has an extra digit over what I typically recommend," says Allan S. Roth, founder of planning firm Wealth Logic in Colorado Springs, Colo.

Somich adds: “Morningstar’s 0.55% fee doesn’t take into account transaction costs, which will be in addition to the management fee and can be charged as a percent of assets or a fixed dollar amount per trade.” In other words, the total fee an investor will pay for the product depends on how active the portfolio strategy is. While mutual fund transaction costs are not included in expense ratios either, they are experienced differently by investors because a fund’s NAV is adjusted daily to account for transaction fees. Morningstar counters that the all of its SMAs employ a low turnover strategy.  

Advisors note that educating clients about fees, therefore, is paramount. Of course, for a true comparison, an advisor's fees, which can vary based on compensation models and client assets, must be factored in, as well.

Though Somich also highlights the potential risk of lost business for advisors as clients seek tools to manage their own investments, he says that, in its current format, Morningstar’s SMAs are not particularly threatening to advisors and their clients. Working with an advisor yields benefits for investors -- like financial planning and retirement planning -- that Morningstar’s DIY options can't offer, he says.


Nevertheless, Morningstar’s DIY products represent intensified competition within the advisory industry and could, if anything, put continued downward pressure on fees, says Luke Dean, a financial planning professor at William Paterson University in New Jersey. 

“If this really ends up being a great investment option for investors – such as dividend-hungry retirees for Morningstar’s dividend-focused portfolio – then there is no reason that advisors won't purchase this for their clients as part of a larger, overall more diversified portfolio,“ he says.

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