Morningstar keynotes cast financial advisors in a crucial role

The rise of private investments, boosting access to advice, succession planning and serving clients who are women loomed large at one of the investment industry's biggest events.

Keynote speeches and panels at this week's Morningstar Investment Conference in Chicago focused on those topics, with a particular emphasis on financial advisors' roles in helping clients consider the impact of fees and engaging a broader base of customers with a growing menu of investments. More than 2,000 investment professionals converged on the Navy Pier for the independent research, asset management and technology firm's annual event.

Private investment vehicles are changing advisors' product shelves in an unprecedented manner, according to Kunal Kapoor, who has been CEO of Morningstar since 2017. And private credit instruments that provide "alternative income sources and some degree of diversification for advisors" are driving that trend any bit as much as the more-heralded asset class of private equity funds, he said. But there are caveats to their appeal.

"Private investments do, in fact, come with higher fees, less transparency, and, importantly, less liquidity. They're complex. They're not as easy to understand," Kapoor said. "In our recent survey, we heard that nearly a third of advisors are thinking about offering these vehicles, but do not want to, because they are so complex. Now, as everyone at Morningstar knows, that's like the Morningstar bat signal. We want to bring clarity to complexity in all we do. It's our rallying cry. 

"So, for example, when investors are chasing yield and managers are leaning heavily on leverage, it's our job to provide the research to tell you why that's happening," Kapoor said. "In fact, some of the largest funds today are posting double-digit distribution yields, but they come with really complex fee structures, limited liquidity and valuation lenses."

READ MORE: All about alts: The cases for (and against) private investments

Tobias Salinger

Growing assets and advice

Between 2022 and 2024, the amount of semiliquid investment assets — interval funds, tender-offer funds, nontraded business development companies (BDCs) and nontraded real estate investment trusts (REITs) — jumped 60% to $344 billion, according to a report released by Morningstar this week. Across those alternative products, private credit surpassed real estate and infrastructure as the largest one by more than doubling over that span to $188 billion in assets. The number of interval funds focused on private credit or other types of assets is accelerating the most quickly, with 19 launches through May this year, putting them on pace to top last year's record of 27. 

However, other Morningstar research has pointed out how those products' complicated and high fees affect their returns. And Kapoor's speech cited the report's finding that the average fees on semiliquid funds run three times higher than open-end investments, which signals how "their return premiums must be significant to offset the high costs."

In that context, advisors' guidance to clients trying to make sense of increasingly popular alternative vehicles often proves especially valuable. Over the next five to 10 years, the industry will see "a surplus of demand and a scarcity of supply" of that advice, according to Salim Ramji, who took over as CEO of asset management giant Vanguard last year. 

While that means that financial advisors are operating in "a great business to be in," the industry is facing a problem from the fact that big demand from the enlarging customer base "will skew more and more advice to the high net worth" clients, Ramji said. 

When asked in an interview at the conference about the potential concern that Vanguard's own advisors are competing with the external ones recommending the firm's funds, he said that the firm seeks to aid the clients of any advisor in building better portfolios and open doors to advice.

"We really view the provision of advice as something that we should make available and accessible to all kinds of people, whether they're people just starting out, whether they're people building wealth, whether they're people in retirement," Ramji said. "The bigger thing that we're trying to focus on for advice is, how do we make it much more accessible to broader and broader parts of the population? And I think that's where technology comes in. That's where AI comes in. I think that's how we're at least thinking about it here within Vanguard, as well as serving the needs of advisors who are independent fiduciaries but like to use Vanguard funds."

READ MORE: How this RIA jumped two succession hurdles at once

Solving for succession

As Ramji grabbed the reins in 2024 at one asset management firm known for its efforts to reduce costs for investors, the CEO of another company with a similar reputation among some circles of advisors and institutions, Dana Emery of Dodge & Cox, announced in January that she would be stepping down from the role at the end of the year. Roger Kuo, the firm's president, will become CEO in January 2026. 

The notably large number of registered investment advisory firms in need of succession plans may take some inspiration from Emery's firm of the past 42 years. Since "the importance of succession planning has always permeated our firm," Dodge & Cox asks its employees for — and usually receives — two years' notice before they leave the company, she noted. Almost needless to say, then, her own departure was "carefully planned," with the announcement well in advance and the discussion beginning long earlier, according to Emery.

"Succession planning is really, really crucial to the firm," she said. "As the CEO, one of my most important jobs is really making sure the right people are in the right places. And we want to make it very normal to talk about succession planning — both unexpected and long term. So we talk with all of our senior leaders about this on a regular basis."

READ MORE: How women can find success in a male-dominated industry

Tobias Salinger

Women and wealth

On the topic of clients' successions, the upcoming "great wealth transfer" will be moving trillions of dollars in assets to women's control in the coming decades. And that poses specific challenges to an industry in which fewer than a quarter of certified financial planners are women. A lot of research also suggests that women are very likely to drop their advisors for new ones after the death of their spouses, said Christine Benz, Morningstar's director of personal finance and retirement planning and the moderator of a discussion about women's wealth.

The reason for that is that "they don't feel like they own that relationship" and retirement and investment planning is "not a discussion that they are part of for many, many, many years," said   Jean Chatzky, CEO of HerMoney.com, a personal finance website for women.

"You're going to go out and you're going to look for somebody who speaks to you and talks to you because you felt ignored — even if that wasn't the intention — for years, if not for decades," Chatzky said. "I think this is a very solvable problem, right? If advisors would just insist in a nice way, 'Hey, I'd rather talk to both of you, come to the meeting, bring your adult kids when you get to the age where adult kids should be part of the conversation.' That's how you maintain a practice over time."

Working with more women as clients requires an understanding of how they generally display lower risk tolerance than men, said Carolyn McClanahan, the founder of Jacksonville, Florida-based registered investment advisory firm Life Planning Partners. They "tend to have a more safety-first approach" than men, she said.

"They are more comfortable taking risk in their portfolio if they understand the risk," McClanahan said. "And so when advisors do a good job explaining how the asset allocation works, what's going to happen in good and bad markets, they're not any more afraid of taking risk than men are. It's just that they want that education."