"You can count on Morningstar for reliable data, research, analysis, and candid editorial commentary," the company's Web site says. The sentence before that, however, Morningstar does not own, operate, or hold any interest in mutual funds," will soon be untrue. Following Morningstar's announcement that it is establishing a registered investment advisor that will buy and sell mutual funds, some industry observers have begun to question how Morningstar's reliability will hold up.

Last week, the Chicago-based investment information and analysis provider, announced that later this year it will launch Managed Portfolios, a portfolio-management service geared to financial advisors. The program will be offered by Morningstar Investment Services, a registered investment advisor the company has established specifically to operate the new program.

Before this announcement, buying and selling mutual funds was not part of the company's business model. The creation of Morningstar Investment Services is a divergence from the company's core business, and industry observers were skeptical.

Initially, the program will offer portfolios of mutual funds researched and monitored by Morningstar. The company will select funds, with input from financial intermediaries, based on a number of defined portfolio characteristics, including tax and risk sensitivity and timetables. Next year, the company plans to add separate accounts managed by leading investment management firms so that portfolios can be created with both mutual funds and separate accounts.

Morningstar has brought in Art Lutschaunig as chief investment officer for the new division. Lutschaunig was formerly director of research and investments for Strategic Advisers, a division of Fidelity Investments, where he ran a similar type of program to what Morningstar will introduce.

Morningstar will charge a fee of between 15 and 35 basis points depending on assets under management, Lutschaunig said. In addition to that, investors will have to pay their advisor a fee that the advisor will have negotiated with Morningstar. While that fee will differ among advisors, the company intends to impose a cap on it, Lutschaunig said. The last expense to investors will be the underlying expense ratios of the funds that are bought.

Some have questioned whether Morningstar will be able, via its commentary, to alter the prices of funds. That notion is misguided, since commentary on the funds cannot drive performance. It can, however, spark flows in and out of funds.

"We've certainly thought about that issue," said Don Phillips, managing director of Morningstar. "We can't really influence the price though. If we were selecting stocks and commenting on stocks, that would be one thing, but by saying more favorable things about funds, we can't influence their price."

Also, the fact that the new program is fee-based takes away the possibility of underhandedness, according to Anthony Vargo, an asset management advisor with Legend Financial Advisors. "If Morningstar was perhaps receiving commissions from trading these various mutual funds, I might think there could be a conflict there," he said.

Vargo further dismisses the notion that the commentary could be affected by the company's holdings. "If a fund warrants a lower rating, that would typically mean that Morningstar is predicting the fund to under-perform," he said. "It would be to their detriment to hold onto a fund and keep it at a rating it doesn't deserve."

Still, some observers have concerns of conflict in other areas. The new program runs the risk of damaging the company's core business if it takes significant business away from its own clients, said Geoffrey Bobroff, president of Bobroff Consulting.

Analysts at several competing data and analysis providers did not want to go on the record about Morningstar's new program, however some questioned how Morningstar will maintain its objectivity and said that they had no intention of developing a similar program.

Morningstar may have a difficult time selling the product to financial planners. Going to clients with additional fees is something advisors try to avoid as much as possible, said several planners.

"I don't know if I would use the program," said Brian Oard, a financial planner in Westlake Village, Calif. "One thing I like about Morningstar is their independence. If they're getting involved with asset management, I question if they will lose some of that. The other thing is, what I do for my clients is try to get the best deal possible in terms of fees. Anytime you add a middle man, it usually doesn't serve your clients and that appears to be what Morningstar would be. I try to get my clients institutional pricing and remove any middle men. The question is what kind of unique value will they offer through their process."

To work, the new unit would have to be a completely separate company, according to Bobroff. That, for all intents and purposes, is what Morningstar is maintaining will be the case. The program will initially employ Lutschaunig and four additional analysts who will be completely separate from Morningstar's team of retail analysts, Phillips said.

"As a registered investment advisor, our obligation is to the person with whom we have an advisor contract," said Lutschaunig. "We are being very adamant about being clear that we don't want to leverage relationships internally."

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