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Managed Account Ratings Greeted with Skepticism


Morningstar's plan to rate managed accounts much the way it ranks mutual funds has drawn concern from an industry lobby group.

The Chicago fund researcher has been working since fall to compile a database of managed account products that will be ranked. The service would be provided to financial advisers on a CD-ROM for a yet-to-be-determined price, said Morningstar managing director Don Phillips.

But the Money Management Institute, the managed account industry's version of the Investment Company Institute, isn't sure that ranking managed accounts is a good idea. Chris Davis, the industry group's executive director, concedes he doesn't know much about Morningstar's plans, but he said such rankings might cause investors to think of managed accounts as short-term investment vehicles, which, in turn, could lead managed account investors to chase performance. That's a bad idea, Davis said, because managed accounts are designed to be long-term investment vehicles.

And while mutual funds are clearly products, Davis said managed accounts are a different animal altogether. They are based on a consultant-like relationship, he said. Therefore, trying to rank managed accounts with something akin to Morningstar's well-known star-rating system might prove fruitless, he said.

"The star system may be an overworked marketing tactic," Davis said.

Managed account providers, meanwhile, are reticent on the issue. AIM Private Asset Management and Oppenheimer Funds both declined to comment. INVESCO and MFS did not return calls.

And Lipper, a researcher that competes with Morningstar, said it had no plans to offer such a rating service for managed accounts. Spokesman Robin Thurston was skeptical of the idea. "I would be concerned that it's oversimplifying a more complex product," he said. "That marketplace is pretty highly advanced and to simplify it might not be doing it justice."

Morningstar decided to take on the project because financial advisers are increasingly serving high-net-worth clients, he said. "A lot of advisers have said they don't feel comfortable in the world of separate accounts because they don't feel they are as informed as they are in the mutual funds," Phillips said.

Morningstar could offer the rating service by summer, but right now the plan is only beginning to take shape, he said. About a dozen Morningstar staff members are currently compiling managed account data. The final product will likely include performance measurements, risk assessments, portfolio overviews and, perhaps, a star-rating system similar to the one Morningstar uses for mutual funds. The database will likely be easy to build, he said, because Morningstar already offers similar services, such as its variable annuity ranking service, which it has offered for nearly a decade.

Phillips said a number of the money managers he has contacted about the service are enthusiastic. And he's frustrated by reports that others in the industry oppose the idea. "It's a turning point in the industry," he said. "It's been a very clubby kind of industry that's been able to control the whole flow of information. You've got to open it up and have more of a clean light showing on it."

Phillips said he suspects that the managed account business doesn't want to be measured, which he called "absolutely absurd."

"MMI is yelling and screaming that they don't like the methodology. We haven't even launched the methodology yet," Phillips said. "They just don't like to be measured in any way that they can't control."

Still, Davis said the MMI certainly isn't opposed to providing investors with more information about managed account products. And he said he would certainly be interested in discussing the idea with the folks at Morningstar. Some "are trying to characterize this as some type of cat fight," he said. "That's not the case at all."