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Firm Balks at Morningstar Rate Hike

Financial planner Ric Edelman got a shock this summer when he opened his bill for the computer services he receives from fund researcher Morningstar.

The invoice showed that Chicago-based Morningstar was raising his rates from about $8,000 each year to more than $50,000, he said, an increase of roughly 525%.

Edelman, who runs Edelman Financial Services, was outraged. He and nearly 30 other employees at his Fairfax, Va., firm use Morningstar's ubiquitous Principia Pro computer network to get information about stocks, mutual funds and annuities. Hiking the rate during a bear market and a recession seemed like adding insult to injury to Edelman.

"We're now seriously questioning whether we can afford to use their service," said Edelman, who has authored several well-known books about personal finance. "We're now looking carefully at their competitors."

At a time when Morningstar is changing much of its methodology for analyzing investment vehicles, some say that the firm is grabbing for new sources of revenue, which explains the price hike.

But Edelman said that increasing the system's cost so substantially could hinder those efforts. "Maybe they're realizing they're the 500-pound gorilla, that they have a market share and they can get away with changing their product line and fee schedule," he said.

There was a time when Lipper, another fund researcher, based in New York, "was king," Edelman said. "Morningstar was the young upstart that took the market by storm. I'm wondering now if Lipper's going to have an opportunity to capitalize on what's going on."

A Morningstar spokeswoman said in an e-mail that, although she couldn't verify the price increase at Edelman's firm, any rate increases for the Principia system are likely the result of a change in the way Morningstar bills its clients for the service.

The changes, which went into effect in February of last year, hinge on the types of licenses that clients purchase in order to use the software. Previously, Principia users could install the Morningstar software on up to four computers for each license they purchased, the Morningstar spokeswoman said. That arrangement allowed only one person to use the system at any one time.

"Now we require one license for each desktop on which the product is installed," the spokeswoman said.

To be sure, the changes in the Principia pricing structure won't result in price increases for every firm. Morningstar said that rate changes are contingent on whether clients buy information on mutual funds, stocks, annuities or all three. Rates are also affected by the number of employees who use the system and the timeliness of the data. Firms have the option of updating information monthly, quarterly or annually.

For example, financial planner Joyce Franklin, of Franklin Financial Advisors in San Francisco, employs one other full-time staff member as well as an intern. She uses a version of the Principia system that provides only mutual fund data, not stock figures. The data is updated quarterly. She said she pays about $550 each year for the service. "It doesn't look like it's much more than last year," she said as she looked over her bill.

But in the case of Edelman Financial Services, in order for the necessary employees to have access to Principia Pro, the company will have to pay exponentially more money. The Principia software had previously been located on a file server at the firm, said Ed Moore, president of Edelman Financial Services. Now Morningstar is requiring the Principia software to be installed on each of the firm's computers and the firm will have to pay for a license for each user, Moore said.

With the cost mounting so dramatically, he appealed to Morningstar, which, he said, offered a discounted rate. Still, Moore is shopping around.

"We haven't made the decision to leave, but we won't stay with the same price tag," he said. "We're not going to pay Morningstar 50 grand."

Moore said he is considering using services from ValueLine of New York, CDA Weisenberger, now known as Thomson Wealth Management, of Rockville, Md. [an affiliate of MFMN publisher Thomson Media] and Lipper.

Eric Almquist, VP of institutional business at Lipper, said that financial planners who use Principia have been asking about Lipper products. "They're wondering what we can give them that's comparable," he said.

His firm offers several types of fund analytical tools. They include a high-end database for fund companies that averages $60,000 each year. Lipper also offers stripped-down data feeds that can plug current and historical fund data into other computer applications at an annual cost of between $5,000 and $10,000.