Morningstar Reveals Best Interest Scorecard Fiduciary Rating Tool

The firm describes its latest release as a consolidated proposal system created for financial advisers to help clients make informed decisions on possible rollover options, designed with their best interests in mind. 

Morningstar has announced the launch of its Best Interest Scorecard, a comprehensive tool that enables advisers to assess a client’s current investment plan, comparing this directly with changes the client could make within their current plan or by moving to other investment accounts.

Utilizing the tool, Morningstar says, advisers can “determine, demonstrate, and document whether their proposal is in the investor’s best interest through three different lenses: investment value, client fit, and service value.”

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As explained by David Blanchett, head of retirement research for Morningstar Investment Management LLC, and Paul Kaplan, director of research for Morningstar Canada, the solution should allow advisers and their clients to build more “gamma-efficient” portfolios. Their premise is thoroughly laid out in a newly published white paper put out in conjunction with the release of the Best Interest Scorecard solution, aptly titled “The Value of a Gamma-Efficient Portfolio.”

“In 2013, we introduced ‘gamma,’ a new metric designed to quantify the value of more intelligent financial planning decisions, with a focus on the potential benefits of working with a financial adviser,” the pair explains. “This paper revisits gamma, but with a relatively narrow scope—to quantify the potential benefits of implementing a gamma-efficient portfolio strategy for an investor.”

Another way to think about this idea is to say the solution “measures the gamma of investing decisions,” they explain. “We do this using a framework of seven questions an investor should consider during the portfolio construction process. This framework is far more comprehensive than simply selecting and comparing a few mutual funds.”

The questions include the following: “Why invest at all? Which type of account may be best? What is an appropriate risk level? Which asset classes should be considered? How does the risk of the goal affect how I invest? What investments to implement with? When should the portfolio be revisited?”

NEXT: Advisers help deliver gamma 

Based on empirical tests and previous Morningstar research, Blanchett and Kaplan estimate that the average investor is likely to benefit significantly from working with a financial adviser, “so long as the adviser provides comprehensive, high-quality portfolio services for a reasonable fee.” Importantly, the potential benefits associated with making better portfolio decisions will vary considerably by investor.

“Rather than contrast the optimal approach to the decisions that a single average—i.e., naïve—investor would make, we consider three types of investors, each with a different benefit level that we refer to as low, average, and high. Not surprisingly, the potential benefit that an investor is likely to realize across the decisions varies significantly across these three levels,” Blanchett and Kaplan explain.

At a high level, the pair finds that investors who are only seeking to fund a single goal (retirement) with a single 401(k) account, and who would otherwise simply invest in an efficient prepackaged multi-asset solution that is of high-quality, are likely to realize “significantly less benefit [from advice] surrounding these portfolio decisions” than an investor who seeks to fund a variety of goals with multiple accounts.

Still, overall, they estimate that the “average” investor is likely to benefit significantly from working with a financial adviser, “even if the services are entirely related to building and monitoring the portfolio,” again so long as the adviser provides “comprehensive, high-quality portfolio services for a reasonable fee.”

“Providing other financial planning services (i.e., financial planning gamma), such as savings guidance, pension optimization, insurance planning, withdrawal planning, etc. are likely to result in even more value for the client, and while very important from an outcomes perspective, are not considered here,” the pair note.

The full analysis is available for download here

Consistency Key to Increasing 401(k) Plan Savings

A longitudinal analysis of 401(k) plan participants drawn from the EBRI/ICI 401(k) database found the average account balance for consistent participants increased at a compound annual average growth rate of 13.9% from 2010 to 2015.

An annual update of a longitudinal analysis of 401(k) plan participants drawn from the Employee Benefit Research Institute (EBRI)/Investment Company Institute (ICI) 401(k) database continues to show consistency is key in building retirement assets.

The average 401(k) plan account balance for consistent participants rose each year from 2010 through year-end 2015. Overall, the average account balance increased at a compound annual average growth rate of 13.9% from 2010 to 2015, to $143,436 at year-end 2015.

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The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 17.9% over the period, to $66,412 at year-end 2015. The growth in account balances for consistent participants greatly exceeded the growth rate for all participants in the EBRI/ICI 401(k) database.

EBRI notes that because of changing samples of providers, plans, and participants, changes in account balances for the entire database are not a reliable measure of how individual participants have fared. A consistent sample is necessary to examine the growth in account balances experienced by individual 401(k) plan participants over time.

However, at year-end 2015, the average account balance among consistent participants was almost double the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was almost four times the median balance across all participants at year-end 2015.

No doubt one reason for the growth in account balances is 401(k) participants tend to concentrate their accounts in equity securities. The asset allocation of the 7.3 million 401(k) plan participants in the consistent group was broadly similar to the asset allocation of the 26.1 million participants in the entire year-end 2015 EBRI/ICI 401(k) database. On average at year-end 2015, about two-thirds of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non–target-date balanced funds, or company stock.

The analysis found younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants. In addition, younger 401(k) participants or those with smaller year-end 2010 balances experienced higher percent growth in account balances compared with older participants or those with larger year-end 2010 balances.

EBRI notes that three primary factors affect account balances: contributions, withdrawal and loan activity, and investment returns. The percent change in average account balance of participants in their twenties was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 43.1% per year between year-end 2010 and year-end 2015.

The full EBRI Issue Brief is here.

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