Morningstar Reveals Best Interest Scorecard Fiduciary Rating Tool

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.”

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.