When you have been commenting on the UK adviser technology sector for as long as I have, watching Morningstar presentations at US conferences can be frustrating. For many years the company has offered a far more sophisticated set of tools in America. Whole services, such as By All Accounts, the long-established financial aggregation service and their Model Marketplace, launched in the US last May, have never made it to the UK. British advisers are not alone, the current product offerings in Canada and Australia are both someway short of the American set.

There are growing indications this may change. This week Morningstar Australia announced the acquisition of AdviserLogic, a Sydney based supplier of CRM, Financial Planning and data technology to Australian advisers.  This followed commitment of Morningstar director of product management Jason Stipp at T3 last week to an early 2020 launch for a Canadian version of the new Goal Bridge offering, a service Morningstar clearly see as a core component going forward. The system has been built to connect a client’s goal plans to their investment plans in one workflow.

This may also be a taste of things to come as Goal Bridge sits perfectly between the By All Accounts service which can build a comprehensive picture of the investors savings and the Model Marketplace that gives advisors access to a wealth of different investment strategies that can be highly personalised for individual investors or large groups of clients.

Stipp described his vision of the product as starting with goals that humans, i.e. the adviser and client have agreed, the middle where portfolios are built to help the client achieve these goals and these portfolios, based on a client’s risk tolerance and ending with a full set of solutions to take the client towards their goal. This process would be repeated regularly to keep the client engaged with their goals and on track to achieving them.

While in parts this is a pretty standard approach, where Morningstar are seeking to differentiate their offering is in creating greater consumer ownership of the goals and achieving them. The view is that a client is far more likely to stick to achieving a goal, especially when market or other financial conditions become more challenging, if it is a goal they have personally bought into. Building portfolios is obviously bread and butter to Morningstar, but their move into helping set goals has been driven by a desire to put the goals at the heart of the portfolio.

Morningstar have made a significant investment in building their behavioural science department. Their recently published paper “The Value of Advice” (see https://www.morningstar.com/lp/value-of-advice) quantifies that a goal focused portfolio can add as much as 1.65% on top of investment returns if it is executed well. This is called Adviser Alpha also known as in Morningstar parlance as Gamma, i.e. the value that advice can add above and beyond investment returns.

The company has also conducted more tactical research around behavioural science and goal setting, the results being laid out in their “Mining for goals” white paper designed by  Ryan Murphy, Morningstar Head of Decision science (see https://www.morningstar.com/lp/mining-for-goals).  This presents a new approach that Morningstar have designed that advisers can use with clients and is proven to drive better outcomes. It takes clients through a series of stages that result in identifying a far more accurate assessment of the goals that really matter to an individual.

I explored this and other work being done by Morningstar’s behavioural science department which identifies how to get a more accurate assessment of how important ESG issues really are to individuals and how much or how little they are prepared to sacrifice in the interests of taking environmentally sound decisions in Money Marketing earlier this year (see https://www.moneymarketing.co.uk/ian-mckenna-a-fresh-approach-when-mining-for-goals/). It is also worth understanding the great work that has been done by Sarah Newcomb, Morningstar’s Director of Behavioural Science in building their Dr Money tool which helps couples understand why they disagree over money. More detail on this service can be found in my Corporate Adviser column https://corporate-adviser.com/ian-mckenna-for-better-or-worse-why-your-partner-determines-your-financial-behaviour/

The Mining for Goals approach has been embedded within Goal Bridge to provide additional tactical behavioural nudges to the customer both initially and over time as adviser and client work towards achieving the goal. Stipp cited further research from Vanguard and from other academic studies that suggest behavioural coaching can add even more than 2 percentage points a year if an advisor can deliver it well and can keep clients invested even when it hurts to invest. Personally, I find this a fascinating statistic to consider especially in the context of advisor charges. It would be interesting to understand if this extra return is net of or before adviser charges. As I pointed out earlier there is no regulatory requirement in the US for advisors to consider what a client’s needs to invest in, however the Goal Bridge helps advisors pay attention to not only what clients are comfortable investing in, but also what they need to invest in, or what they have the capacity to invest in if they have longer time until their goal starts. In other words, it is leaning towards many UK type suitability requirements.

In his T3 session Stipp particularly acknowledged growing regulatory demands around the world, acknowledging that while the Department of Labor rule did not proceed it has been replaced by the new Best Interest requirement for broker dealers. It is good to see Morningstar recognising this and building in elements that will help them address levels of regulation in other countries.

As far as I can tell, the Best Interest rule is vastly watered down from the former DoL requirements, which in turn fell far short of regulatory standards in the UK and many other well-regulated financial advice markets. In the US most advisors do not yet seemed to have grasped that high regulatory standards actually help demonstrate their value.

The software has been designed so advisors can serve more clients, producing a plan for consumers for whom they don’t have time to conduct full financial planning. Their view, supported by their research is that a client is going to understand their plan and buy into their plan because they’re seeing how it relates to the goals that they want to accomplish so hopefully, it’s easier to keep those clients on track because they understand why they’re taking the risk they’re taking. The research suggests this makes clients far more likely to follow through on their plan.

Rather than produce a step by step summary of the demo, in the interests of time, I will call out important features included in the service, the following list is not exhaustive. The process is designed to take 30 minutes and is compatible with a wide range of different investment vehicles or strategies. This can include model portfolios, an approved list and build portfolios based around goals.

It focuses on quickly setting client goals using a master list. Users understand the client’s risk tolerance, but also their capacity for risk because the service uses the details of those goals to suggest an asset allocation for each.

Morningstar’s investment data can then be used to create an investment plan in a proposal that addresses each goal, goal by goal, so clients can clearly see the investment plan for each goal. Behavioural science principles are used to help the capture and prioritise the aims of those goals. It then suggests an asset allocation and a risk profile for each of the goals.

Key elements of the proposition include

  • The ability to support multiple goal plans
  • Import client portfolio data and demographic data from Morningstar Workstation together with client personal and dependent data, again from Workstation
  • The service will also be able to connect to third party portfolio accounting or client data systems with an enterprise component (EC) version of the Goal Bridge tool.
  • Retirement age and life expectancy which and can be configured to align with any specific life expectancy approach a firm may take together with income and other similar data
  • Workplace contributions can also reflect employer matches as well as other savings
  • An inbuilt Risk Tolerance Questionnaire, although Morningstar say they can work with other risk profiling systems
  • Goal commencement dates and how long the goal lasts are captured on a goal by goal basis
  • All other risk profiling questions are only asked once
  • A separate risk profile and asset allocation can be set for each goal
  • A master list of goals is applied following the Mining for Goals approach
  • The US version has integrated college cost data
  • When applying funds from portfolios to meet each goal calls are made to the Morningstar wealth forecasting engine to produce an optimistic and pessimistic amount of money that the client would need today in order to have a good chance of funding the required goal at the appropriate date in the future
  • The correct types of products are linked to types of goals, e.g. retirement accounts are going to be used to fund retirement goals
  • Projections are then produced based on current savings and ongoing contributions to identify how near to each goal a client can get using current arrangements

The objective is to enable a conversation between the advisor and the client to improve the goal plan to achieve better contribution rates so the advisor and the client can feel more confident that they can reach the goals that they want to reach and identify the actions a client can take to improve their probability of achieving their goal, for example delaying retirement or possibly a more aggressive portfolio. These can each be modelled with the client in real time to facilitate discussions about the benefits and disadvantages of each approach.

This approach is then repeated across each goal, from the most important goals to those that are more luxuries than necessities.

The focus intends to create an investment plan for each goal; this can be achieved by various means including:

  • Advisor’s own portfolios
  • Currently Goal Bridge pulls model portfolios stored in the parent portfolio accounting system; in this case, Advisor Workstation. If Goal Bridge has access to additional models or a marketplace of models in a parent system, it could potentially pull those models into the workflow in the future.
  • approved list
  • other client portfolios or pre-existing portfolios
  • Specific criteria can be applied for the investments in a client portfolio. Such criteria can be saved for use in building portfolios

If using model portfolios where the system has loaded a firm’s model, the idea is to find the model with the least variance from the recommended or suggested asset allocation for that goal in this case. The next asset allocation step is reviewing the underlying investments in that model portfolio. At this point the system again identifies the deviation from that suggested asset allocation for the goal as the advisor make adjustments. Adjustments can be made adding or removing specific investments as necessary to achieve the required recommendation.

Once finalised the system will generate a summary of the investment differences between the original plan and the proposed plan. This will show the target risk based on the suggested asset allocation for the goal, in line with the risk profile and the goal, the current portfolio which  It may or may not be more aggressive, but likely will not be fully aligned with the proposed asset allocation. This should clearly show the differences between the two portfolios.

A PDF report can then be generated with all the necessary disclosures. This process is repeated goal by goal for each of the client’s objectives. This is currently where the workflow ends.

The next step for Morningstar will be to add the ability to use this process for ongoing reviews of the progress towards goals, to be able to monitor their progress and if necessary make any refinements or adjustments to get back on track?

To be fair much of what is being provided in the investment selection process is pretty standard stuff compare to various offerings in the UK market, what differentiates this approach however is the linking to Morningstar’s behavioural finance driven goal setting process. If a UK version of the software is created I can see this being a potentially powerful solution especially if Morningstar choose to link the service to various other components such as UK versions of By All Accounts and the Model Marketplace. Such a combination could make them a very attractive supplier for adviser firms.