Morningstar Introduces Best Interest Scorecard

The consolidated proposal system, available in Morningstar® Advisor Workstation(SM), represents company’s ongoing efforts to help advisors serve clients’ best interests

CHICAGO, Oct. 26, 2017 /PRNewswire/ — Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced the launch of the Morningstar Best Interest Scorecard, designed for financial advisors to help clients make an informed decision on possible rollover options designed with their best interests in mind. This new tool demonstrates Morningstar’s ongoing efforts to prioritize investors’ best interests in light of changing regulatory requirements for retirement accounts, as well as evolving investor preferences and global trends around investment advice. The Best Interest Scorecard is available as an add-on feature in Morningstar® Advisor WorkstationSM.

Morningstar, Inc. Best Interest Scorecard

“Investors today are demanding a more collaborative and transparent approach to investment advice, which is driving advisors to better demonstrate and document the value of their advice,” said Tricia Rothschild, chief product officer at Morningstar. “With the Best Interest Scorecard, advisors now have a rigorous, convenient way to assemble the data they need to consider investment options, investors’ preferences and financial situations, and other factors to ensure their advice is in the best interests of prospective or actual clients.”

The Best Interest Scorecard is a comprehensive tool that enables advisors to assess the client’s current investment plan; changes the client could make within their current plan; and the new portfolio and service offering that the advisor is proposing for the client through a rollover or other process.

Advisors can then determine, demonstrate, and document whether their proposal is in the investor’s best interest through three different lenses:

  • Investment Value: The expected returns and costs of 97.5 percent of US mutual fund and ETF assets, powered by our research team’s ratings and methodology.
  • Client Fit: Overall efficiency of the asset allocation relative to Morningstar® Target Risk Indexes1 and the ability of the plans to deliver a portfolio that matches the client’s risk profile. In a sample of retirement portfolios, Morningstar found that 90 percent were aligned with the asset allocation and diversification embedded in the Target Risk Indexes and 10 percent were not2.
  • Service Value: The net benefit of financial planning services provided, dynamically mapped to the investor’s needs. Morningstarresearch has revealed that these services can add more than 20 percent to an investor’s income in retirement before fees.3 Examples include life insurance advice, estate planning, behavioral coaching, rebalancing and annuity purchase decisions.

The Best Interest Scorecard also allows advisors to capture other client factors, such as appreciated employer securities, financial health of the investor and employer, or desire to work with an advisor, without weighing these factors explicitly in scores.

“For the first time, advisors can provide investors with a clear, concise synopsis of how their proposal could benefit them,” said David Blanchett, head of retirement research at Morningstar Investment Management LLC. “Our methodology is unique as it combines ratings and analytics from Morningstar’s comprehensive investment database with retirement plan data and aggregation capabilities to give advisors the most up-to-date and rigorous information we can get on retirement plan fees, lineups, and participant portfolios.”

The Best Interest Scorecard is fueled by Morningstar’s proprietary research including the Morningstar Quantitative RatingTM, asset allocation models and portfolio analytics to assess portfolio risk and returns-based style, and proprietary measures of the utility of advisory and financial planning services to investors at different stages of their investing career. All these have been assembled into a concise decision architecture that enables advisors to assess the net benefit for their client of changing to their proposed plan and portfolio from an existing one.

Please visit for more information about the Morningstar Best Interest Scorecard and Morningstar’s Best Interest Solutions. Learn more details about the research behind the Best Interest Scorecard at

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Disaster Recovery Plans

With all of the disasters in the past couple of months (hurricane, fires, floods) now is a great time to determine the adequacy of  your Disaster Recovery Plan (“Plan”).  You are required to “test” your  Plan each year.  Riding out a disaster is an opportunity to “test” the Plan.  Create an after-action report if you will and document this “test”.  Your “test” didn’t occur if it isn’t documented, so be sure to document what you did and what you learned.

I have been reviewing several Plans in the past  weeks as part of the Annual Document Review for clients.  After discussions with those clients that have been through a disaster recently and reviewing these Plans, I feel it is important to have a hard copy of your plan handy AND that the Plan include the information that you need to know in the event that you don’t have access to anything at your office or in the cloud. Access to the cloud is not a guarantee during a disaster – as many people can attest to during the past couple of months.

When reviewing your Plan, take a look at the details – do you need to add account numbers or policy numbers in the event of a disaster?  Is the person that is responsible for completing something as part of a disaster preparedness the only person that is trained to do this process?  If so, what happens if they aren’t in the office when this process needs to be performed?  One of my clients discovered during their disaster preparation that the only person in the office that knew how to forward the phones was on vacation.  So their preparations were slowed while they discovered how to forward the phones.

You’ll want to really look at the Plan and determine if you will be able to recover from a disaster with the information in the plan alone.


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Cybersecurity Checklist

At the NASAA (North American Securities Administrators Association) annual meeting last month, the group was presented with a tool for state-registered advisers to help them assess their cybersecurity preparedness.

The NASAA Cybersecurity Checklist for Investment Advisers includes 89 assessment areas to help identity, protect and detect cybersecurity vulnerabilities, and respond to and recover from cyber events.

Take a look at the checklist.

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The Fiduciary Rule, Distributions and Rollovers

information provided by Fred Reisch blog at

Now that it seems likely that the fiduciary rule and the transition exemptions will continue “as is” until at least July 1, 2019, it’s time to re-visit the fiduciary rule and the requirements of the transition exemptions. This article focuses on the requirements for recommending that a participant take a distribution and roll it over to an IRA with a financial institution and its advisor. (Practically speaking, the financial institutions will likely be broker-dealers, RIA firms, and banks and trust departments). For ease of reading, this article uses “advisor” to refer to both the entity and the individual.

In order to recommend that a participant take a distribution, the financial institution and advisor must satisfy ERISA’s prudent man rule and duty of loyalty. That is because a recommendation to a participant is considered to be advice to a plan. Among other things, that means that, if the advisor violates the rules, there is a cause of action under ERISA for breach of fiduciary duty (as opposed to the Best Interest Contract Exemption, where a private right of action is less certain).

If the advisor will earn more money if a participant’s benefits are moved to an IRA, that will be a prohibited transaction. As a result, the advisor will also need to comply with the condition of an exemption, most likely the Best Interest Contract Exemption (BICE). The transition version of BICE requires that an advisor adhere to the Impartial Conduct Standards. Of those standards, the most significant for this purpose is the best interest standard of care. Since the best interest standard of care and ERISA’s duties of prudence and loyalty are substantially similar, this article just refers to the best interest standard (even though both apply). The best interest standard requires that an advisor obtain the information that is relevant to making a prudent and loyal recommendation about a distribution. The Department of Labor has said that, at the least, that includes the services, investments, and fees and expenses in both the plan and the IRA. In addition, the best interest standard requires that the plan and IRA information be evaluated in light of the needs and circumstances of the participant.

The information about the services, investments, and fees and expenses in the plan is the most difficult to obtain. Fortunately, that information can be found in the participant’s plan disclosure statements. Additional important information is in the participant’s quarterly statements.

But, what if the participant can’t locate the information? Realistically, that should be a rare case, since plan sponsors are required to distribute the disclosures at the time of initial participation and annually thereafter.

But, what if the participant can’t find those disclosure materials? In a set of Frequently Asked Questions, the DOL responded that an advisor must make “diligent and prudent efforts” to obtain the plan information. If the participant can’t find those materials, then it seems likely that, at the least, a diligent and prudent effort would require that the advisor inform the participant that:

  1. The information is usually available on the plan’s website and they could obtain it from that source.
  2. The information is available from the plan sponsor upon request to the benefits personnel.

If neither of those options is successful, or if the participant is unwilling to take those steps, the advisor can use information from the Form 5500 or from industry averages. (Interestingly, 5500 data is not considered primary data for this purpose. It can only be used after a diligent and prudent effort has been made to obtain current plan data from the participant.)

Even where 5500 data or average plan data is used, there are additional considerations:

  • The advisor must provide “fair disclosure” of the significance of using the primary plan data, that is, current information about the plan from, e.g., the participant disclosure forms.
  • Plan averages must be based on “the type and size of plan at issue.” As a result, the advisor will need to know the type and size of the plan.
  • The advisor must explain the alternative data’s limitations.
  • The advisor must explain “how the financial institution determined that the benchmark or other data were reasonable.”

However, it would likely be a rare case that alternative data could be used. If a financial institution finds that its advisors are consistently using alternative data, that suggests that the advisors are not making “diligent and prudent efforts” to obtain actual plan data. The consequence of non-compliance is that the compensation paid from the rollover IRA is prohibited and cannot be retained by the financial institution or the adviser. There could also be an ERISA claim for breach of fiduciary duty.

An additional issue is that the “alternative data” may only include information about fees and expenses. In order to perform a best interest analysis, the advisor must also have information about a plan’s services and investments. For example, does the plan offer a brokerage account where, if the participant desired, the participant could have access to a wider range of investments? Another example is whether the plan offers discretionary investment management for participants’ accounts. If it does not, that may be a valuable service offered by the IRA; but, if it does, the expenses and the quality of those services in the plan and IRA should be compared.

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Finding Fees to Satisfy DOL Rule – Part 2

FeeX for Advisors helps financial advisors comply with the new Department of Labor fiduciary rule regarding 401k rollovers and IRA transfers. FeeX automatically collects and analyzes the 404a5 participant fee disclosure document as its main data source and runs a detailed analysis on an investor’s existing account, taking into consideration the investor’s specific plan and holdings.  This type of detailed analysis could take a veteran advisor days to complete and is now required under the new DOL rule.

The FeeX for Advisors platform automates and streamlines compliance processes thereby saving financial advisors valuable time which allows them to focus their efforts where they are truly needed – helping customers.

The platform allows for a side-by-side comparison of fees, features, past returns and asset allocation against a model portfolio or personalized portfolio. It can be white labeled and deployed in a matter of minutes. It is currently being used by thousands of advisors as well as Fortune 100 financial services companies.

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Finding Fees to Satisfy DOL Rule

A question I keep hearing is “how do I determine the fees associated with the 401(k) or other retirement plans that a client currently owns?”  Good question and could be a difficult one to answer.  Here are some suggestions:

  1. Ask the client to provide you with the Summary Plan Description for the plan.  This should have the information that you require.
  2. Check out a website  It looks like they will provide the information, but you may receive solicitations after entering information to obtain a response.
  3. RiXtrema’s tool IRAFiduciaryOptimizer is a paid software that could be of assistance.

If any of you try these, I would appreciate any feedback.

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Be Aware When Wiring Funds for a Client’s Escrow

It has come to my attention that wiring funds to close an escrow for a client could end up with funds going to a hacker.

My understanding is that most escrow companies will give the wiring instructions to the client initially and will NOT change the instructions after they initially give them to the client.  However, some hackers have been sending clients (those that are buying the house) new wiring instructions.  Then the funds for their new home are wired to the hacker instead of the escrow company.

I suggest that, as done with any wire, that you call the escrow company directly via a phone number that you already have and confirm the wiring instructions.  If you are aware that your client is buying a home and will need funds from their account, get those instructions and/or the contact information for the escrow company early on in the process.

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