Considering Morningstar a Fiduciary is a Bad Idea

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Considering Morningstar a Fiduciary is a Bad Idea

Morningstar is a big name in the investment industry. Their “star” system of rating investments is one of the most widely used, yet misunderstood, rating systems. Unfortunately, Morningstar’s fiduciary advice follows in similar footsteps. The company has admitted that their star system is not a strong indicator of investment performance, and the truth is that it can generally be ignored. So when they act as a third-party fiduciary, should they be relied on?

If you are considering using Morningstar as a third-party fiduciary, consider this: It is not the same thing as hiring a true fiduciary adviser.

The 401(k) platform provider has chosen Morningstar as a ‘fiduciary partner’ because they know Morningstar’s ratings are so broad that nearly every fund will qualify. In addition, the reason for offering you this fiduciary service in the first place is in part for the purpose of better marketing, not necessarily to better serve you as a client.

A third-party fiduciary tacked onto an investment service doesn’t even follow the same legal guidelines of a true fiduciary. Let’s look at it this way: There may be 500 mutual funds in a 401(k) platform’s recommended list to choose from however, this is just a small portion of the 25,000 mutual funds that exist outside of their options. The third-party fiduciary will only recommend funds within the select list of 500 funds, even if there are better and less expensive options for you in the remaining 20,000 not offered to you. If all of the options provided to you are bad, Morningstar will simply choose what is best from the bad pile, rather than referring you to the good pile next door.

You are never truly going to get the best investment options.

Companies like Morningstar also aren’t held to the same fiduciary standard as a true fiduciary. They are only liable if found guilty of gross negligence, whereas a true fiduciary is found liable for any advice that isn’t in your best interest.

Using a company such as Morningstar gives plan sponsors a false sense of security, as they aren’t doing all they could to give you the best plan possible. They aren’t even required to document their decision process.

On the other hand, if you work with a true fiduciary they will do the research and take the time to provide you with the best options. Sure, a true fiduciary may be a little more expensive, but they will make sure that you have all of the information you need and will always work in your best interest. There shouldn’t be conflicts of interest or compensation for advice from other companies.

At Anson we believe strongly in our fiduciary duty and we promise an experience free of conflicts. Considering the risks and liability of sponsoring a 401(k) plan, wouldn’t it be prudent to hire a full-fledged fiduciary?


Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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