Deals & People February 22, 2007

S&P Sells Fund Data Biz to Morningstar

Standard&Poor's is selling its mutual fund data business to Morningstar, including mutual fund data on performance, rankings and holdings on more than 135,000 funds in over 30 countries, as well as desktop applications and data feed products, for $55 million in cash.
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Under the agreement, Standard & Poor’s will license mutual fund data from Morningstar for use in Standard & Poor’s fund ratings and research products and services.
Resource Focus
S&P described the move as an effort to “focus resources on its core analytical services for the global fund industry,’ noting that the firm continues to experience increasing demand from wealth managers and leading fund distributors for its independent fund ratings and research, which include fund management ratings, fund research and selection services, and money market and bond fund ratings. The companies expect to complete the transaction in March, subject to customary closing conditions.
“Historical fund data is used as a screen for our fund ratings and research business, but is not core to our business of providing independent qualitative ratings and analysis for the global fund industry,’ said Deven Sharma, Executive Vice-President at Standard & Poor’s, in a press release.
Ratings versus Rankings
Standard & Poor’s fund rating is a forward-looking opinion of the quality of a fund’s management, based on an in-depth analysis, qualitative analysis of its investment process and consistency of approach. Standard & Poor’s will continue to build and develop this business. On the other hand, Standard & Poor’s fund ranking is a quantitative assessment of the past performance of a mutual fund compared to that of its peers in its respective style group. Standard & Poor’s fund rankings are part of the mutual fund data business sold to Morningstar.
“Our market-leading qualitative fund ratings and research business has grown significantly over the last few years, specifically our fund management ratings business, which currently rates over 2,200 funds globally,” said Sharma. “As a result, we have ambitious plans to expand the fund ratings and research business by widening the pool of funds that we rate, increasing our research capacity and developing additional distribution channels throughout the world for our market-leading analysis and opinions. Our fund management ratings supplement quantitative historical performance with qualitative fund manager evaluation.”
Global Expansion for M’Star
“With the acquisition of Standard and Poor’s fund data business, we believe we’ll have the most extensive global database for managed investment products in the industry. The combination of Morningstar’s industry-standard investment data and Standard and Poor’s international mutual fund data will significantly strengthen our global database and our offerings to investors,’ said Joe Mansueto, chairman and chief executive officer of Morningstar, in a press release. Mansueto also said the transaction would give Morningstar a “much stronger presence outside the United States, particularly in Europe, where Standard and Poor’s has operated for more than 20 years.’
In Practice February 22, 2007

Focus on Plan Fees and Revenue Sharing to Continue

Retirement plan advisers can anticipate a continued focus on fee transparency in the coming months.
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As a result of the series of lawsuits filed against plan sponsors and plan providers, there will be calls for increased fee transparency within the next year, and new action from the government and the Department of Labor (DoL), said Fred Reish, of Reish, Luftman, Reicher, & Cohen, speaking on PLANSPONSOR’s “Plugged In” webcast yesterday.
Since these suits are likely only to continue to put pressure on the retirement plan industry, especially as the government gets involved, Reish’s advice for plan advisers is to be working on fee transparency with clients. “Position yourself as an ally to the plan sponsor,” he said. An adviser’s job is to tell the plan sponsor if the fees are right for the plan, according to Mark Davis, an RIA and partner at Kravitz Davis Sansone, who said that fee fairness should be an ongoing discussion.

The Allegations

The lawsuits, filed by the St. Louis-based law firm of Schlichter, Bogard & Denton against several 401(k) plans sponsored by large employers, are not identical, said Nevin Adams, Editor-in-Chief of PLANADVISER (See Fee for All), in fact, it was surprising to see how specific they were about each program. Although not the same, in general the allegations include three major concerns: first, that plans entered service arrangements under which the plan and participants paid “unreasonable fees” and “hidden and excessive fees;” second, that the plan sponsor did not understand or recognize revenue sharing arrangements; lastly, that the plan sponsor did not disclose to participants in “proper detail and clarity” the transactions fees and expenses.
Under the Employee Retirement Income Security Act of 1974 (ERISA) 406(a), fiduciaries must act in the exclusive interest of participants and beneficiaries for the purpose of providing benefits and defraying reasonable administrative expenses of the plan and 406(b) says that a fiduciary cannot use influence or authority to be paid fees from third party provider. ERISA 408(b)(2) states that the use of plan assets to pay fees of plan service providers is a prohibited transaction unless the services are necessary and the compensation is reasonable. The lawsuits allege breaches under all of these.
“Even though I disagree with some of their conclusions,” Reish said, of the customized complaints, “they did do their homework.”

“Hidden” Meanings

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Reish said it is interesting to examine the use of the word “hidden” in the complaints. He said those filing the complaint are effectively saying that when the payments are indirect, when the plan isn’t cutting a check to a provider but instead are making payments to each other, that is a hidden fee. Their “logic is that if something is hidden it is bad,” Reish said, “[they think a provider] wouldn’t hide a good thing.’
Reish said that there are different perspectives on the issue; those that say the only thing that matters is the overall cost, and its fairness, and people who say that the components of the total cost must be disclosed, because they are entitled to know what each entity is making as part of a determination that the allocation, as well as the total amount, is fair – and if anyone making recommendations to the plan, be they a fiduciary or not, is making money
When you buy a car, you don’t consider what the metal or other components costs, you just examine the total cost, said Adams, discussing the specificity of the complaints, looking for full disclosure on how plan fees are charged. However, commented Reish, when you buy a car, you don’t want to learn that your brother-in-law is getting paid to get you to buy that vehicle, alluding to the revenue sharing agreements critiqued in the suits.
Coming Monday: Part II – Appropriate share classes, looming regulatory changes, and insights on how and how often to review plan fees.

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