Ep. 110: How the Risk Ecosystem Helps Clients Invest Differently with Jeff Schwantz, Morningstar

“At the end of the day, Morningstar is a data company and we’re a research company, and we expose that through software. Twenty years of history and academically validated research is really hard to replicate in the FinTech space. And part of the acquisition of PlanPlus Global is they did some things on the advanced financial planning side that was going to take us a bit to get there. So it helped us accelerate that. So how do we take it out of those legacy products and make it available for all of our enterprise software solutions?”

— Jeff Schwantz, Global Head of Advisor Client Experience, Morningstar

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The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. This episode is part of our September focus on client experience. We’re talking to influential industry leaders who can provide technology solutions that help advisors build stronger relationships, improve outcomes, and enrich their clients’ lives. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.

Companies Mentioned

Topics Mentioned

  • Helping Clients Invest Differently
  • Morningstar Software Empire
  • Build vs Buy Decisions
  • Trends in Usage of Risk Software

Episode Transcript

Craig: I’d like to introduce our guest for this episode, Jeff Schwantz, General Manager and Global Head of Advisor Client Experience at Morningstar. Jeff, hey, welcome.

Jeff: Craig, great to be here, love that we get to talk about client experience today.

Craig: So happy. This is our client experience month at the WealthTech Today podcast, and who better to have on than the head of Global Client Experience, than you. So, everyone of course knows Morningstar, we don’t need to introduce Morningstar to the audience, especially this audience, but we’re talking about on this episode the risk ecosystem which is a new product offering from Morningstar, so you can you give us a 30-second overview of the risk ecosystem?

Jeff: Sure. Morningstar has been continuing to invest in our financial planning capabilities of last several years. The launch of the Morningstar risk ecosystem was just the next evolution of that, which really brings together several things today that we think there’s a lot to improve on the marketplace and ultimately to help investors better understand the impacts of risk and help them achieve their financial goals.

So at a high level, Craig, it really brings together understanding an individual’s risk tolerance in a way that we think is unique and very Morningstar, and bringing that element into it. It’s also looking at portfolio risk, so this is what Morningstar has been doing for years and years and years, and then it’s really marrying those two together. But the other opportunity, what we’re also as we build on the risk ecosystem, it’s also bringing in an individual’s non financial preferences.

So think about on the vein of client experience, think about what everybody is looking for impact investing, ESG investing, that’s another really important element of the overall risk ecosystem that will be the next element that comes in the overall risk ecosystem. When you look at our methodology its risk tolerance of the individual, think about that as their risk IQ. The next is their portfolio, what are the risks in their portfolio. And then understanding the fit or miss fit between the client, the individual and their portfolio. And then last, they’ll be layering in the elements of their non-financial preferences so think about their impact investing, ESG, those are really the elements of the risk ecosystem.

Helping Clients Invest Differently

Craig: Excellent, so let’s take them one at a time, I’ll work backwards. Non-financial preferences. So, in the old days we used to call those restrictions or customizations where the client doesn’t want to invest in tobacco stocks, they don’t want to invest in military equipment or energy stocks, now it’s called ESG. When you call them non-financial, they are kind of financial because they’re talking about investments they don’t want to make or is there something beyond that when you call them non-financial preferences?

Jeff: It’s understanding those things that really are important to them that are probably more related to their social preferences or things that are really important to them. And so, everything else in the risk ecosystem it’s understanding risk and reward and take off. But there’s other things that investors in the world of hyper personalization, when you talk about cleaning experience today that everybody’s really interested in saying hey you know what, there’s things that I want to do differently and better. I want to invest differently, I want to take these types of actions because I want to lead a better life or I want to leave a better world than what I may be operating in today. It’s that kind of perspective that we’re looking to gather a better sense of today and you’re right, it’s always been around exclusions of tobacco or stocks or gaming. So it’s that, but it’s also more on the positive side of, I’d really like to invest in companies that are doing better so sustainable energy as an example, reducing carbon footprint. It’s not necessarily just the exclusion, but it’s also on the positive side of, hey, I want to invest in things that are going to make a difference. It’s understanding those preferences that they have, as opposed to the exclusion side of, I want to do more of this and really calling that out. So around the client experience it’s really understanding that personalization that we know is so important to make so many ambassadors and growing during the day.

Craig: So I definitely want to get more in depth into the client experience aspect of this, but I want to backtrack, you mentioned that when you taught when you started out your 30-second overview you said “Morningstar is continuing to invest in our financial planning capabilities”. So, can you give us a quick glimpse into the overview of the strategy of financial planning at Morningstar and how does this risk ecosystem fit into your overall financial planning capabilities?

Jeff: Sure. Well, organically in our own development, what we do and have been doing been doing around financial planning is really our goal is, how do we help investors have better financial outcomes. So we know financial planning, and understanding and illustrating the decision trade offs that are made within financial planning is hugely important to help people understand prioritize understanding goals. So we’ve been investing in our own capabilities building out our own financial planning capabilities over the last several years. So inorganically, we’ve also made several acquisitions globally over the last couple of years. We acquired AdviserLogic in Australia a couple of years ago, we acquired PlanPlus Global in April of last year, and with the PlanPlus Global not only did we acquire financial planning capabilities, but what also came in was risk, and that’s the piece of the risk ecosystem.

So how do they all interplay, well if you look at our financial plan typically there’s a couple of decisions to make. So, number one, we all know the impacts of goals. If you’ve been in the financial planning space like many of our listeners have, we can always choose to defer our goal, therefore work longer, we can contribute more to it. I can reduce my spending, I can invest more into my goals. There’s a series of triggers, but the one that’s most often understood and is the one that is least accessible for most people, Craig is understanding risk. Should I be taking more risk to achieve my goals or how does risk actually impact my goals?

You think about the first couple, they’re pretty simple for all of us to go, yeah, I understand that you work longer I can save more I can spend less, mostly when it comes to the risk well, how much risk should I actually be taking within to achieve my goals, and do I really understand risks I need to take and do I understand the risks that I’m comfortable with? When we look at and why this has become such an interesting inflection point, we believe this because as more and more organizations go towards financial planning, understanding these things in a better way, making them more accessible and making them understood by the end investor is going to naturally drive the risk question, because that’s the one that’s least accessible for most people. So to the extent that we can shine a light on understanding and having people truly understand the risk that they’re comfortable with, that’s your risk tolerance, that’s the really first big step.

What’s been really interesting in the risk space is that, as an industry, we could do a better job on this. Because historically we’ve asked clients to take a risk tolerance questionnaire, and we call it a risk tolerance questionnaire, but really what most organizations have done is they’ve conflated a couple of topics, they’ve conflated time horizon, they’ll ask you a series of questions and how would you react if this were to occur. But what that’s not getting at Craig is the actual risk tolerance of an individual. And this was part of our acquisition of the PlanPlus Global specifically FinaMetrica, that was so intriguing for us because they had a they had 20 years worth of data that had been academically validated and asking a series of questions that’sagain very accessible for the end individual to understand their risk tolerance and having that validated by nearly 2 million respondents over 20 years, gave us great confidence that we’re asking better questions to really understand the behavior and tolerance of individuals that we don’t think the industry has done a great job of historically, because again, topics are often conflated.

So that’s where we saw the really big opportunity to bring together the behavioral side of what’s really going on with individuals, and starting to marry that together with what’s going on in the portfolio side, different than what we’ve seen historically done in the space and we’ve got again to do with our ability to do a better job and in doing that.

Morningstar Software Empire

Craig: I think what a lot of people don’t realize is that with Morningstar, everyone thinks of Morningstar data, Morningstar portfolio analytics, but really, you have a huge footprint in software in our space between Morningstar Office, Morningstar Direct, Advisor Workstation, and now the risk ecosystem and your other acquisitions. So, how will the advisor at client experience which is your area of expertise, how will that change with this new technology and this new ecosystem, and what how will it be different than how advisors are working today?

Jeff: What we are going to do is, the Morningstar ecosystem has already been integrated into Advisor Workstations just in North America, we have the pleasure of serving over 185,000 members of that community today so member subscribers. It’s already within that experience, we are in the process of integrating it into all of those other flagship solutions as well so Morningstar Office, Morningstar Direct, but here’s the other important part of it too Craig is, we are also bringing it to how we serve consumers directly today. So we have over two and a half million people that come in today into Morningstar.com, and that are doing their own research. Some of those are also become members of our, our premium community, so we provide tools sets to those individuals that want to do some planning or financial managed portfolios on their own or in conjunction with an advisor that they actually may work with. We are taking the Morningstar risk ecosystem, at the end of the day and putting it into every one of our flagship products that serve advisors, professionals, institutions, and ultimately, to the end consumer as well.

When you look at the trends that are going on around the client experience, we look to the healthcare space we look to other industries and what individuals are looking to do, and they want to what they want to do is they want to educate themselves first, they want to be able to really understand it. So that’s where we’ve got the inflection point of how do we serve this to the end investors in the communities that we serve there, but then how do we enable that collaboration that’s happening between the investor community and the advisory community in a more seamless way that again is another opportunity that we see to be able to lean into and help advisors better serve their investors, we’ve got a more informed investor, being able to understand the things and the questions that they should be asking as well.

Build vs Buy Decisions

Craig: How did you guys make the build versus buy decision to acquire PlanPlus Global and FinaMetrica? Obviously you’ve got a very strong bench of software development, building out your own systems and you started building out Goalbridge, your own financial planning tool, what was the impetus to make you to pull the trigger on that rather than building it yourself?

Jeff: Sure. You know what’s kind of fun in the FinTech space Craig is we can all build really amazing tools right now, but at the end of the day, Morningstar we’re a data company and we’re a research company, and then we expose that to software. And what’s really hard to replicate Craig is 20 years of history and academically validated research that’s really, really hard to replicate in the FinTech space. And part of the acquisition of PlanPlus Global they did some things on the advanced financial planning side that was going to take us a bit to get there. So it helped us accelerate that. And how do we start to take it out of what were those legacy products and make it available into all of our enterprise software solutions.

But what’s really interesting about that acquisition was the acquisition of the IP, and the 20 years of academically validated research on understanding the risk IQ of individuals. And that’s the part that’s really hard to replicate for any FinTech. Any new FinTech that starts today, they don’t have that history to be able to have that research validated through and through, and that’s a part that’s really meaningful part of the acquisition. So it’s not just the software, it’s really the research and the history.

Craig: Got it. So you mentioned this before risk IQ. Can you explain how individual risk tolerance is different from risk IQ or how risk IQ is better than the way firms are doing risk tolerance today?

Jeff: Sure, so people understand, typically, if you understand an individual’s IQ over their life their IQ really doesn’t change meaningfully over their life. It’s a psychometric trait that you have, it’s something that is in each individual being, and your tolerance for risk is similar. And this is really important, so risk tolerance Craig if done well, it’s going to measure that person’s their psychological trait, their appetite for risk and that does not change over their life. And some of the things that we see today, they don’t have that consistency to be able to understand and measure, and quite frankly, some of the questions that we asked advisors in enterprises is if your risk tolerance is actually changing if markets get a bit choppy, you’re probably not actually measuring risk tolerance because your risk tolerance again, it’s a trait of yourself it’s not going to change regardless. And that is a, that’s a that’s a part of the education that we’re trying to do to help people understand it so your IQ does not change over a lifetime. How you may react to things, that’s a different measure. We’re just trying to get people back to basics Craig of what is risk tolerance, and how does it change or not change over an individual’s life and let’s start there.

Craig: I would think a lot of things change over people’s lives and how they react or interact with the markets or any part of their life especially finances as they get older, you know, when you’re in your 20s, 30s, 40s and may be very different, how you interact with finance, interact with the market than when you’re 40, 50, 60.

Jeff: Correct. But that’s the point is, it’s your tolerance for risk, as a human does not change over your lifetime. But what happens is market events, things like your risk composure well that’s actually something else. So that’s where, again, as an industry we have conflated topics, unfortunately, that we’re bringing these things together and the actual measure of risk tolerance if done correctly and measured correctly, that tolerance does not change over a person’s life. And that’s what we’re trying to make sure that individuals, advisors, clients really understand is that, if done correctly, that doesn’t change. Everything else, we may shift around composure, their risk capacity to be able to take on additional risk or reduce risk to achieve their goals. But the core of that risk tolerance if done correctly, does not change over a person’s life, and that’s where we see again a significant opportunity in the market to help better serve investors, having advisors understand that nature, being able to explain that to the end consumer. And then, how do we start to parlay that into how does it impact their financial goals.

Craig: And then you can link it to Goalbridge.

Jeff: Yeah, exactly it’s linking it to Goalbridge or any of our financial planning capabilities.

Craig: I remember when you first announced that I thought it was a really good idea considering you have a lot of the tools but that’s gonna be a big gap between your portfolio analytics software and data, and Morningstar ofice your implementation portfolio management tools, there was that gap in between that Goalbridge seemed to fill and now the risk ecosystem, fills even further.

Jeff: Exactly, just fills in so you think about. It’s all about planning to action, to your point, Craig, it’s let’s understand it, let’s understand the trade offs, and then when we agree on, here’s the next best action today, what do we do and so how do we put it into a portfolio, how do we then put that portfolio to action, fund it, be traded, everything else that that exists that we all know takes place next.

Craig: Your software is used by so many advisors, I think the numbers I saw were Advisor Workstation has something like 150,000 users. So what how do you see risk ecosystem, what would be a success in terms of adoption rate of your current user base?

Jeff: Yeah. So, in North America we’ve got actually north of 185,000 members subscribers today.

Craig: You mean I was shortchanging you with only 150,000.

Jeff: No, just wanted to make a point of clarification, we’re a growing company so while we always want to make sure that the facts align two won’t be what we communicate

Craig: Jeff, I appreciate your being precise.

Jeff: So it’s important, and what was interesting Craig is when we launched it within two weeks, we had north of 32,000 member subscribers start to already engage with the morning service ecosystem. One element of that was just a portfolio risk score, running it through, and understanding what’s the risks for the portfolios. When we were communicating with advisors in the very beginning, advisors were really excited to have effectively a Morningstar rating for their portfolio. To sit down with their clients and say hey, Craig, this is the portfolio I built for you and this is the Morningstar risk score that when we ran your portfolio that I built for you custom, here’s a point of view. And advisors were really excited to be able to take what has always been the star rating or the analyst rating and now they can have something that they built and they touched for the consumer, and put in the personalization that they wanted to do to the household that they serve, super excited about it.

I mean, ideally, we’d love to see, and we would expect to reach almost all of that 185,000 members subscribers that we have today using the Morningstar risk ecosystem. So now we are we are almost two months in and we are getting large adoption but it’s also where else can we bring it? We’re bringing into Australia, we’re bringing it to India, now that we’ve got the fundamentals built and we’ve got the processes running so it’s not just relegated to North America, which is our largest footprint but it’s also bringing this globally as well so high adoption expectations. Craig is, Is this the shorter answer.

Trends in Usage of Risk Software

Craig: I can only imagine. It’s interesting you within two weeks to get 32,000 advisors engaging with your product that’s, the best kind of initial rollout you could possibly expect from any company would be glad to exchange that because the data you’re getting from those initial users I’m sure is really valuable and helps shape the further direction of the product.

Jeff: Exactly. And I think even some of our correspondents we were starting to analyze what we were seeing in in the data. So, portfolios risks or where are we seeing differences between genders so those that have associated with being female, we’ve always known the data suggested to be more risk averse, guess what we saw exactly that. We saw differences in portfolios, built for consumers here in the US versus Canada we saw our can our Canadian households, be a bit more risk averse and the portfolio’s that were being traded or managed by advisors in Canada as well. We’re only starting to see some of the really, really rich data coming out of that, we’ve got our data team our behavioral science team also starting to really analyze that we are getting more and more data, running through the application that we’re starting to extract and look at those cohorts so, super interesting.

Craig: Were there any other differences besides risk averse and non risk averse that you saw in that data?

Jeff: Those are kind of some of the high levels as you can imagine, we really need to drill down into that to understand well. This is where the financial planning connection comes, so it’s which of those portfolios are attached to which types of goals, what are the time horizons of those goals. So, on a blend, it’s hard but now that’s really where we’re focused on now is how do we start to parse this information to see what is the time horizon of some of those goals where portfolios may actually be more conservative, why naturally, we’ve got a shorter time horizon with which to achieve that goal. So that’s kind of a layering that we’re seeing, you know, we’ve got this layer of obfuscation right now but now what’s working toward we’re drilling in

Craig: The layer of obfuscation, we want to get rid of that, pull that layer off. So, we’re running out of time, I want to make sure I get all the questions in. So, with this new risk ecosystem and we’re seeing it rolling out, we’re seeing advisors engaging with it, we’re seeing it move through the ecosystem. How about on the investor side? One thing we do a lot of research at Ezra Group, our research group, we do a lot of research talking to advisors, and we did a risk study a couple weeks ago. And one of the things we heard from advisors was even when they do a risk tolerance with a client, the client forgets that they were risk averse. And then when they’re behind the market a couple years later, they say what are you doing, well you told me you’re risk averse no I didn’t! You know, they argue that. So what kind of educational tools are you building to help clients really understand the decisions they’re making when they say they’re risk averse, or they’re picking a conservative portfolio what that means in the future?

Jeff: That’s why it was so important for me to mention what we’re doing direct to consumer and the two and a half million people today to come look for education on Morningstar.com on all topics around portfolio, risk is next element. We’ve got Dr. Sarah Newcomb she’s actually a member of the advisory planning experience here at Morningstar, and Sarah is well known for what she’s been doing in the behavioral science side for years here at Morningstar and how we help work with advisors, put certain things into the practices.

What Sarah has been tasked with is how do we help not only lift, if you will the understanding of risk with advisors, but how can we help create communications that we can use directly with the end consumers that lets their understanding of that because of that exact thing Craig, of reactions that investors want to take well if they understand, back to the risk IQ, if they understand their risk IQ, how can we help them avoid making those behavioral changes that we always see a permanent when markets rise, and when they fall. So we’ve got the education side going on with advisors, but it’s also what we’re doing directly to the end consumers, hopefully helping them lift their understanding of risk and how does it impact their goals and what we’re doing. So really, it’s feeling both sides to be able to again make better investors and better informed investors and better consumers really great advice that we know advisors combined.

Craig: Jeff, you’ve said it all and we are out of time, we had to rush this one, I’m glad we squeezed it in Jeff. So you could be here, how can people find out more about the rescue ecosystem?

Jeff: Go to Morningstar.com, you can do a quick Google search just call it the Morningstar risk ecosystem. We’ve got a video directly on there that quickly illustrated as well. So the web is a wonderful way to engage, but our teams are also available for advisors and consumers alike that are looking to get more information as well.

Craig: Fantastic. Thanks Jeff. Really appreciate it.

Click here and schedule a Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com