A. Firm
Morningstar Research Services LLC is a Delaware limited liability company formed in
2016, and is a wholly owned subsidiary of Morningstar, Inc. (“Morningstar”).
Morningstar is a publicly traded company (NASDAQ Ticker: MORN) with Mr. Joseph
Mansueto, Executive Chairman of Morningstar, holding more than 35% of
Morningstar’s outstanding shares. Because of that ownership, Mr. Mansueto is an
indirect owner of Morningstar Research Services.
Morningstar Research Services is registered with the United States Securities and
Exchange Commission (“SEC”) under Section 203(c) of the Investment Advisers Act of
1940, as amended. Morningstar Research Services consists primarily of investment
professionals that were previously part of Morningstar’s U.S.-based manager and
equity research teams. Morningstar’s manager and equity research teams have been
producing investment research since 1986 and 1999 respectively.
B. Services - Overview
Investment Research Reports
Our core offering is the production of investment research reports on equity securities,
mutual funds, exchange-traded funds, separately managed accounts, model portfolios,
and other managed investment products (“Investment Research Reports”).
Investment Research Reports are prepared without taking into consideration any
investor or investor’s specific facts and circumstances and thus are generic/impersonal
investment advice intended to be educational in nature and for user’s research
purposes.
Our Investment Research Reports or excerpts from them are distributed in two primary
ways: (1) through Morningstar’s software products (e.g., Morningstar Direct),
newsletters, and Morningstar branded websites (e.g., www.morningstar.com)
(collectively “Distribution through Morningstar”); and (2) through license agreements
directly with non-affiliated financial institutions including broker/dealer firms, banks,
insurance companies, investment advisory firms, and media platforms (“License
Arrangements”).
Our core investment research offerings include the following:
1. Equity Research Reports
a. We produce investment research reports with qualitative
analysis on primarily North American equity securities. Our equity
analysts utilize a proprietary discounted cash flow model as part
of their evaluation of a security and their determination of its fair
value estimate of the security’s stock. See Item 8 below for
details.
2. Manager Research Reports
a. We produce investment research reports with qualitative
analysis on certain open-end mutual funds, exchange-traded
funds (ETFs), separately managed accounts, model portfolios,
collective investment trusts (CITs), variable annuity, variable life
subaccounts, and other managed investment products (each a
“Managed Investment” or collectively, “Managed Investments”).
The cornerstone of our investment research is the determination
of a Managed Investment’s Morningstar Medalist Rating TM. See
Item 8 below for more details.
As the process by which equities and Managed Investments can be analyzed is
limited by the size of the equity and manager research teams, Morningstar has
developed machine-learning models that use the decision-making process of the
analysts, their past rating or analysis decisions, and the data used to support
those decisions. The machine-learning models are then applied to create
quantitative analysis or ratings, which are designed to be analogous to what an
analyst might produce if they covered the security.
Manager Due Diligence and Selection Services
We provide investment consulting services to affiliated registered investment
advisers (“Affiliated Clients”) as well as non-affiliated financial institutions
including, but not limited to, broker/dealer firms, banks, insurance companies, and
investment advisory firms (“Non-Affiliated Clients”). These services are provided
on a non-discretionary basis; with the Affiliated and Non-Affiliated Clients
(collectively “Institutional Clients”) having final decision-making authority on
whether to follow our recommendation(s) or not.
Our core manager due diligence and selection services, either on a stand-alone
basis or in combination, are the following:
1. Due Diligence
a. We apply quantitative screens and qualitative analysis to
evaluate investment managers with the end goal of
identifying those we believe would be appropriate for an
Institutional Client to consider given their stated
objective/purpose. See Item 8 below for details.
b. In addition to identifying investment managers, we often
are required to provide a written analysis on each
investment manager including our rationale for
recommending them.
c. At the Institutional Client’s discretion, we may be engaged
to provide ongoing monitoring. This ongoing monitoring
typically includes our periodically applying quantitative
screens and qualitative analysis and when need be,
recommending a change or changes to what we initially
recommended to the Institutional Client. This is often
supplemented with a written document detailing our
rationale for such a change(s). Institutional Clients have the
final decision-making authority as to whether to accept our
recommendation or not and, if accept, the timing of when
the changes are to occur.
d. If requested by an Institutional Client and based on their
requirements, we use a questionnaire to conduct an operational
due diligence review as part of our investment due diligence
process.
2. Investment Selection
a. We analyze an investment universe as defined by an Institutional
Client and create a list of securities that meets the Institutional
Client’s specific criteria (e.g., certain performance level over a
five-year period, tenure of portfolio manager). The list of
securities is typically used by the Institutional Client in providing
investment advice to their clients. A given list is typically broken
down by asset class and for each asset class, the identification
of several securities that have passed our quantitative screens
and qualitative analysis. See Item 8 below for details. In
engagements with Unaffiliated Clients, the list of securities under
each asset class may require that a certain number of them be
their proprietary securities. If such requirement is present, the
Unaffiliated Client is responsible for communicating such
constraint to its clients.
b. In addition to identifying securities, we often are requested to
provide a written analysis on each security including our rationale
for recommending it.
c. At the Institutional Client’s discretion, we may also be engaged
to perform ongoing monitoring. This ongoing monitoring typically
includes periodically applying quantitative screens and qualitative
analysis against the defined investment universe and when need
be, recommending a change or changes that the Institutional
Client may want to consider. In addition to recommending
securities we often are required to provide a written analysis on
our rationale for making such recommendation. The Institutional
Client has the final decision-making authority as to accepting our
recommendation or not and, if accepted, the timing of when the
changes are to occur.
3. Model Portfolios
a. We offer the Morningstar Medalist US Core Portfolios (“Medalist
Core Portfolios”) to institutional clients on a non-discretionary
basis. The Medalist Core Portfolios are a series of diversified,
multi-asset manager portfolios designed to provide investors
across a range of risk tolerances access to differentiated
portfolios.
Ancillary Services
1. Tailored Account Coverage
a. The institutional sales team provides research via email
distribution to clients based on account holdings and/or
investment approach. Additionally, the team organizes client
meetings and calls with equity research analysts, fields incoming
client inquiries on equity research and answers client questions
on thematic research. Custom screens and reports are also
provided for client base.
2. Newsletter Content
We provide content for two newsletters (1) FundInvestor and (2)
ETFInvestor distributed by Morningstar. The purpose of these
newsletters is to provide subscribers education/information on an
investment topic or topics as well as data, statistics and written
analysis on a specific fund(s) and/or ETF(s).
3. Other Commentaries/Reports
a. We prepare commentaries such as market outlooks, sector
outlooks, industry reports, and thematic research as well as
various other types of reports that are a more condensed/
targeted format than what is in our standard investment
research reports. Such commentaries and reports are
available through Morningstar’s software products,
newsletters and Morningstar branded websites. The goal
of these commentaries and reports is to provide readers
with education/information. Our analysts also participate in
videos or podcasts produced by Morningstar and made
available through Morningstar’s branded websites and
platforms.
4. Analyst Access
a. Institutional Clients are given the ability to interact with
our analysts about their published investment research
(referred to hereafter as “Analyst Access”). During such
conversations, the analyst can:
i. Answer questions pertaining to the content of
their published research;
ii. Clarify points made within their published
research;
iii. Provide insight into the analyst’s research process;
iv. Reiterate the analysis/opinions made within the
published research; and
v. Provide their opinions on a given market sector or
sectors.
4. Due Diligence Tools
a. To assist with an Institutional Client’s internal research
team’s processes and workflows for Managed Investment
selection and monitoring, we prepare a custom suite of
reports to help teams evaluate Managed Investments and
operate more efficiently. Scorecards use objective and
data-driven methods to rank Managed Investments based
on formulas that aggregate many of the important
characteristics that drive a Managed Investment’s
performance, as determined by Morningstar’s research
analysts. The Scorecards are delivered with updated data
each month, using a client’s preferred file type and location.
Additional summary reports that assist with the due
diligence process include Screens (a report that lists high-
quality investments for different strategies and goals,
according to Morningstar’s research analysts), Alerts (a
report that captures material changes and supports the
monitoring workflow for a custom list of investments), and
Red Flags (a report that captures warning signs and
supports the monitoring workflow for a custom list of
investments).
C. Customized Services
At an Institutional Client’s request, we will take under consideration a request to
provide them a customized version of the above services or a different type of
advisory service that would utilize our investment research, due diligence, and
Managed Investment selection expertise. Given the customized nature, the
Institutional Client may impose constraints/restrictions on such things as security
types, asset classes, or proprietary Managed Investment requirements and/or
wish to collaborate with us on such things as investment methodology and
screening criteria.
D. Wrap Fee Programs
We do not sponsor a wrap fee program, nor do we provide portfolio management
services to a wrap fee program.
E. Assets Under Management
Given the nature of our services, we do not have assets under management.
Item 5. Fees and Compensation
A. Fees and Compensation
For our Investment Research Reports, our compensation is generally structured in
the following way:
1. Equity Research Reports
a. With respect to Distribution through Morningstar, we do not
charge a separate fee to a subscriber of Morningstar’s software
or websites to access our qualitative reports on equity securities.
The subscription fee charged to subscribers of Morningstar’s
software and/or websites includes access to such reports as
well as Morningstar’s data, statistics, tools and general
educational materials. That subscription fee is determined, billed
and received by Morningstar. We do not receive a fee from
Morningstar for subscriber’s access to our qualitative reports.
b. With respect to License Arrangements, fees are negotiable, but
generally start at $250per authorized user annually. The actual
amount charged depends on a range of variables including but
not limited to the number of users it wishes to have available to
our investment research, the number of securities they wish to
receive investment research reports on, the inclusion or
exclusion of the analyst access service, the degree of
customizations (e.g., translated in other languages), and/or the
client’s assets under management. The fee is typically charged
quarterly in advance. In other instances, fees are based on the
percentage of gross revenue received related to the use of an
Equity Research Report. These fees are negotiated. If, in
accordance with contractual terms, the institutional client
terminates the License Arrangement they have with us prior to
the end of the billing period, we may refund any unearned fees
on a pro rata basis after the termination of the contract. In
addition to the fee, payment terms and payment schedules are
negotiable.
c. In certain cases, Non-Affiliated Clients may determine what to
pay us for our Equity Research Reports by using a ‘broker vote’
process. That process is where we receive remuneration for our
investment research and analyst access services based on its
perceived value as determined by the institutional investor’s
representatives. Actual remuneration is determined by the
institutional investor, is typically received in arrears and is paid to
us by the institutional investor’s broker(s) at intervals they and/or
their broker determine.
2. Manager Research Reports
a. With respect to Distribution through Morningstar, we do not
charge a separate fee to a subscriber of Morningstar’s software
or websites to access our manager research reports. The
subscription fee charged to subscribers of Morningstar’s
software and/or websites not only includes access to such
reports, but access to Morningstar’s data, statistics, tools and
general educational materials as well. That subscription fee is
determined, billed and received by Morningstar. We do not
receive a fee from Morningstar for subscriber’s access to our
Manager Research Reports.
b. With respect to License Arrangements, fees are
negotiable, but generally starts at $250 per authorized user
annually. The actual amount charged to the institutional
client depends on a range of variables including but not
limited to the number of users they wish to have access to
our investment research, the type of client they wish to
redistribute our research to, the number of Funds they wish
to receive investment research reports on, the inclusion or
exclusion of the analyst access service, the degree of
customizations (e.g., translated in other languages), and
the client’s assets under management. The fee is typically
charged quarterly in advance. If, in accordance with
contractual terms, the institutional client terminates the
License Arrangement they have with us prior to the end of
the billing period, we may refund any unearned fees on a
pro rata basis after the termination of the contract. In
addition to the fee, payment terms and payment schedules
are negotiable.
For Manager Due Diligence and Selection Services, our compensation is the
following:
1. Due Diligence
a. Fees are negotiable, but typically starts at $5,000 per
investment strategy reviewed. The actual amount charged
to a Non-Affiliated Client depends on a range of variables
including their intended use, the number of investment
strategies they wish to have reviewed, the type of
reporting they wish to receive from us, the degree of
customizations or constraints they wish to place on us, and
whether they want us to provide on-going monitoring
services. The fee is typically charged quarterly in advance.
If, in accordance with contractual terms, the Non-Affiliated
Client terminates the License Arrangement prior to the end
of the billing period, we may refund any unearned fees on a
pro rata basis after the termination of the contract. In
addition to the fee, payment terms and payment schedules
are negotiable. Fees in connection with services provided
to Affiliated Clients are typically governed by an
intercompany agreement and is often lower than the above
stated amount.
2. Investment Selection
a. Fees are negotiable, but typically starts at $50,000 per
standard list or $65,000 per custom list annually. The
actual amount charged to a Non-Affiliated Client depends
on a range of variables including their intended use, the
number and type of asset classes they wish the list to
cover, the number and type of Managed Investments they
wish the list to have, the type of reporting they wish to
receive from us, the degree of customizations or
constraints they wish to place on us, and whether they
want us to provide on-going monitoring services. The fee is
typically charged quarterly in advance. In instances where
our Investment Selection services are used as an input for
an Institutional Client’s financial product, basis point fees
are generally charged. Basis point fees are charged
quarterly in arrears, and typically start at 15-20 bps
annually. If, in accordance with contractual terms, the
Non-Affiliated Client terminates the License Arrangement
prior to the end of the billing period, we may refund any
unearned fees on a pro rata basis after the termination of
the contract. In addition to the fee, payment terms and
payment schedules are negotiable. Fees in connection with
services provided to Affiliated Clients are typically governed by
an intercompany agreement and is often lower than the above
stated amount.
3. Model Portfolios
a. Fees are negotiable but are typically comprised of an annual fee
ranging from 10-15 basis points based upon the aggregate value
of all accounts participating in the Program, a fixed annual fee
starting at $65,000 or a combination of a fixed fee and asset-
based fee.
For Ancillary Services:
1. Newsletters
a. We do not charge a separate fee to the subscribers of
Morningstar’s Newsletters to access our written analysis of
other commentaries/reports. The subscription fee for the
FundInvestor and ETFInvestor newsletters is determined, billed
and received by Morningstar. We do not receive a fee from
Morningstar for subscriber’s access to our
commentaries/reports.
2. Other Commentaries/Reports
a. We do not charge a separate fee to Morningstar’s software or
websites subscribers to access our other commentaries/
reports. The subscription fee charged to subscribers of
Morningstar’s software and/or websites not only includes access
to such commentaries/reports, but access to Morningstar’s data,
statistics, tools and general educational materials as well. That
subscription fee is determined, billed and received by
Morningstar. We do not receive a fee from Morningstar for
subscriber’s access to our commentaries/reports.
3. Analyst Access
a. Equity Analysts
i. Licensed Agreements – compensation for granting access to
our equity analysts is negotiable and is included in the per
user charge as referred to in 1(b) of Section A of Fees and
Compensation above. In ‘broker vote’ cases, remuneration
paid by the institutional investor includes their perceived value
in having access to our equity analysts.
b. Manager Research Analysts
i. Licensed Agreements – compensation for granting access to
our manager research analysts is negotiable and is included in
the per user charge as referred to in 2(b) of Section A of Fees
and Compensation above.
4. Due Diligence Tools
a. With respect to License Arrangements, fees are negotiable, but
generally start at $25,000 annually. The actual amount charged
depends on a range of variables including the number of users
with access, how the tools will be used, and how the reports will
be distributed. The fee is typically charged quarterly in advance.
If, in accordance with contractual terms, the institutional client
terminates the License Arrangement they have with us prior to
the end of the billing period, we may refund any unearned fees
on a pro rata basis after the termination of the contract. In
addition to the fee, payment terms and payment schedules are
negotiable.
For Customized Services:
Fees for a customized version of the above services or a different type of advisory
services that would utilize our investment research, due diligence, or investment
selection expertise are negotiable. In negotiating with an institutional investor, the
actual amount charged depends on a range of variables including the type of
service being sought, the type of securities involved (e.g., equities or Managed
Investments), the intended purpose for our service, the type of output being
sought from us, the intended use of the Morningstar name. In addition to the fee,
payment terms and payment schedules are negotiable.
B. Payment
Payments, payment terms and payment schedules are negotiable and governed
by the contractual agreement with the Non-Affiliated Clients. Other than Affiliated
Clients, we typically send an invoice on a quarterly basis, although in some
instances, we may bill monthly or annually. For our Affiliated Clients, fees are
charged through an intercompany charge.
C. Other Costs in Connection with our Advisory Services
The above noted fees are separate from fees and expenses one may incur if
followed our recommendations. For example, investors in an equity security will
be subject to brokerage/transaction costs and custodian fees or expenses
whereas investors of open-end funds and exchange-traded funds will be subject
to fees and expenses as described in their prospectus including management fee,
operating expenses, distribution charges including 12b-1 fees and for open-end
mutual fund, sales charges (e.g., front-end sales loads), and for exchange-traded
funds brokerage/transaction costs.
D. Charging Fees in Advance
If, in accordance with contractual terms, we agree to terminate a contract with
the institutional client prior to the end of the billing period, we generally refund
any unearned fees on a pro rata basis after the termination of the contract.
E. Compensation from Sales of Securities
We do not expect, accept or receive compensation for the sale of securities that
are the subject of our Investment Research Reports.
F. Revenue Sharing Arrangements
We do not have any revenue sharing arrangements with any registered
investment advisers or mutual funds.