Morgan Stanley’s Wealth Management unit will stop distributing Standard & Poor’s equity research to its brokers and online clients next month, replacing it with Morningstar’s stock research, according to an article in AdvisorHub. Morgan Stanley’s defection is the latest setback for Standard & Poor’s since it downsized its equity research group in 2014.
“Cost is not the primary factor,” according to an anonymous source quoted by AdvisorHub. Since S&P Capital IQ, now rebranded as S&P Global Market Intelligence since the acquisition of SNL, laid off 50 equity analysts, shrinking its equity research team from 66 analysts to 16 analysts, Morningstar has been aggressively marketing its significantly larger analytic team.
Unlike S&P, Morningstar has retained an equity staffing level of over 100 equity analysts first added during the Global Research Analyst Settlement. To recapture lost Settlement revenues, Morningstar has sought to expand its institutional business by focusing on smaller asset managers whose commission flows are too small to be interesting to investment banks. Morningstar can offer its equity research at a much lower price point than most investment banks.
Nevertheless, the primary focus of Morningstar’s equity research is the retail segment, and Morningstar has been targeting S&P’s retail client base with some success. Charles Schwab, a long-time licensor of S&P research and once one of S&P’s largest customers, has added Morningstar research, which is now the only stock research featured on its website. Edward Jones now uses Morningstar as a complement to its own internally generated research. Wells Fargo, which once outsourced much of its equity research to S&P, now uses Morningstar.
Morgan Stanley and other big brokerage firms increasingly encourage their brokers to use model portfolios devised by firm strategists rather than come up with their own investment recommendations. Nevertheless, the third party stock reports from Morningstar will be significant because brokers are not allowed to recommend or trade stocks that Morgan Stanley does not cover unless they are on an approved third-party research firm’s buy list.
Morgan Stanley distributed Morningstar’s equity research briefly during the Global Research Analyst Settlement but dropped the firm when the independent research requirement ended in July 2009. Morgan Stanley continued, however, to distribute S&P stock research until now.
Morningstar covers about 1,700 equities, while S&P’s coverage has dropped to 1,100 stocks receiving its STAR rankings. Since the downsizing, most of S&P’s STAR rankings are now assigned by models instead of by analysts as was the case previously, and much of the textual commentary is automated.
Morningstar’s rankings have always been a mix of quantitative and qualitative. Morningstar argues that its analysts ultimately determine the rankings because they are responsible for the Fair Value Estimates (an equivalent of a price target). Because Morningstar’s equity star ratings indicate how cheap or expensive the stock is relative to an analyst-assigned Fair Value, a low price target from an analyst will generate a low rating and a high price target will generate a high rating.
S&P made a gamble that users wouldn’t mind the reduced analytic input and the increasingly automated reports. It appears that the gamble may not be paying off.
Retail investors, and their advisors, often value a perspective that only an analyst can give. Analyst color can make the difference in the decision to transact a stock, and this is the key ingredient most S&P equity research lacks. However, the extra cost base associated with 100 analysts makes this a very expensive added feature, and Morningstar will need to keep hustling to make it pay.