Morningstar Direct Forum Perspective on Asset...

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Ramsin Jajoo,Head of Asset Management Client Solutions, North America

Morningstar Direct ForumPerspective on Asset Management Industry

Strategic Market Drivers

Investor preferences

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Investor preferences – education & sophistication, low cost, goals/values-based

Percentage of Assets in Passive Funds, Equity

Percentage of Assets in Passive Funds, Fixed Income

Since 2014, Fees Matter More Than Ever for Actively-Managed Funds

So far this year, Morningstar has received 1,062 media mentions regarding Sustainability, reaching 939 Million people

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Regulation – transparency & fiduciary standards (conflicts of interest, best interest)

Global Reg-Scape

Regulatory Areas of Focus / Morningstar Capabilities

Regulations

North America Europe AsiaPac

• Fiduciary or Best Interest Standards Best Interest Scorecard Data Catalyst Due Diligence Scorecard

RBICRM II

RDRMiFid II

FOFAFAIR

Royal CommissionFSA in Japan

• Advanced Portfolio Analytics Full Portfolio Holdings Aggregate Portfolio Reporting Data and Software Performance Reporting Real-time

RBICRM II

RDRMiFid II

Solvency IIBasel III

FOFAHK & Singapore Product

Due Diligence

• Fee Transparency Granular Fee Data Cost Calculator Fee Analysis

RBICRM II MiFid II

RG97SEBI in India

SFC in HK

• Unbundled Research Procurement Independent research MiFid II MiFid II

• Banning Commissions / Professional Standards Open architecture Whole of market data

Trend to fee based accountsRDR

MiFid IIFOFAFAIR

• Other regulatory initiatives Disclosures RBI

Clean Share – Service Fee Arrangement

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Modern advice – holistic advice, behavioral coaching, goals-based, value of advice

An Established Trend to Fee-Based Accounts Professional Services and Standards

Source: Company filings, Morningstar.

Engagement with Modern Advisors has changed

Practice Management and Behavioral Insights

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Digital evolution – low barriers, scale/efficiency, big/small data, blockchain/crypto, robo/fintech

49% of asset managers say technology innovation will cause fundamental change in their operating model over the next 24 months.4Q 2017 Confluence Trend Survey of asset managers and third-party administrators

48% of organizations surveyed now have a Chief Digital Officer and 23% are planning to establish the role this year.

Capgemini 2018

Increase and improvecustomer engagement

Operate efficientlyand scale

DigitalTransformation

Increase and improve customer engagement Growth New experiences End-to-end experience Customer data User behavior

We drive digital transformation with top firms globally

Operate efficiently and scale Third party integration Cross-platform

effectiveness Sales productivity Efficiency & integration Cost savings

Digital Transformation

Personal portfolio analysis

A few of the most prevalent projects we’ve seen

Consolidate vendors

Digital Transformation

User analytics

Sales force effectiveness

Artificial Intelligence

What is Artificial Intelligence?

Knowledge Reasoning Planning

Machine Learning

Natural Language

Processing

Computer Vision

Robotics

Linear Regression Decision Tree K-Nearest Neighbors Random ForestSupport Vector Machines Neural Nets Deep Learning

Algorithms

Artificial Intelligence Requirements: Data

Artificial Intelligence Requirements: Scalable Infrastructure

Algorithms Require Tradeoffs

Morningstar QuantitativeTM Rating for FundsMachine Learning Algorithm: Random Forest

Morningstar QuantitativeTM Rating for Funds

Morningstar Global Risk ModelInvestor PulseMachine Learning Algorithm: Linear Regression

Morningstar Global Risk Model

30Source: Morningstar Direct

Investor Pulse

Natural Language-Based Fund ScreenerArtificial Intelligence Type: Natural Language Processing

Natural Language-Based Fund Screener

Natural Language Process

Robo Advisor - Latest Equity Research

Key Takeaways:

g Robo-advisors have failed to disrupt and many are still unprofitable

g Moaty financial service firms (e.g. Vanguard & Schwab) have leapfrogged the early entrants

g Cost of client acquisition ($300-$1,000 p/client) means access to a fertile pool of prospects/clients is key

g Partnership with established firms may be the best path to success

g Revenue enhancing strategies improves the outlook for select robo-advisors becoming profitable

Download at http://www.morningstar.com/learn/robo-advisors

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Consolidation – M&A, smaller shelf space, more usage of models

Fastest-Growing Fund Families

Impact Analysis – Outsourced Investment Value Stack

When we refer to the ”stack” we mean the sum of fees paid by the investor. Market participants can move fees up and down the stack depending on competitive positioning

Custodian Float

Custodian Fee

Advisor

Technology

Broker Dealer

Strategist

Asset Management

100 BPS\0 to 25 BPS for robo

30 BPS

10 BPS

12 BPS

75 BPS

10 BPS (basis point equivalent)

Asset Management

Custodian

Platform

Impact Analysis – Competitive Lane Hopping

Custodian

(robo) Advisor

Technology

Broker Dealer

Strategist

Asset Management

New Capability

The full stack providers may move costs up or down the stack as suits them competitively (software for free if you custody with us)

Regulation

Modern advice

Digital evolution

Consolidation

Disruptors

Disruptors – direct to consumer, internet giants (Amazon, Apple, Google, IBM)

Morningstar Research Publications – Recent Insights

Source: Morningstar Direct

What Factors Drive Investment Flows

Data as of March 31, 2018

What Factors Drive Investment Flows

Data as of March 31, 2018

4/1/2013 4/1/2014 4/1/2015 4/1/2016 4/1/2017

Net Expense Ratio Fund Age Fund Size Trailing Growth Rate Trailing Return

APPENDIX

Unbundled (“Clean”) Share – Service Fee Arrangement

Unbundled Share – Service Fee Arrangement

Expense Type Unbundled Semi-bundled Bundled

Management fee Yes Yes Yes

Fund operating expenses Yes Yes Yes

Sub-TA No Yes Yes

Revenue sharing, platform, or other access fees No Yes Yes

Distribution fees (12b-1 and other) No No Yes

Loads and commissions No No Yes

Transaction and other operational fees No No Yes

Fees for advice or planning No No No

Digital evolution – low barriers, scale & efficiency, big/small data, blockchain/crypto, robo/fintech

Disruptors – direct to consumer, internet giants (Amazon, Apple, Google, IBM)

Morningstar Direct Forum Perspective on Asset...

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