Morningstar Advisor - Summer 2007 - 80

The Phillips Curve The Advisor’s Economic Moat by Don Phillips Fifteen years ago, I was routinely asked by financial planners why their clients would still need them if the clients could just go to the library and get all of the Morningstar data on funds for free. Today, I never get that question. In retrospect, it’s understandable that so many advisors believed that access to information was their competitive advantage. For years, Wall Street equated information with power. Bigger, more connected firms had access to better pricing data, to unique research, or to corporate management that the little guy or the independent advisor lacked. Not surprisingly, those in the know tended to fare much better than smaller investors, even to the point that Wall Street mocked the behavior of outside-the-loop investors—as in the odd-lot theory. However, with the democratization of data, Regulation FD, greater pricing transparency, and Internet access, the playing field is now more level than it’s ever been. Today, it’s not just about having information; it’s about knowing what to do with it. Indeed, one can even argue that while two decades ago the challenge facing advisors was the scarcity of data, today the challenge is sorting through an overload of information. Advisors who once thought that their competitive edge was dependent on data now recognize that their franchise runs much deeper. Yes, a professional is expected to have the best tools, but the mark of a true investment pro is not just having access to timely and accurate data, but knowing how to use it to produce something of value— and that’s what financial advisors do everyday. Investing is not simply a matter of knowing the most about investments, any more than oil painting is just about knowledge of pigments, canvases, and brushes. The art of investing is executing the proper match between investment and investor, and while that does require investment skill, it also requires empathy with the client and the ability to help the client define goals and chart a path toward meeting them. For good financial advisors, suitability is not just a narrowly defined legal term, but the heart and soul of their practice. Getting the right investor into the right investment for the right reasons is the hallmark of good planners, and the ability to do so is what creates an enduring competitive advantage for the successful advisor. Morningstar’s stock analysts talk often about the competitive advantage of companies, using the term “wide moat” to describe firms with especially strong positions relative to their competition. Many financial planners are learning that their economic moat is wider and deeper than they had anticipated and, interestingly, that their moat derives not just from the quality of the tools in their practice, but from the bond of trust they create with their clients. Good advisors have unique insights into their clients forged from years of discussions and firsthand observations of how the clients react to both good and bad times, and an understanding of when they waver in their convictions. This knowledge combined with practical For good financial advisors, suitability is not just a narrowly defined legal term, but the heart and soul of their practice. legal, tax, and investment know-how makes a trusted advisor so valuable. Despite numerous theories of disintermediation, the financial advisors’ role has grown, rather than shrunk, over the past two decades. Financial planners who embrace a client-first mindset have seen their practices grow and the bonds with their clients strengthen. That I no longer am asked if access to Morningstar data will pull their clients away shows how much more comfortable advisors have become with their practices and the unique value that they create. The profession is maturing nicely, settling into a more comfortable place, one where the rewards of doing the right thing— matching investors successfully to investments to maximize their odds of meeting goals—has created enduring competitive advantages. Suitability, it seems, suits the smart advisor well; it is their economic moat. K Don Phillips is Morningstar’s managing director, corporate strategy, research, and communications. 80 Morningstar Advisor Summer 2007

Morningstar Advisor - Summer 2007

Table of Contents for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007
Contents
Letter from the Publisher
Get to Know the Bond “All-Stars”
Research Briefs
Our Stewardship Test Gets Tougher
Save It for Later
Too Many Oranges
Best of Both Worlds
No Two Clients Are Alike
When It Comes to VAs, It’s Seller Beware
Hands On: Finding the Suitable Fund Share Class for Your Client
Fund Style Can Drift Off Course
Sticking to Their Style, Through Thick and Thin
Marathon Man
Growth, With a Chaser
A Menu of Ideas to Fill Five Market Baskets
Funds: Finding Funds with Conviction
Stocks: So You Say You Want Income?
All Eyes on China
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
What’s New at Morningstar and on the Web
The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Intro
Morningstar Advisor - Summer 2007 - Morningstar Advisor - Summer 2007
Morningstar Advisor - Summer 2007 - Cover2
Morningstar Advisor - Summer 2007 - Contents
Morningstar Advisor - Summer 2007 - 2
Morningstar Advisor - Summer 2007 - 3
Morningstar Advisor - Summer 2007 - 4
Morningstar Advisor - Summer 2007 - Letter from the Publisher
Morningstar Advisor - Summer 2007 - 6
Morningstar Advisor - Summer 2007 - 7
Morningstar Advisor - Summer 2007 - Get to Know the Bond “All-Stars”
Morningstar Advisor - Summer 2007 - 9
Morningstar Advisor - Summer 2007 - Research Briefs
Morningstar Advisor - Summer 2007 - 11
Morningstar Advisor - Summer 2007 - Our Stewardship Test Gets Tougher
Morningstar Advisor - Summer 2007 - 13
Morningstar Advisor - Summer 2007 - Save It for Later
Morningstar Advisor - Summer 2007 - 15
Morningstar Advisor - Summer 2007 - Too Many Oranges
Morningstar Advisor - Summer 2007 - 17
Morningstar Advisor - Summer 2007 - Best of Both Worlds
Morningstar Advisor - Summer 2007 - 19
Morningstar Advisor - Summer 2007 - 20
Morningstar Advisor - Summer 2007 - No Two Clients Are Alike
Morningstar Advisor - Summer 2007 - When It Comes to VAs, It’s Seller Beware
Morningstar Advisor - Summer 2007 - 23
Morningstar Advisor - Summer 2007 - 24
Morningstar Advisor - Summer 2007 - 25
Morningstar Advisor - Summer 2007 - 26
Morningstar Advisor - Summer 2007 - 27
Morningstar Advisor - Summer 2007 - 28
Morningstar Advisor - Summer 2007 - Hands On: Finding the Suitable Fund Share Class for Your Client
Morningstar Advisor - Summer 2007 - 30
Morningstar Advisor - Summer 2007 - 31
Morningstar Advisor - Summer 2007 - 32
Morningstar Advisor - Summer 2007 - 33
Morningstar Advisor - Summer 2007 - Fund Style Can Drift Off Course
Morningstar Advisor - Summer 2007 - 35
Morningstar Advisor - Summer 2007 - 36
Morningstar Advisor - Summer 2007 - Sticking to Their Style, Through Thick and Thin
Morningstar Advisor - Summer 2007 - 38
Morningstar Advisor - Summer 2007 - 39
Morningstar Advisor - Summer 2007 - 40
Morningstar Advisor - Summer 2007 - 41
Morningstar Advisor - Summer 2007 - 42
Morningstar Advisor - Summer 2007 - Marathon Man
Morningstar Advisor - Summer 2007 - 44
Morningstar Advisor - Summer 2007 - 45
Morningstar Advisor - Summer 2007 - 46
Morningstar Advisor - Summer 2007 - 47
Morningstar Advisor - Summer 2007 - Growth, With a Chaser
Morningstar Advisor - Summer 2007 - 49
Morningstar Advisor - Summer 2007 - 50
Morningstar Advisor - Summer 2007 - 51
Morningstar Advisor - Summer 2007 - A Menu of Ideas to Fill Five Market Baskets
Morningstar Advisor - Summer 2007 - 53
Morningstar Advisor - Summer 2007 - 54
Morningstar Advisor - Summer 2007 - 55
Morningstar Advisor - Summer 2007 - 56
Morningstar Advisor - Summer 2007 - 57
Morningstar Advisor - Summer 2007 - Funds: Finding Funds with Conviction
Morningstar Advisor - Summer 2007 - 59
Morningstar Advisor - Summer 2007 - Stocks: So You Say You Want Income?
Morningstar Advisor - Summer 2007 - 61
Morningstar Advisor - Summer 2007 - 62
Morningstar Advisor - Summer 2007 - All Eyes on China
Morningstar Advisor - Summer 2007 - 64
Morningstar Advisor - Summer 2007 - 65
Morningstar Advisor - Summer 2007 - 66
Morningstar Advisor - Summer 2007 - 67
Morningstar Advisor - Summer 2007 - Mutual Fund Analyst Picks
Morningstar Advisor - Summer 2007 - 69
Morningstar Advisor - Summer 2007 - 70
Morningstar Advisor - Summer 2007 - 71
Morningstar Advisor - Summer 2007 - Undervalued Stocks
Morningstar Advisor - Summer 2007 - 73
Morningstar Advisor - Summer 2007 - Most Popular Variable Annuities
Morningstar Advisor - Summer 2007 - 75
Morningstar Advisor - Summer 2007 - What’s New at Morningstar and on the Web
Morningstar Advisor - Summer 2007 - 77
Morningstar Advisor - Summer 2007 - 78
Morningstar Advisor - Summer 2007 - 79
Morningstar Advisor - Summer 2007 - The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Cover3
Morningstar Advisor - Summer 2007 - Cover4
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