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A Lawyer’s Blog Post Reveals a Tiff Between Morningstar and LPL Financial

Advisors using Morningstar Office are stuck in between.

On an otherwise slow Friday morning in terms of news, Max Schatzow, an attorney at​ Stark & Starkmore, used Twitter to reach out to more than a dozen reporters and publications. A call from a client inspired him to write a blog post that he thought the press would be interested in.

“Do your thing!” he tweeted.

The blog post shared what might have been alarming news for thousands of financial advisors: LPL Financial, one of the largest broker-dealers and custodians with almost 17,000 financial professionals and $762 billion in assets, was ending its relationship with Morningstar, one of the most popular research and tool providers.

“It is my understanding that LPL Financial ( LPLA (NASDAQ)) will prohibit its roughly 17,000 financial professionals from using Morningstar in the near future. It appears that this change will become final in the first quarter of 2020. This is a big blow for Morningstar and will potentially have a ripple effect in the industry,” Schatzow wrote.

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Advisors affiliated with LPL began reacting shortly after.  

“I’m an LPL advisor at a hybrid RIA. Between this and getting rid of Albridge I’m leaning towards going fully RIA. It’s ridiculous,” one advisor said online. “This is how I found out about this change.... Twitter. I feel like a pro athlete finding out they got traded on Twitter.”

Schatzow theorized that the reason for the change was that advisors were using Morningstar to show existing and prospective clients hypothetical, back-tested portfolio performance without proper disclosures. His law firm has been warning clients about this practice — an issue increasingly coming up during examinations by the Securities and Exchange Commission. An aggressive way to limit that practice would be to cease to allow advisors to use it entirely.

The attorney turned out to be wrong, at least about LPL and Morningstar. The broker-dealer is not cutting ties with the research firm.

“Unfortunately, the headline to the blog post is a bit misleading...We are NOT discontinuing use or prohibiting advisors at LPL from using Morningstar,” an LPL spokesperson told RIA Intel in an email.

Schatzow acknowledged his error, the confusion it caused, and plans to update what he wrote.

The blog post failed to break the news that Schatzow thought it did, but it ultimately revealed a tiff between LPL and Morningstar.

LPL plans to no longer allow hybrid firms affiliated with its broker-dealer to use Morningstar Office, a portfolio management system, at least at its intended capacity.

“The blog post may be referring to an issue related to Morningstar Office, and the use of certain reporting functions. We recently communicated to our advisors about this issue. The way Morningstar’s systems work limits LPL from having the visibility we need, and requires a change in how our advisors use Morningstar Office moving forward,” a spokesperson said.

Morningstar has worked with LPL for several years, implementing “many” customizations to suit LPL’s needs. But LPL has requested “unique modifications to the advisor reporting functions of Morningstar Office, and we have received no similar requests from any other client,” a spokesperson for Morningstar said.

Discussions between the companies are ongoing to determine if there are “reasonable ways to meet their new set of specific requests while not sacrificing core Office functionality for our clients,” according to Morningstar.

“We value our long-term relationship with LPL, and we are disappointed by their decision not to allow their advisors downloading LPL data to use Morningstar Office for consolidated reporting. LPL’s decision is not related to the quality or computation of Morningstar’s data or research, and it does not relate to any other Morningstar products or services.”

LPL also said it is continuing to work with Morningstar to resolve the issue at hand and that it impacts “only 25 LPL offices.” How many advisors work at those offices is unknown and it is unclear what the exact issue is. LPL declined to respond to follow-up questions about it.

Morningstar also declined to share additional details.

“LPL is really in a better position to outline what their specific needs are related to the reporting functions, so I’ll defer to them on that. But I can confirm this is not related to the quality or computation of our data,” a Morningstar spokesperson said.

Stuck between the two are an unknown number of advisors using the software.

As a result of the dispute over Morningstar Office, at least one group — Schatzow’s client — is already looking for software to potentially replace it, he said. 

“This specific client I work with, it’s not that big of a deal. But I’m sure for some it’s a huge headache.”

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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