Whether you’re looking at grocery-store items or investment products with Morningstar ratings, the same rule applies: buyer beware.
In a review of over three dozen mutual-fund and ETF advertisements that contained Morningstar ratings — which were four or five stars — the Wall Street Journal
found at least eight that were inaccurate. Some ads reported ratings that were high but out-of-date, while others used misleading language.
One digital ad for the Oppenheimer Small Cap Revenue ETF, which appeared on the New York Times
website in August, claimed the fund had a four-star rating; in fact, it had lost one star around three months before the ad ran. According to a spokesperson from OppenheimerFunds, it had acted in compliance with industry advertising rules, but the Journal’s
inquiry prompted “an additional process improvement.”
Similarly, a full-page ad for the Columbia Adaptive Risk Allocation Fund, which Columbia Threadneedle Investments ran in an April issue of Barron’s claimed a five-star rating that had actually declined to four stars months earlier. “When we submitted the advertisement for publication, it included the most current quarter-end data available, which is consistent with regulatory requirements,” a representative from the firm said.
Regulators, as well as Morningstar itself, have guidelines that govern how ratings should be used in advertisements. Policies from the United States’ Financial Industry Regulatory Authority (FINRA) say that rankings marketed to investors “must be, at a minimum, current to the most recent calendar quarter end” prior to use or publication.” Meanwhile, Morningstar requires fund companies that wish to use its star ratings in ads to submit all materials for review, and to use only the most current monthly rating.
“[O]ur guidelines require submission, but not all advertising material is actually sent through to us,” said Rob Pinkerton, Morningstar’s chief marketing officer, in an email to the Journal.
He added that the guidelines are meant “to help investors, not to regulate fund companies.”
While fund firms might be acting on-side relative to industry regulations, their use of such misleading ads has been called an “unethical practice” that hurts investors who rely on the ratings.
“People are looking at that information to give them some short-cut clue as to what the next great thing is,” said Tom Smythe, a business professor at Furman University whose work includes studies on mutual funds.
Other ads scrutinized by the Journal
failed to account for a broad change in ratings methodology Morningstar implemented in 2016, which removed adjustments for sales charges—or loads—attached to some funds. The ads, which claimed that star ratings still included the effect of loads, effectively implied better overall performance for funds than they actually managed.
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