Working with Today's Investors

David Kitai  00:00:00
David, Hello to all of our attendees. My name is David Kitai. I'm the Senior Editor at Wealth Professional and I will be your host for today's webinar. Just as folks filter into the webinar, I would like to welcome you all and go over a few quick technical details. Notably, we will be hosting a Q and A session at the end of the webinar for the last 15 or so minutes of our session. So any questions you may have, please enter them in the Q and A tab, which you will find at the bottom of your screens. If you have any technical difficulties, you can use the Q and A section to flag them to us as well. With that, let's get to the webinar. Change might be the only constant in wealth management, markets, geopolitical conditions, demographics, they're all subject to changes that advisors have to manage for their clients, but what happens when the client base itself begins to change? Today's webinar will explore that very topic to do so we are lucky to be joined by Ian Tam, Director ofInvestment Research at Morningstar Canada, and Jenny McMillan Brown, VP of Business Development at Morningstar Canada. Together, they will explore some of the extensive research on changing retail investor demands, biases and expectations. They'll dive into the impact of DIY platforms and how clients now view their advisors, offering us some context and insights to help advisors manage a changing world. Ian, Jenny, welcome.

Ian Tam  00:01:31
Thanks, David. Really appreciate well professional for having us on this webinar today. You've been great partners to us and thankful to be able to present to this wonderful audience. So like Dave said, my name is Ian. I am director of investment research here at Morningstar Canada. Been in the role for about a few years, but I've been at Morningstar for 11 years. I also sit on a couple of industry councils, namely the Ontario Securities Commission investor advisory panel, as well as the CFA Institute's ESG Technical Committee. I'm also lucky to be joined by Jenny, my colleague, Jenny.

Jenny Brown  00:02:05
Thank you, Ian. Welcome everyone. My name is Jenny McMillan Brown. I cover enterprise advisor software and all of the financial planning and risk profiling tools that go along with it. For all of Canada, I have an extensive background in the investment industry, and I've been at Morningstar for about four years, heading up my advisory experience through asset manager as well as wealth channels and the do it yourself channel. So I'm excited to share our insights today with everyone.

Ian Tam  00:02:37
Awesome. Thanks, Jenny. So like Dave said, you know, the demographic in Canada, and I would argue globally, is changing quite a bit. And as an advisor, it's important that we keep up to date with that trend and not really lose sight of what's important, which is really in line with morningstars goals, try to get the investor to their financial goals. So with that in mind, I wanted to share a little bit of some industry research, not necessarily from Morningstar, but things that we have noted specific to the Canadian market. And the one thing that we know for sure, and this is probably not news to most of you on the call, is that the investor in Canada is changing more specifically, when we look at Generation Z or Gen Z investors, more and more of them are starting to invest earlier. In fact, a FINRA survey, which included Canadian data, tell us that many Gen Z investors, or one in four, actually, 25% start investing before they hit the age of 18, and typically that's done through a discount broker or a DIY channel. I'm sure the pandemic and COVID probably has something to do with that. But regardless, we know that investors are getting younger. That's the kind of the first stat. The second element that's kind of concerning for your traditional advisor in Canada is that younger investors are increasingly less reliant on traditional sources of information, namely financial professionals like an advisor. So the stat tells us that roughly 40% of millennial investors still want to get information from professionals like like an advisor. But as you get younger, so when we look at the Gen Z demographic, only 30% prefer to do so. So as we get younger, there's less and less reliance on the professional financial advisor instead. Of course, the Gen Z demographic tends to get information from, you know, miscellaneous sources like the internet, social media and perhaps friends and family. And finally, a bit of a sobering stat. This is data from Ernst and Young This is in their 2023 survey of Canadian investors. And what they what that tells us is millennial investors are more than twice as likely to switch advisors than their boomer parents, and one in five Millennials expect to add a new provider in the in the coming year. So all very sobering statistics around how we need to really constantly monitor what's happening to the investor demographic here in Canada, I. Um, I also wanted to point out a couple of notes from a survey done by fair Canada, which is really an investor advocacy group. And what they found is, they looked at DIY investors specifically, or those that use a platform that's order execution only, or a discount broker, is the more general term. Most DIY account holders to believe that the tools that are offered on their platforms are defined as investment advice and as advisors. We know that's clearly false, right? So since that 2016 ban on trailing commissions, DIY platforms are essentially prohibited from providing advice. So there's a bit of misinformation out there about what's considered advice and what's not and the second portion of that is in the same survey, they noted that four in 10 DIY only investors, or those that only trade through discount brokers, do not trust Investment Advisors. So there's a bit of work that we as advisors have to help, help, I guess, proliferate, to regain that trust of the younger investor. So Alongside this, there's a couple of observations that we have morning, sorry, and dealing with a lot of the firms that that you all work with, that we notice in the in the industry. So the first is that there are a couple of forces, external forces, that are going to reduce client switching costs in the very near future. And the first is open banking. And for those that aren't familiar, open banking is essentially the method by which a large financial institution, like a bank, perhaps, is going to transmit, you know, personal information to either other banks or maybe FinTech companies, just to make it a bit easier to do business across the board. And the tangible part of this concept is that by mid, sorry, in September of next year, in fall of 2025 we expect that the Financial Consumer Agency of Canada to come up with some sort of a data standard. So how is this data going to be transmitted? So the whole concept of open banking in Canada is beginning to crystallize, just making it a bit easier for the everyday investor, the everyday consumer of banking services, to do to do business with different organizations or different financial institutions. The second element comes from Ciro so the new SRO, which is a merger of Iraq and mfda. In their strategic plan, their three year strategic plan, they noted that they want to pursue the standardization of KYC, or know your client information, they also want to create some sort of a central repository, so imagining that you know your client comes in, you fit, they fill in all their personal information, like date of birth, social social security, all that, all that's great stuff, and that's going to be sent, if they're successful in this endeavor, sent to some central storage facility which will be accessible by other other dealers. And of course, that if this happens, that'll make it a lot easier for the everyday investor to be able to add a provider, or even switch providers. Right now, what happens is, of course, when you talk to a new advisor, you need to refill in all your paperwork and eventually have your assets transferred over if you wanted to do that. So that's really a barrier to switching, and we think that that barrier might come down, should zero be successful in their implementation of this repository. So a couple of forces from the outside that we think are on the horizon in the next few years, and then in terms of the investors motivation to potentially switch advisors, there's two really regulations that we think will shine a light on this. The first of course, is client focused reforms. And as you all know, client focused reforms really raises the minimum bar that every advisor operates here in Canada. So having to conduct a proper know your product, proper know your client, including a risk profiling process, that's something that every advice giver must do now in Canada, and you have to record that and have it all, all kind of in your in your in your books, of course, if you're not doing that, or if an investor finds that they're not doing that, it's going to be very, quite obvious, given that this is the new standard. The second element that we think will again further highlight or potentially motivate someone to look again at their provider, is total cost reporting, and this is really an extension of CRM too. I think fees and how investors are charged are really just going to get more transparent. So what's going to happen is, in january 2027, every client statement in Canada is going to have a very, I would say, a very detailed breakout of what fees are being paid down to the penny, and, more importantly, where those fees are going. So is that going to you, the advisor for your your cost of advice? Is it coming back to you through a trailing commission, through the fund company, and also, how much is going to the fund manager themselves? So all this is going to be made very transparent. Of course. You can imagine an investor first time seeing a statement, oh, my God, I've spent $10,000 in the last year, but I've only made $1,000 in gains. That's going to really bring into question What, what, what the value of advice is in Canada, which, you know, isn't a new theme, but certainly these two regulations, I think, shine a brighter light on on what that value is. That. Provide, as an invest, as an advisor, and then, kind of on top of this, we all know that in 2023 over the calendar year, the CSA and Ciro kind of completed their sweeps across KYC and Kyp, and they plan to update their guidance in early 2025 now, the industry has already seen an updated guidance around national instrument, 31 103 around the relationship between investors and advisors. But that guidance really focused on Kyp, which was a know your product, which was a kind of a newer element to our regulatory regime in Canada. What they haven't really honed in on is know your client. So my belief is that this guidance is going to focus a bit more on that element of suitability. Now, if you've ever read regulatory guidance, it doesn't often get more relaxed. It often gets a bit more granular and hopefully a bit more prescriptive. So we think that that's going to tighten up when this new guidance comes out in 2025 of course, that remains to be seen. Along this vein, I also wanted to kind of give a picture of how the mutual fund industry has kind of shifted in Canada. Now we grew up in an industry where commission based or bundled advice was the norm for many, many decades over the last, I would say five or six years, we've seen that trend in the opposite direction. So if you looked at all mutual funds in Canada, a certain percentage of them are sold in a bundled commission arrangement, where the fee includes advice, and then others are sold in a fee based arrangement, where you, the advisor, charges a, you know, a specific fee outside of what's charged in the management expense ratio. Or Emer that ratio today is about 6040, so 60% of assets sit in bundled arrangements, whereas 40% sit in fee based arrangements. Of course, this is kind of going, in my opinion, the right direction. Morningstar is a big fan of good financial advice. We think it's worth its weight in gold. However, we believe that decoupling that from the sale of a mutual fund often lines up the motivations of the investor and the advisor, and we think it's better for the investor overall. So hopefully you agree, but certainly the the industry tends it looks like it's trending in that direction. The other thing that we wanted to point out is a fairly bold statement that the Ontario Securities Commission published in their strategic plan. This was back in November, and they made a pretty bold statement around branch advice or the sale of proprietary products in in Canada. And I think the the main takeaway here is that I don't think the our regulators have an issue with the business model of selling proprietary products. However, I think the issue is with the title or the the titles being used by the representative selling that product. So my analogy here is, when you go to visit a doctor, your assumption is that that doctor has your interest, your health interest in mind, very different from talking to, let's say, a pharmaceutical sales rep, which, of course, I'm happy to deal with. You know, very useful information, a great service. However, that conversation with a salesperson might be quite a bit different than when speaking to someone that has fiduciary care over whether it be your health or, in this case, your financial situation. So I think that's where the crux of the issue is. And it sounds like the regulator is quite aware of this, and hopefully they'll action this as well in the coming years. That being said, a few industry trends we wanted to present to you in terms of the investor, and now I think might be a good time to pause for a quick poll just to see if we're off the mark and what we're seeing in the market. So the poll question to the audience today is, which industry headwind do you think will have the most significant impact on your advisory practice? There are four answers should be up on the screen here. The one, the first is emergence of DIY Investing, or discount brokers. The second is younger investors switching advisors through the great wealth transfer associated with the great wealth transfer, number three is around client focused reforms and tightening of regulations. And then the fourth is around open banking. So please go ahead and fill in your answer, and we'll give it about 30 seconds and we'll have a quick look at the poll results. You uh, no, I can't see, I can't see the live results coming in right now, but I assume each of you are busy clicking through and All right, let's have a look here. So according to the audience, about 27% of you believe that DIY Investing is the most disruptive. 35% believe that the wealth transfer and younger investors switching is the is the concern. 33% so pretty tight, believe client focused reforms is the issue. And then very few of you believe open banking will have impact on your on your practice today. That's great information to have. I. So I think we're in line like client focus reforms, of course, is a regulatory requirement, and so I think many of the topics today we're going to cover will speak to that concern. So all the fluffy stuff aside for a second. I wanted to take it back to basics. And I think as an advisor, the value you provide to your client is really around getting them to their financial goals, very similar to morningstars mission and statement to empower investor success so and with that in mind, I think there are three pretty core conversations that every advisor in Canada should be ready to jump at the opportunity to have today, number one, and they're purposely on the surface level, quite simple, but as you know, there actually there's a bit more to it. So the first question is, what are the right investments options for me? Number two is, how does my portfolio align with my comfort around risk? And number three, how do I know your advice is any good? Can you give me some confidence that I'm actually receiving good advice? Because I'll be talking to you in a year when I get my account statement. So let's dive into some of these questions. So first question is, you get a call from millennial, and the millennial says, What are my investment options today? How do I know they're good? My friends are suggesting I look at some alternative asset classes, maybe crypto. Do you have 15 minutes to connect? And of course, you do. And the step that kind of surrounds us, and this is around our own Morningstar survey is that one in four people feel fairly uncomfortable making investment decisions, and that's no surprise. It's very hard to see that sometimes as we work in the depths of the industry. But you know, your average person in Canada may not know all the ins and outs of this. So what options are available to you? So Morningstar, I would argue, has a fairly substantial database of not only managed investment information like mutual funds and ETFs, Psych funds, pool funds, but also individual security. So the pie chart on the left just an illustration that we have a lot of this information. The I guess the sticking point is that it's fine to look at returns of this information on a trailing basis that's readily available. But what sets us apart is the ability to look through so what these investment funds actually hold. And I would argue, Morningstar has a pretty strong holdings database. And why that helps is because that enables Morningstar to actually rate these funds. So there are a couple of icons on the right that you may be familiar with. The probably the most well known is the morning star star rating, the former, the formal name of that is actually the morning star rating for funds, and that's essentially an objective look back at risk adjusted returns after fees against similar funds. And in Canada, we use the category system defined by the CI FSC or the Canadian investment fund standards committee. So that is a very, I guess, easy metric to use, because it boils down a fairly complex calculation, which is trailing returns, but adjusted adjusted for risk and adjusted for fees, and it just tells the investor How well did this fund do over time. Now our data interesting, interestingly, shows that, on average, after the fact, Five Star Funds end up performing Four Star Funds, which end up performing three, two and one star funds, again on an ex post basis. So even though the rating itself is derived from trailing returns, it tends to have some staying power. The other thing that Morningstar does quite well, and this is, I think, what we're known for, is our essentially qualitative assessment of the funds ability to produce above average or excess alpha on an atrophy basis, but in the future, right? So this is an assessment of three pillars of what makes a good fund manager. One is the parent company. So how good are the stewardship qualities of the company? So is the is the fund company, you know, targeting faddish products like cannabis and crypto, and then shutting down those funds Three years later, which we think is very poor stewardship for the investor. Or are they actually interested in producing products or funds that help meet a specific goal? For example, market Date Funds is a great example of something that that would help, would help with that. The second is people. So how experienced is the management team? What's their tenure? How's their track record? And the final is process that the third pillars process. So how, how good is the risk mitigation strategy? How consistent the investment process? Does the team have enough resources to execute that process. So these are all quite qualitative, I guess, inputs that drive what we call our Morningstar medalist rating, which is our assessment of a fund's ability to outperform in the future. So my point here is that, yes, we have a lot of information on funds. I would argue we have one of the largest fund databases in the world. In Canada alone, we cover about 22,000 individual share classes mutual funds, as well as ETFs, but we also have the holdings and some analysis to back that up, which I think we're kind of known for. So a couple of the other things that we note here in Canada is that, by and large, the the traditional. Long only mutual fund still dominates the market today. So our market in Canada is about 2.6 trillion Canadian dollars, and about 80, roughly 80% of that this data is as of March, is still in that traditional long only mutual fund that's changing a little bit. So even in the last three years, we've seen that figure drip drop down from 86 to 79 and that market share is being taken up by the likes of ETFs, for example, whether it be active or passive or a hybrid of the two, which we call Smart beta or strategic beta. The other thing that we've noticed is that it's not in the small country south of us, the United States, there's a very distinct shift towards passive management. And what's interesting is that for the first time last year, this was in, I believe, March of 2023, if you looked at all us, mutual funds and ETFs, for the first time, the split between those that are actively managed, so where a human being is making discretionary calls on what to buy and sell, and those that are passively managed, or those that follow an index, that split is about 5050 and as we saw earlier, the split in Canada, and has been for a very long time, is about 8515 so 85% of funds in Canada are actively managed, and 15% of assets or funds are passively managed. So quite a dispersion. And if you've been in the industry for a while, you'll you'll notice that oftentimes trends that start in the US eventually made their way to to Canada. But for now, active management is still very much the dominant approach in investing in Canada, between the two of active and passive. That being said, the ETF market has also evolved quite a bit. So 10 years ago, in 2014 there were 308 ETFs in Canada. And by and large, if you look at the number of ETFs, more than half, 55% of them were your traditional passive index, following ETF fast forward 10 years later. So on the left here, in 2024 there are now 15 136 ETFs. That's a huge increase in the number of products available to the average investor. So the landscape is getting more complicated, and to add an additional wrench into it, over half so 52% of ETFs, by Count, are actively managed. So active management is also making its way into the ETF space. And I wanted to mention this because of the demographic shit that we've been talking about. Younger investors typically have a higher propensity to invest in an exchange traded product for perhaps cost reasons, perhaps liquidity reasons, or just perhaps because they're using a DIY platform, and that's what's available. So it's important to understand this and do some analysis on it. The other thing we're seeing a lot of buzz on at Morningstar is around thematic investing in probably the most famous example is like Kathy Woods funds around robotics and autonomous technology. These are all things that many fund companies have started to wrap products around. So if you wanted to invest in water, you could do that. If you wanted to invest in consumer brands, you could do that. This market in Canada is not huge. I think it's about 3.7 billion. Last I checked. However, it's getting a lot of buzz from the investors. And of course, we need to have a way to track all that. So what you're seeing a visualization of is how Morningstar tracks the various themes. We actually have a taxonomy that tracks all this stuff, and we can track assets behind that as well. You can see the assets and flows, like I said, about 3.7 billion, and there's been interest going in and out of these types of products. The last kind of dimension I just want to quickly mention is smart beta or strategic beta funds. And that's of course, these are the funds that are a mix or a hybrid between active and passive. So they do follow an index, but the index is typically constructed and constructed in a way to give the investor an active exposure to a factor like value or growth or low volatility or quality. These are all examples of investment factors. And there are a number of products in Canada that that an investor can can buy or to own, to give active exposure at a very low cost. So why do I tell you all this? It's because there's a lot of dimensions to to investment funds, and first of all, you need to be able to identify that. So when you're making recommendation to an investor. Hey, do you know whether that product is actively managed or passively managed, or is it a combination? Is it thematic fund? All these dimensions are, I think, squarely within the know your product. I guess workflow. Secondarily, you also need to understand what is one product better than the other, right? So the two ratings I mentioned on the left really help you as an advisor. Get some I would argue, fairly objective, clear cut answers on on one, is the fund better? Not only is it better on an absolute basis, but after you adjust for risk, after you adjust for fees, is this still the best recommendation? I think our star rating does a pretty good job of that. Yeah. Secondly, what do you think is going to happen in the future? So again, our medalist ratings, or analyst ratings, that's a good, a good way to at least get some commentary around what the strengths of the fund management team is. So not just the name of the fund and how long it's been around in the performance, but who is managing the fund. How long have they been there? Did they have a good track record? Did they move from another fund company, and how is their track record at that fun company? These are all details that take a very long time for the average advisor to research. I would argue that you don't have the time. And so I think the medalist rating does a very good job of summarizing that. And then, of course, in the era of hyper personalization, you know, some investors want to invest sustainably, and of course, we have a set of ratings for that as well. The most well known one is a measure of ESG risk, and we have a it's called the Morning Star globe rating, or Morningstar sustainability rating for funds. So my point in showing you all this is that we do have some fairly specific intellectual property that'll help you get your recommendations through that Kyp or know your product workflow. I just wanted to pinpoint this. I did mention it earlier. This is a chart we put together that shows you the last 19 years worth of history in Canada, ending in 2020 so just before the pandemic. And what we found that is, on average, if you were to randomly buy a five star fund after five years as a group, Five Star Funds earned you 26% this is an absolute basis. After five years, a one star fund earned about 16.7% so that's a pretty wide dispersion, and what that tells you is the star rating, if you were to only rely on it, we don't recommend it at all, but if you were to do that, it tilts the odds in your favor. It doesn't give you the best pick all the time, but certainly our data shows that funds that have performed well historically on a risk adjusted basis, tend to do so in the future as well relative to their own peer group. So that's around what investment options are available to me. So of course, we have that data to cover it, and we also give you some analysis. And I would say the finished product of my research is our ratings, which will give you some insights into potentially what could be a good pick. Second question I brought up is around risk comfort. So how do I know that the product that you're recommending, or the fund that you're recommending is lined up with the amount of risk that I can take on? And this is really the essence of what a suitability determination is, if we're to look at the lens of client focus reforms so kind calls in and says, hey, the recent market volatility makes me feel like investing options are too risky, and maybe a high interest savings account might be a good option for me. Should I stay invested? Should I do something different? Where should I put my money? And the stat that we have, again, from our own survey, is that roughly 47% of investors claim that the advisors ability to understand tolerance and align my investments to that level is the main thing you look for as an advisor. And that being said, I want to turn over to my colleague Jenny, who can talk a little bit about our risk profiling or risk tolerance questionnaire.

Jenny Brown  00:28:03
Great. Thank you, Ian. So what I really like about this part of the presentation is we're now taking a lot of complex information and great information that Ian has provided, and we're helping you with the How can I incorporate this into my business? How can I help my investors with this? How can I drive better outcomes? And most importantly, how can the Morning Star risk ecosystem help me align my clients for better goals, and ultimately answer that question of, does my advisor really know me? So in order to help you articulate your value proposition, I feel that the risk comfort and the morning star risk ecosystem is one of the best ways that you can do this, and it all starts with a questionnaire. And I want to take a second and just sort of preface that this questionnaire is not a typical, you know, five questions, are you okay with 20% down in the market? Here you go. You're a balanced investor. This is a validated questionnaire that's been in market for over 20 years. We've had over 2 million people globally complete this questionnaire, and we're able to assign a risk group so that you can actually validate your client's risk tolerance. And what I mean by that is we have a questionnaire that has a 10 question version and a 25 question version. The 10 question is very good for an asset allocation recommendation, and the 25 is highly used within the ultra high net worth and high net worth space. And of course, with some educational institutions, the variance between if you take the 10 and the 25 is the same. So if you take the 10 and you score 88 you're going to take the 25 and you're going to score 88 so we have all the methodology and validation behind that that you can that you can review once your client takes this psychometric risk tolerance questionnaire, we are uniquely able to take all of the data, all of the data points that we have collected with the over 2 million people who have completed this and we can actually assign. Your client through a risk peer group. And the real benefit here is you can see with this client, they are an average so from very low all the very, very high, when we looked at their when we looked at their risk tolerance questionnaires, that psychometric risk questionnaire, and we connected it to their time horizon, or the amount of time that they would be before they would be investing. We can now come out with what we call risk comfort. So this is the first piece putting it into the context of the client, and one of the very key pieces to the validation of this that will help you not just to explain to your clients in plain language what their risk tolerance is, to separate it from the rest of the risk profile, but this will help you show them if they had any, any defenses from what we would expect. So any differences in the case of Question three, meaning of risk? So for a very high investor, that probably is opportunity. For a low investor, it's probably something different. You will be able to highlight these, these differences or these outliers to your to your client. Right away, that client should walk away with this full report understanding exactly why they are profiled with the risk tolerance that they are profiled with. We then bring in other pieces of capacity, like a time horizon, to give a range for suitability that you should you should get gear towards a portfolio creation for proposal. The other reason I really like this is we also have embedded this into our research, so you will be able to see how this would impact an existing profile. So you can see the actual risk score, and then you can bring it into the context of the client. You can go through all of the risk metrics that the client validate with the client, enter your other capacity features, and then move on to a proposal that you can be very comfortable recommending is in line with your client's suitability. If you go to the next slide and yeah, just jump. Just

Ian Tam  00:31:54
jumping in real quick. Jenny, I just wanted to mention for those that have read the guidance on national instrument 31 103, part of the guidance for client focused reforms includes validating that your client or your investor understood the question, that if there's something that looks a little off on the client's questionnaire, you need to go back and clarify with them. I think what Jenny just mentioned around validation is a good way to answer that. In fact, I think it answers it quite, quite well. Sorry about that.

Jenny Brown  00:32:23
And the key pieces, it's great for me to speak about all the data on the 20 the 20 years we've been in market that it's a global product that we validated. It's only questionnaire to be academically validated globally. But we can also show you that it works so clients that are accurately risk profiled, and I mean separate that risk profile, the psychometric risk tolerance, the risk attitude the client has consistently. We can show over the last 20 years that our client scores are pretty stable. So you're not going to see when the market goes down and the client completes the questionnaire, you're not going to see, oh no, all of a sudden I am not as aggressive as I thought it was so in the ideal world, it's going to help you position your clients appropriately for all market environments, any period of volatility, so that when a market is down, if you have a high risk client that's very risk, willing to take on risk, they're going to be calling you for opportunity. And those that are lower risk are most likely, you're going to have them positioned appropriately so that they are ready for these volatile times. So again, that's a key difference in the morning star profiler and the morning star risk methodology, is that we believe that there is one risk tolerance for every client, and then your capacity per account would change the goals for the client, but the risk tolerance is really one attitude for risk that gets adjusted as you go into goals for proposals. You know, I'll hand it back to you in case you have any other points on this slide.

Ian Tam  00:33:50
No, just that. You know, 20 years is a long time, and it covers bull markets and bear markets. And it's good to see that having a consistent measure of client risk that really just reduces the number of frantic phone calls, which I think was the original question. Original question. You know, that's not something that's sustainable for your practice. And you know it's, I don't think it's necessarily what you want your firm to go under in terms of legal risk, either when a client is in is improperly profiled in terms of their risk, comfort,

Jenny Brown  00:34:19
Great. So again, I think I mentioned earlier, Ian has done a great job of going through a lot of our ratings, which you see on the left hand side of the screen. We do a really good job at Morningstar at making these ratings. And a lot of these are very product slash portfolio focused, complex the taking the complex and making it very simple for clients, for you, to empower your investors and and I will say, with my industry experience, these ratings are very well known to the to the investors. Investors look for these ratings where we have gotten a little different. And that's why we wanted to highlight the risk profiler. The Morningstar risk ecosystem is these. Ratings on the left hand side, we've launched over the last number of years. Now I've mentioned the personalized ratings, so the Morningstar portfolio risk score and the Morningstar investor preferences tool. These are newer. Now, the Morningstar portfolio risk score is part of the risk ecosystem where you can bring in the profiler to put that risk score in the context of the client, but we have actually generated on demand, over 2 million risk scores within workstation. So there's about 50,000 users of workstation in Canada today, but 170,000 in North America. So we've already generated a number of risk scores by advisors, by our users that are going in creating portfolios, looking at models, looking at ETFs, what you're going to see is that Morningstar portfolio risk score, and because it's a newer rating over the last two and a half, almost three years, I think it's important to just note that these are two ratings that you can really use to show your client your value and really show them how you've personalized their portfolios. Now, I understand everyone's scaling their business, but you've still personalized you've gone in, you've looked at the risk score. So maybe you've got a client coming in from outside, you're looking at their account, you can see they score 88 that's the real risk of that portfolio. So we're looking at all the holdings comparing to our index to get a well diversified benchmark, and then we're assigning a score of the real risk. From there, you bring in the Morningstar profiler, which will put that risk into that suitability, that risk comfort range that we talked about. We don't see anybody else doing the second level of personalization that we do have within our workstation tool, which is the overall investment commitment level when it comes to client values. From a regulation perspective, I think everyone can understand why the portfolio risk score would be relevant to looking at the risk and the inefficiencies, or efficiencies of an existing portfolio. Where we see the ESG tool being very useful is in new guidance. It does note that KYC, part of KYC should be an advisor having a conversation with clients about ESG values. There's no guidance on what you need to do with that information. But this is a nice way that we've created where a client can go in state, whether they have a preference or not. So we take that stated preference, we don't believe the stated preference is worth much. So you take the stated preference, then the client goes through, does an exercise that will actually walk them through some trade off scenarios, where we will be able to come out based on the data that the client has responded with, and we'll be able to come out with whether or not that client has a strong conviction to these values. And ideally, you know, we all know the clients that come in say, I don't want to have any energy exposure, but then when we see energy take a run, they you know, well, why is my portfolio not doing very well? And it's maybe because we've pared back on some of these areas. So this is another way that we're helping our advisors Empower investors to have those better outcomes. So if you go to my last slide in this section, I think I'm going to hand this one back over to Ian.

Ian Tam  00:38:06
Thanks. So the question, just as a quick reminder everybody as well, how do I know, like, I think my investments are a bit risky, maybe want to go to cash. And Jenny just kind of commented on maybe part of that is really measuring the client's risk profile properly to begin with. But what about on the product side? So in Canada, what you see on a fun fact sheet today, which is kind of a proxy for risk, is something that the regulators call risk level. So you'll see low, low, medium, medium, high, and sometimes high. And behind that is a fairly basic calculation. It's the 10 year standard deviation of returns. Now there's a couple of reasons why I think that that measure maybe not the best possible measure of risk. One is that it's a 10 year measure. So for those that been around long enough, 10 years does not include the financial crisis, which I would argue is one of the ultimate litmus tests of how well a manager performs during a system, systemic, you know, market, market correction. And the second is, it is, it doesn't factor in holdings, right? So it's looking at trailing performance at the portfolio as a whole. So I think Jenny mentioned this already, but morning stars risk score, which is part of this risk ecosystem that we've been talking about, does actually look at the underlying holdings, and we also factor in when holdings change. So what I'm trying to show here on the scatter plot is that most balanced funds in Canada, again, balanced funds make up about, I think, 85% of the fund market in Canada. Most of them have a risk rating of low to medium. So does that really help you as an invest, as an advisor? Maybe, maybe not. When you look through the lens of the way Morningstar measures portfolio risk, you can see the dispersion is quite wide, so you'll see a number of so on the vertical scale, there is when you're seeing the Morningstar portfolio risk score and. This is against all balanced funds in Canada, and you'll see that even though many of them, or most of them are in that low to medium bucket, in reality, their risk scores are quite varied, at least through our lens. And part of the reason for this is because, on average, the port the portfolio of a Balanced fund changes every year between 20 and 40% that measures called turnover. So 1/3 of the portfolio is different this year than it was last year. So what happens when a portfolio manager makes a trade in the mutual fund to the risk so when you look at the industry standard risk measure, which is again low, medium high, nothing, nothing happens, because that one trade in the portfolio gives you no historical change in his in performance. When you look at morning stars approach, we will factor in those new holdings, and we will also measure the historical risk of those holdings and their interactions, their correlations, to come up with a new risk score. So in many ways, having access to the holdings of a portfolio give you a lot more, I guess, robustness in measuring risk, and in some ways, I think it's also a leading indicator of when the risk measure on a fund Fact Sheet might change in the future. Again, because we're factoring in the change in holdings. Finally, I just wanted to bring this last point again. We we've kind of alluded to this concept called the risk ecosystem and and what we're saying there is that very often when you measure a client's risk profile, it's done in one very specific system. Maybe you have a very specific risk tolerance questionnaire you use, and then when you measure the client's portfolio, or when you measure the portfolio that you're proposing, it's on a different system. So maybe somewhere over here, those two that, when you match those two together, that's what suitability is. But they're often on very different scales. So just because a client measures as medium risk, does that mean their allocation should be 5050, equities, bonds, maybe, maybe not. There's a bit of there's a bit of guesswork there. So our ecosystem, or Morningstar ecosystem, really brings everything to one single scale, which I think takes some of that guesswork out for you. Jenny, anything to add on that?

Jenny Brown  00:42:13
I would just point out that when you're looking at these two, as Ian has noted, they may appear balanced, but when you actually peel under the hood, because we have the holdings data, it is able, you are able to really highlight inefficiencies. So think about your business every day. Maybe you have clients coming in with accounts that are outside. You can easily run this score on the client's account right away to see if there's anything that is is flagging for you right away. So we really believe that this helps you in your day to day business. As I mentioned, these scores are derived on demand. So you create the portfolio, you would get this score right away. And because we're looking at holdings, it's not just looking at what like 5050, and you can see, even on this example, there is no big bucket of other which is very important.

Ian Tam  00:43:05
Great. Okay, last question that you should be ready answer today, say, hey, I really enjoyed meeting you. My current advisor is not able to explain if my current investments are a good fit for me. I need to be comfortable in this volatile market environment. Can you demonstrate why I have confidence in your advice. So I think these stats are something I mentioned earlier, but basically there is the, I guess, trend towards adding new providers and possibly switching advisors amongst this newer demographic of investors. So how do we instill confidence? Jenny, I'll kick it back to you for Why are my recommendations a good fit.

Jenny Brown  00:43:40
Thank you Ian. so one of the best things we do within the workstation platform is we're able to actually help you take a great look through on demand at the aggregate level of a client's portfolio. So the first thing you can look at and see is, how is this investment right for the client? A lot of times you're going to have clients come to you asking for investments that you may not think are appropriate or not. You're really easily able to create those portfolios, look at those investments. You know, you can use the risk score, that's one metric, but you can also use all the other data points as well, risk versus return correlation. But what I what I see here, what's really important is this gives you a way to really highlight because you've got the entire holdings data, again, you're not seeing a lot of other in that asset allocation, because we're looking at all of the holdings. So we're able to look at the complete portfolio, assign that risk score, and you can immediately go in and see in those underlying holdings which ones are creating maybe some friction in that portfolio, or, you know, maybe not a conversation that's had as much maybe the risk score looks much too conservative for what you've taken in for the client. Another way that you can highlight inefficiencies, and then ultimately, and I think if you go to the next slide, it's all about portfolio optimization. So being able to illustrate to a client, whether it's existing client portfolios they have with you or. Portfolios you're bringing over. It's all about helping you bring awareness and adoption, but we also want to help you retain so great way to dynamically display portfolios. You're able to look at again by holdings level. You can show all the different accounts, and you can highlight what you want to highlight. So for instance, if you want to keep the screen very clean, and you don't want to have the performance history. You just want to focus on risk. You can have the display suit out to all that. So in in the perspective being able to make sure your client understands the value that you're bringing to them, the why they're positioned the way they are, that the portfolio is suitable, these tools are invaluable. So this is how we really try to help you in your day to day business, ultimately Empower investor success. And I think with that, I'm handing it back over to Ian, yeah.

Ian Tam  00:45:49
So last, last piece on why your recommendations are good fit. This is just another visualization of how effective our ratings have been. So if you happen to use Morningstar ratings, and we think we should at least consider them again. What we're showing here is that, on an ex post basis, generally speaking, Five Star Funds end up outperforming 432, and one star funds over various periods. So that's something that I think in Canada in particular, our star rating does have some resonance amongst retail investors. I think retail investors do look at it. In fact, I think we get a third of a million viewers of morningstar.ca and many more morningstar.com on a monthly basis. So certainly they're familiar, at least the motivated ones are. And moreover, I think they work quite well. So I think they do what they're expected, and they're tilting the odds in the investors favor. So considering, you know, some of our ratings might be a good potential fit in terms of, you know, that's choosing a portfolio, or at least an input into choosing a product for for your for your investor, for your client. So those are we kind of fired through quickly, three questions, what are the right investment options for me, I think Morningstar has got a fairly robust database, and more importantly, we have ways to dissect that database and categorize them and rate all the investments in there that really provides good input into your recommendation. How does my portfolio align with my comfort around risk? Well, first you have to measure the client's risk properly, which we think we have a gold standard in doing through our risk profiling approach. And of course, that's done on the same scale as the way we measure portfolio risk. So we call that the portfolio, sorry, Morningstar risk ecosystem. And finally, how do you give confidence on receiving good advice? And that's generally through showing that your risk is matched, showing your asset allocation how that all makes sense. And of course, there's a bit of confidence in terms of using morningstars ratings, since they have worked specifically in the Canadian market over the last 20 years or so. That being said, regardless of whether you use Morningstar tools or not, we hope today's session was informative, and at this point, I'd love to open it up for Q and A.

David Kitai  00:48:04
Well, thank you so much Ian and Jenny for just a fascinating discussion. And I gotta say, I mean, speaking as millennial investor myself, really do appreciate just a language that speaks a little bit better to me and and would have addressed many of my questions as well. We've had a few questions come in and to all of our attendees, I would just invite you again to ask anything that might have occurred during the session, or anything else that occurs to you now. Please do take advantage of this opportunity to hear from Ian and Jenny on your questions. So you've got the Q and A button down at the bottom of your screens. Feel free to ask it. And the first question that's come in that I'll ask is, what are kind of the problems? And it's pretty plain text, but what's the problem with just using the risk level that's in my fun facts document that the lovely fun provider has given to me? What's the issue there?

Ian Tam  00:48:58
Yeah, yeah. So David, I think that's a great question. And you know, this is kind of the standard right right now in Canada. There's two reasons I think I might have covered part of it. One is that risk level does not factor in what happened at all in 2008 2009 and for those that have been around, you would have been a tough time to be an advisor around that time. So that's the first thing. And the second thing is, like I said earlier, that it doesn't change when the holdings change, right? So 1/3 of your portfolio can be completely different, and that doesn't affect the way that's measured. And then I guess the last piece I might add on to that is that the way standard deviation works, which is the basis of this risk level on the fund fact sheet, it considers upside deviation and downside deviation the same. So I would argue that most investors would be ecstatic if their fund went up by 30% in a day. They would be terrified if it went down by 30% a day. So standard deviation treats both of those the same. So it would, it would, it would, upside and downside is the same. So the way that Morningstar. Actually star ratings work. Our adjustment for risk uses a very unique application of utility theory that basically puts that emphasis on the downside risk. So that's another reason why the you know, it's not the perfect measure of risk, but it's what's standard in Canada. Hope that answers the question,

David Kitai  00:50:17
Okay, great. There's another one that's come in. And I think this is sort of in some ways, weighing different criteria. But the question is, what is important to look at when you pick funds, ratings or risks or fees?

Ian Tam  00:50:34
Great question. I think all of them are important. Actually, I think those three. I'm not sure if the question asker or the audience member took that straight from regulation, because those are all three part of part of the guidance for client focused reforms. All three are important, and all three are baked into the way that Morningstar rates funds. So the star rating, which is the most, I guess, well known, I think in Canada, it adjusts for risk. So when you have a, I don't know, I'm being extreme here, but let's say a crypto fund that's taken on a ton of risk, that's kind of, you know, 300% and in a month, versus, you know, a Balanced Fund which is taking on much less risk, maybe up only 10% that risk adjustment, using that utility theory, puts them on, kind of on the same scale. So one's not overly, I guess, looking better because of the amount of risk it's taking on. The second is that everything is done after fees. So always, fees are the single detractor from wealth over time that's consistent. And so all of our ratings on an after fee basis, you'll see that several of our fund ratings will differ by share class, so an A share might get a lower rating than, let's say, an F share or even an ETF version of the fund, simply because that's what affects the investor. That's what our ratings are based on. So ratings, risk and performance, are all baked into our figures, but they're all They're all important.

David Kitai  00:51:55
Another question has come in about access, and it's a fascinating idea and topic to get into this. But the question really is, are financial coaches able to get licenses to these tools, or is it limited to advisors only? And I'm going to assume we mean zero registered advisors.

Jenny Brown  00:52:12
I'll take that one. Essentially we do when we buy individual when we sell individual licenses of advisor workstation, it is for licensed advisors. We do have some cases where we have some professional financial planners. I would suggest maybe just emailing us with your contact information and we can review your situation to see if it's a tool you can get access to

David Kitai  00:52:38
another great plain text, kind of a question that's come in, how is this better than the stuff that my wholesaler gave me? He came to my office. He had, he had brochures. Sorry, I'm editorializing on that one, but, but just just that plain text.

Ian Tam  00:52:51
Sure. Well, it depends how hot the coffee was your office. No, no. I think this is spelled out in a client focused reforms, right? So I think there's generally view, I think this is objectively a conflict of interest when any you know, I understand how the wholesaler relationship works. Of course, wholesalers are great providers of information, and they're great way to keep abreast of what new products are coming out on the shelf, that type of a thing. But it is my belief, and I would argue the regulators belief as well, that the true Kyp know, your products simply cannot come from the same manufacturer as the product that you're recommending. That is a distinct conflict of interest. I'm not saying that information can't come from that source, but that final, you know, understanding of the product that has to come really from you, the advisor. So I think that's really the main problem, that perceived conflict of interest, that that comes from that relationship.

David Kitai  00:53:48
Another one that's come in this is, again, a bit of access question. Can I obtain both the 10 and 25 question risk questionnaire by email? Is that going to be something that's feasible for Morningstar? Sorry, Jenny, maybe you can.

Jenny Brown  00:54:02
I'll take that one. Take that one. So the risk profiler, the Morningstar profiler, is available on advisor workstation in our what we call our planning accesses. So you get access to both the 10 and the 25 we do not provide the PDF of the questionnaires because there is a calculation that needs to be done in the background, to assign, if you're maybe an enterprise contact, or someone who's looking at looking at the questionnaire, or wants to have a methodology conversation around the questionnaire with your risk, risk risk team. We are happy. We're happy to do that, but we don't, in general, pass out the questionnaire in PDF form.

David Kitai  00:54:43
Another one's come in. You touched upon global finance, the global financial crisis and 10 year standard deviations. Briefly. Does your risk rating somehow incorporate scenario Alice analysis in risk calculations?

Ian Tam  00:54:57
It does not. We have a very specific workflow. Some of our other tools that is based off of our risk model, I think it's a forget how many factors there are, but there's more than five and less than 12, I think. But we have a way to input a portfolio and understand that, okay, if the financial crisis happened again, based on your exposure to the investment factors in our model, how would your portfolio perform? So that's not baked into the risk measure, necessarily, but there are other calculations that we have. The other thing that's very useful, I think, is the concept of a Monte Carlo simulation. So when you're doing financial planning, you know, with a 95% confidence level, how am I am I going to get to my financial goals? And again, that type of workflow is available through various iterations of morningstars platform.

Jenny Brown  00:55:45
Ian, I would just add we I mentioned capacity for the investment. You know how we got to the risk comfort level for one client by bringing in a time horizon. We do have a workflow within workstation that takes in more of a goal based approach, in the sense that you can bring in the time horizon with the goals, attach more of the client's assets for what's slated to fund those goals. And at the end of that workflow, there is a Monte Carlo simulation, which highlights a maximum drawdown for the client. So for instance, if you have 20% on on 20% on route to your goal in a great market or in a good market, you're less than 10% in a very bad market. So we can actually highlight those, those maximum drawdowns. So you can actually show the client in a bad market scenario. This is where you This is where you would be with this with this goal. So we do have those workflows. And again, I would just encourage anyone that would like to see those workflows, reach out for a demo of advisor workstation.

David Kitai  00:56:52
Love that you broke brought in the Monte Carlo analysis because we had a question come in as you were answering on Monte Carlo. Is there anything else you would want to add on how your systems can operate with Monte Carlo analysis. Or do we think we've kind of covered that one?

Jenny Brown  00:57:05
I think I've covered in workstation how it works. We do have another tool within workstation called hypothetical. It is a scenario builder, essentially, and you can use it for a what if scenario for your clients. Many of my users, from the workstation perspective, will use it to show drawdown, withdrawals, investing, transfers, taxation, any sort of value that they're putting into the portfolio, maybe dollar cost averaging. You can do a lot of with a lot of what if scenarios, and show the client. You know, over the last 2010, years, we've been taking 5% out of the portfolio. You still have x today. So there's lots of of ways you can use that, that hypothetical tool, to create values and show your client portfolio optimization over over time. We can bring in scenarios such as 2008 etc, to show how that portfolio would have, would have acted. However, I you know, again, it's best to have a demo. And we do. We have a whole team that does detailed demos for for users

David Kitai  00:58:11
We only have time for one final question, but just beforehand, anybody else who's attending, who might have any more burning questions, feel free to enter them into the Q A, or reach out to Morningstar directly to just make contact and get your questions answered. My final question, though, coming in is my firm uses model portfolios. How can you help me?

Jenny Brown  00:58:32
I think Ian and I can both take that one to close it off. So essentially, we at Morningstar. We're not just one product. I'm very specific to advisor workstation. We do have other tools such as Morningstar direct, where models are brought in or they're built in direct. And then we also do have many firms at the enterprise level that take their models and put them into workstation so that their distribution channels, be it an asset manager sales desk, or be it advisors, can actually utilize those models within the Morningstar Advisor workstation workflows, just to entail help, helping the advisors surface all the data in one spot. So we can do that. And again, I would encourage you to reach out to myself directly if you're looking at whether or not your models are within workstation, in our data lake, etc. And then we can, you know, work with your firm to see about if there and if how we can get them there and so that you can use them.

David Kitai  00:59:24
Great. Ian, final note?

Ian Tam  00:59:27
This is more of a practical note, but if, if there are those in the audience that have access or are interested in publicly available models, Morningstar is currently in process of building out a database in Canada. Frankly, we have a very robust model, public model database in the US, where this concept has proliferated quite a bit more. So if you do have interest in looking at that, we actually have a ratings landscape for that space as well. In the US, we're just building that out now in Canada. So if you are either a model provider or you'd like to see them, we'd love to hear from you to help us build that out. And get you more access to, you know, insights on those models.

David Kitai  01:00:04
Okay, fantastic with that. All I will say is, thank you both so so much for sharing these great insights just fantastically presented information. As I said when I came back on, you know, it's just, it's refreshing to see how much thought is being put into the way this information is being presented, and how the next generation of client can be can be reached and communicated with so So thank you both again, and thank you to all of our attendees for joining us. I believe there will be more information flowing out to you immediately afterwards, but it was a pleasure to host you here. Have a great rest of your day.

Ian Tam  01:00:36
Thanks, David.