Morningstar CEO Kunal Kapoor: ‘Evolve Ahead’

Kunal Kapoor: Good afternoon, everybody, and welcome to the Morningstar Investment Conference. I hope you’re all having a good time. Awesome. You know I’ve lived in Chicago for a long time, and many of us who live here don’t come down to Navy Pier because we say it’s a tourist trap. But I have to say that every time I’m down here I’m wowed by the views and just how beautiful the city looks. I hope amidst the conference you’re having an opportunity to just check out the city as well and that you’re enjoying the new refreshed experience that we’ve put together for you. So, thanks for being here. We’ve got a great agenda.

Let me dive right into a few comments as well. I love that video. Hopefully, you did as well. I heard some fantastic keywords that I bet resonate with all of you. I heard the word “journey.” I heard the word being a “partner.” I heard “impacting generations.” And I heard “taking stress off” and “just making lives better.” That’s what we’re all here for at the end of the day, and it’s a particularly special time for all of us at Morningstar because just last month we celebrated our 40th anniversary. And it’s obviously sent us down memory lane, and you can see that this picture of Morningstar founder, Joe Mansueto, and our first analyst, Don Phillips—I see Don sitting right there—kind of hearkens back to time when we were largely a print publication and when Don and Joe were fashioning beachwear.

Now, obviously over those 40 years much has changed, but what hasn’t changed is Morningstar’s mission of pairing up with you to empower investor success. And I think what’s lovely about our journey and your journey is that since 1984 we’ve been partners in helping so many people realize their goals, and that’s why we’re ultimately here.

Now, admittedly, the business has changed in many ways. I think if you were here in the ‘80s and early ‘90s, the word “broker” often came to mind and the notion of commissions was front of mind. All that has changed, and we have a better model today, a fee-based model that was created to support the modern financial advisor, and firms like Morningstar have come up to ensure you have the infrastructure to act independently and in your clients’ best interest.

Let’s be frank, though. It’s been a period where investors, where you, and where we, Morningstar, have benefited from some serious tailwinds. Think about it. We’ve had fiscal stimulus, low rates, a tech boom, and asset classes across the board having a very good 40-year run. In fact, even just in the past 12 months, if you look at the trailing 12 months’ return of the Morningstar US Market Index, it’s more than 25% as of last year, and that’s on the back of what’s been an amazing decade for equities and other risk assets. But our investment team expects a reversion to the mean.

So, for example, while the US stocks have generated 12% annualized over the past decade, our team is now forecasting returns will be cut in half over the forthcoming decade. And I was listening to Capital Group podcast this weekend, and I believe they’re forecasting something closer to 7%. Now most clients don’t care about things like fees when markets are soaring, but suddenly, put yourself in their shoes. If you’re in a world of 5% returns, a 100-basis-point fee is 20% of that return, and you can be sure it’s going to draw a lot more scrutiny and interest. Now people have been calling for lower returns and disruption in this industry for a long time, and so it’s fair for you to say: “Are we crying wolf again?”

But let me assure you of this: The wolf shows up eventually; it’s often, though, when we least expect it. I remember standing up here at this conference for many years and hearing experts say interest rates are going to go up, interest rates are going to go up, and guess what, they didn’t go up for 10 years, 15 years, 20 years, and then they did, and they erased almost a decade’s worth of gains in bonds. So, disruption is inevitable, and how do you then win and position yourself to succeed with that possibly being the case?

Well, as with the theme of this conference, you evolve ahead. Which means two things: one, putting the value of your great advice front and center, embracing it, and talking about it, and secondly, embracing technology to make it happen. Now, by show of hands, how many of you in this room are Uber One members? Few souls. How many of you are Costco members? Probably more than half the room. Now what I like about those models is that you pay an annual membership fee, and then you get a report back quarterly, or in the case of Costco, you’re getting a rebate check once a year that shows you whether you’re deriving the value for what you paid. It’s really simple, and it’s really effective, and it leaves no doubt in your mind about whether value received exceeds value paid. We want to do the same with financial advice. And here’s how.

At the Innovation Lab in the Festival Hall, we’re showcasing a new suite of advice analytics that essentially consumerize the quality of investment advice. If you’ve looked there already, you’ll know that we’ve got metrics for proposals’ risk levels, asset allocation, investment merit, and additional services like estate planning or savings guidance. In the past, this was a checklist you did for a client. Today, we want to give you a score card to be able to talk about how, on each of these measures, you’re actually providing additional value. So, these are not just tools that will help you do what you do, they’re going to help you communicate what you do. They’re going to show a comparison that demonstrates why what you’re building for your clients is the most suitable option for them. And honestly, what better time to do it than now?

And why do I say that? Well, Sheryl, if I asked you that question, I’m sure you would be saying it’s because just one in five affluent investors use their parents’ advisors. Think about that: 80% of investors do not stick with their parents’ advisors. And you don’t need me telling you that we have a historic shift in who controls wealth in this country. You’ve got more women and more Gen Xers taking control of family wealth as this transfer takes place than ever before. So that 80% number should be startling because there’s so much money that’s in motion.

Moreover, a recent Morningstar study found significant differences among generations around the perceptions of advisor value, including how fee transparency ought to be improved. You can get these and other insights with a QR code that I’ll flash up at the end of my presentation. But I also want you to think about embracing technology courageously to win against this backdrop.

Now, you’ve seen already that every aspect of advice has started to get improved or automated to a certain degree, whether it’s investment management or tax planning. And you know that each of these areas are only going to continue to benefit from more automation. Artificial intelligence in particular represents a sea change that has the potential to be both powerful and easier to use than anything that’s been in your hands before. A recent study by the CFP Board of Standards showed that nearly one in every three investors would act on financial planning advice from AI—but without verifying it. That’s right. One in three would act without verification.

Now, that’s cause for reflection, obviously, because you have all kinds of potential outcomes. But it’s also not surprising. I imagine many of you who are in the audience have at some point today said, “Hey, Alexa.” “Hey, Siri.” “Hey, Mo.” That’s right. It’s not surprising, because we introduced you last year to our very own chatbot, Mo, and when you met him on this stage last year, and he’s here again, by the way, at the Morningstar booth, what we’ve discovered is that people, as they start interacting with Mo and get comfortable with it, they start to ask even more personal financial questions than before, because it’s easy and natural just to ask a machine those types of questions.

Now, we don’t make up the kinds of questions that people ask, and what you see appearing on the screen behind me, these are real questions that investors and advisors have been asking Mo. And you can see that the relative level of sophistication is likely more than you would expect. So, the near future will see many more hybrid investors who want to partner with an advisor but also expect that you’re going to bring a certain level of technology to help them engage with their money. They’re not going to be passive in that sense.

So, rather than thinking about how AI could take away your clients, I want you to listen to the next session with Zack Kass to think about how it can actually improve your business and help you take on even more clients. You can also head down to the Innovation Lab, and among the things that we’re showcasing are our portfolio talking points that use Gen AI to essentially prepare you for every client conversation that you’re walking into. So, in the morning, right before your conversation, the tool will basically give you the three or five things based on the client’s portfolio that you can be highlighting to have a jargon-free conversation with that client.

So, what I want to leave you with today is this: Position yourself for change so that you can continue to do what you do well into the future, no matter when that wolf appears or in what clothing. We’ve been here for you for 40 years, and our plan is that no matter the change, we’re going to be your partner over the next 40 years as well. We’re committed to helping you prove the value you provide and embracing technology courageously. I look forward to meeting many more of you back in the Festival Hall, and in the meantime, enjoy the conference and let’s keep evolving ahead.

Thank you for being here.

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