Morningstar Japan KK intends to add investment advisory services to its current core business of providing mutual fund ratings, says Tomoya Asakura, COO in Tokyo. In the United States and other markets, Morningstar provides advice on areas such as asset allocation to independent financial advisers. Given the lack of IFAs in Japan, the firm is instead going to target banks selling mutual funds.
Japan's rapidly aging population has a growing need to consider financial planning, although most individual investors and distributors remain unsophisticated when it comes to funds, Asakura notes. "We hope retail investors will look at our service and not just rely on banks or brokers."
The Japanese mutual funds industry has shrunk over the past three years from ¥60 trillion to ¥37 trillion ($341 billion) today, but the improving fortunes of the Nikkei 225 index augurs a revival that may begin next year. The introduction of defined contribution plans and the expansion of distributing variable annuities to banks has also provided a floor to the industry.
The American version of the service is primarily web-based, allowing financial advisors to analyse a client's risk tolerance, investment time horizons and so on, and customize an asset allocation. Then it connects that with Morningstar's mutual fund portfolio data to select investment vehicles.
Morningstar has provided fund ratings in Japan since entering the market in 1998. It is a joint venture, 50% owned by Softbank and 38% by Morningstar of the US. Asakura acknowledges that in the present environment, where investor education remains low and most people prefer to keep money at banks or at the post office, the concept of mutual fund ratings has been slow to catch fire.
But retail customers do rely heavily on the opinion of bank or broker distributors, some of which are using Morningstar fund reports. "We'll start providing asset allocation advice to these distributors," Asakura says. Morningstar has already begun providing some advice to Chuo Mitsui Trust Bank for its fund of funds product.
The wedge to get distributors' attention is in new areas such as for defined-contribution plans or variable annuity products. For DC plans, Morningstar will have to work directly with employees, which means targeting large companies or plan sponsors that can recommend it.
Variable annuities are now being sold more for their insurance features than the investment product, but Asakura believes over time, more investors will take an interest in the fund component. "Distributors could use our asset allocation service to pick the best funds for their variable annuity products," he says.
Morningstar sees a critical need to launch this service in the next year, while the Japanese stock markets remain patchy. "Once the market booms, investors don't care about asset allocation," Asakura says.