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What Investors Should Know About Fund Advertising

The role of marketing in investment decision-making

Rob Pinkerton

 

Recently, The Wall Street Journal published a story about fund marketers misrepresenting our ratings in advertising. Like the story the Journal published several weeks ago about the efficacy of our ratings system, we disagree with the premise of this article and how both stories have been promoted. But the misrepresentation does offer us a great opportunity to talk about the role of ratings in marketing and investment decision-making.

How investors should view ratings in advertising

Today’s investors are fortunate to have choices when buying wealth-building products. There are more than 5,000 equities, 15,000 mutual funds and over 1 million indexes available to them. Fees continue to decline, and access to these products have increased through employer retirement plans, robo-advisor platforms, and advisor-provided options.

But choice can be daunting. The wall of 100 toothpaste options at the supermarket is enough to wear me down. Buying complex fund products is considerably harder. Ratings are a great starting point for investors to understand their options, level the playing field, and decide what's best for their investing needs. 

The Morningstar RatingTM for funds, known as the star rating, is a simple design metaphor that has served investors well for that purpose. There are other ratings systems, both within Morningstar and from other firms. Fund companies like to use our ratings in their advertising and, as the Journal points out, sometimes they make mistakes.

Morningstar’s approach to misuse of our ratings

At Morningstar, we take several measures to protect investors from accidental misuse of the star ratings in advertising. Investors can search for a fund to see its most recent star ratings for free on Morningstar.com, so they can validate promotions themselves. The most recent ratings are also available on most financial news websites, such as CNN Money, the Financial Times, Yahoo Finance, MSN Money. And up-to-date ratings are also published on brokerage and asset manager websites, within 401(k) plans, and through our Morningstar products—including Morningstar DirectSM, Morningstar OfficeSM, and Advisor WorkstationTM.

When making an investment decision, be sure to use multiple sources and not just a single advertisement. Consider the sources I mentioned above, as well as other Morningstar ratings and those of our competitors.  

Learn more about how we illuminate investing with our independent research and ratings.

Read our FAQ

How fund firms market their products

U.S. fund firms must responsibly manage multiple checkpoints and technical requirements when promoting their products to investors. In addition to complying with our licensing and process constraints, they're required to submit their advertising materials for approval to the Financial Industry Regulatory Authority.

Firms also have to manage their own production processes, marketing vendors, technology systems, and budget timelines. And when companies operate between the old world of print advertising and the frenzy of new media advertising, they can encounter problems. For instance, it takes time to produce advertising material and pass it through internal compliance and external regulatory requirements, before it appears in digital ads or print publications—particularly weekly or monthly ones. And during that time, some ratings may age out or we're unable to help them in the multi-step processes.

I don’t envy firms’ challenges. We have guidelines to help them and will continue to assist where we can. But the guidelines are put in place to protect investors. That’s why having multiple sources (like those listed above) where investors can get free, up-to-date performance and rating information is so important to us.

At Morningstar, we will always be committed to helping with the proper marketing of our ratings to extend their reach to investors. This is part of our mission to illuminate investing.

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