David Bodamer | Wealth Management

Morningstar Inc. and iCapital will partner to bring Morningstar Advisor Workstation users smoother access to alternative investments and analytics. The workstation will use iCapital’s analytics to generate risk scores on portfolios that incorporate alts.

The goal is to make it easier to vet and access these investments inside an advisor’s existing workflow, rather than on a separate system—that includes investments in private credit, private equity, private real estate, structured notes and hedge funds.

Research and investment tools will be integrated into Morningstar’s Advisor Workstation’s platform so advisors can compare private assets to traditional investments. The Advisor Workstation will also include investment proposal and reports on alternatives.

“We’ve observed consistently over the past several years the need to include alts as part of advisor proposals and workflows,” said Vimal Vel, chief product officer of Morningstar’s Enterprise group. “Our way to approach that is to give them end-to-end capabilities that can be used from research to execution. We want to make alts accessible in the natural workflow of the advisor. We recognized that it requires us to give a multi-asset experience.” 

The goal is to bring the same kind of unbiased evaluation of alternative investments as Morningstar brought to mutual funds, and help advisors “see” the investments working inside the client’s total portfolio.  

“That’s always been an objective of ours,” said Lawrence Calcano, chairman and CEO of iCapital. “This partnership allows us to take a much bigger step in that direction. As you think about alts, they don’t and won’t ever live in a vacuum, but today they are something you deal with separately. The ability of advisors to use alts is enhanced dramatically by fitting them into existing streams and workflows. That’s one of the key things we will be able to do together.”

The first phase of the strategic relationship is live, giving Morningstar’s users access to iCapital Marketplace, a platform featuring a selection of alternative investment funds, due diligence and education resources, fund subscription processing, and third-party reporting services, and to iCapital Architect, a portfolio construction and analysis tool.

The second phase of the partnership, which is slated to go live in the next few months, will give Advisor Workstation’s Enterprise-level clients the ability to generate Morningstar’s Portfolio Risk Score using iCapital’s analytics. The score “represents the risk level of a given portfolio against the Morningstar Target Allocation Index Family, when alternatives are added to client asset allocations,” according to a press release. “Coupled with the Morningstar Risk Profiler’s risk tolerance test, Advisor Workstation can then show the range of Portfolio Risk Scores, known as the Risk Comfort range, within which each client would be most comfortable.”

The two companies have been working on the partnership for over a year, which included the challenge of figuring out how to integrate two different systems. Calcano and Vel said that it continues to be a work in progress and that advisors’ experience will evolve as the integration matures.

“I don’t think this process ever ends,” Calcano said. “There’s so much more that we envision that needs to happen to make the alts experience even easier. As we spend more time, we will find more areas to collaborate.”

Part of what drove the partnership was requests from clients who already work with both companies.

“We have incentives for both partners to collaborate as we support each other as we go to market,” Vel said. “We also have a large overlap of clients. There is some pent-up demand. Those incentives are set up to to motivate us to continue to build.”

There has been a steady drumbeat of industry studies showing increased interest in alternatives. A recent CAIS/Mercer study showed more than half (62%) of financial advisors allocate between 6% and 25% of clients’ portfolios to alternative asset classes and more than 80% expect allocations to increase within the next year. The numbers align with other industry surveys, including WMIQ’s study on alternative investment conducted in the summer of 2023.