Technology offers first step in addressing anticipated ‘advice gap’ in post-RDR environment

LONDON, 3rd May 2011—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, is bringing its Wealth Forecasting Engine—a web-based investment forecasting and planning tool— to financial services providers in the UK.

The Morningstar Wealth Forecasting Engine uses Monte Carlo simulations in forecasting how long a person’s money might last based on a mix of investment products, asset types, risk levels, and savings behaviour. Financial services providers can embed the Wealth Forecasting Engine within their own online portals to enable investors and advisers in their development of a personalised investment plan to include estimated retirement expenses; projected income shortfall; probability of meeting retirement needs in good, fair, and poor market conditions; and income draw-down analysis.

“We are seeing strong interest for a credible investment planning tool that supports institutions as they look to assist increasing numbers of advisers and investors,” said Geoff Balzano, chief executive officer of Morningstar UK. “The anticipated advice gap that may result for many thousands of investors as the UK industry moves to a fee-based advice model puts greater urgency on a technology solution that supports investors in an efficient and scalable way. The Wealth Forecasting Engine offers a first step toward addressing this issue, making the delivery of robust and cost-effective investment forecasting to large numbers of individuals entirely possible. This will be invaluable to financial institutions and financial advisers in light of the approaching Retail Distribution Review.”

The Wealth Forecasting Engine leverages the expertise of Morningstar’s registered investment adviser— Ibbotson Associates— in the areas of capital market expectations; economic forecasting; and simulation methodology1. The Wealth Forecasting Engine employs the latest forecasting techniques including the ability to simulate extreme market downturns that occur with greater frequency than most other forecasting tools predict. It takes into account the UK tax code2 and includes a spousal profile option to offer a more complete expectation of household retirement finances. Also included are financial restrictions such as investment account limits.

Originally developed by Ibbotson Associates for the U.S. market, the Wealth Forecasting Engine has been offered to U.S. investors since 1998 as a tool they can use as part of their assessment of their retirement investment needs. In the United States, it is available to more than 21 million pension plan participants.

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Notes to Editors:

1. The Wealth Forecasting Engine uses ‘Truncated Levy Flight’ distributions in its Monte Carlo simulations , a technique pioneered by Ibbotson Associates, that captures the probability of extreme market events (“fat tails”) and their impact on investor outcomes. Modelling extreme events provides investors with a better assessment of risk and encourages prudent decision-making. Traditional forecasting models based on normal, or bell-shaped, return distributions ignore fat tail events that are now known to occur more frequently than these traditional models predict. For further information on this technique refer to article ‘Using truncated levy flight to estimate downside risk’ by James X. Xiong, senior research consultant at Ibbotson Associates, a Morningstar company, published in the Journal of Risk Management in Financial Institutions Vol.3, 3 pg. 231-242.

2. The Engine is intended to be UK tax-compliant. It takes comprehensive investor and spousal information such as salary, investments and savings, state, defined benefit and defined contribution pension funds, rental and other income, planned expenses, and bequest needs and applies current UK tax rates, investment account limits, asset class returns, and mortality rates to produce a forecast. The Engine is updated to meet regulatory changes when necessary.

3. Morningstar has conducted extensive research into new asset allocation models that take into account the impact of extreme events (“fat tails”) on financial markets. For further information, please refer to articles “MPT Put Through The Wringer” and “Morningstar Conversations: Roger Ibbotson, Benoit Mandelbrot, and George Cooper” by Dr. Paul D. Kaplan, PhD, CFA, director of quantitative research for Morningstar Europe.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 390,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services and has nearly $140 billion in assets under advisement and management as of March 31, 2011. Morningstar, Inc. has operations in 26 countries.

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