EXCLUSIVE: Morgan Stanley to Drop S&P Stock Research, Align with Morningstar
(Updates 14th paragraph to show that Morgan Stanley has previously distributed Morningstar research.)
Morgan Stanley will replace the Standard & Poor’s stock research it provides free to brokers and online clients with ratings and reports from Morningstar in late August, according to several people with knowledge of the decision.
The change has not yet been announced internally, the people said.
Morningstar, which is known primarily for its mutual fund ratings, offers stock research that is deeper and that covers a broader universe of companies than the S&P Capital IQ product, said a person familiar with the decision who spoke on condition of anonymity.
“Cost is not the primary factor,” the person said, when asked whether the change is part of the broad expense-cutting program Morgan Stanley unveiled in January.
Some brokers who learned of the change were skeptical.
“Morningstar is a lightweight on equities,” said a veteran Morgan Stanley Dean Witter broker who recently learned of the change. “I would never forward a Morningstar report to a client.”
Officials at Morningstar, which was founded in 1984 and began providing common stock ratings in 2001, did not reply to requests for comment. Morgan Stanley is expected to be its largest stock research client on Wall Street.
S&P Global Market Intelligence, the financial research, data and analytics division of McGraw Hill Financial’s S&P Global, “cannot comment on who our clients are and are not, or what products they may or may not subscribe to at any point in time,” spokeswoman Christina Twomey wrote in an email.
Several Morgan Stanley advisors said they were agnostic about the change since they rarely use the research from S&P. Available through the firm’s online research portals for brokers and clients, the third-party reports are meant to supplement the reams of fundamental and technical stock research churned out daily by Morgan Stanley analysts.
The reports can be significant, however, because brokers are not allowed to recommend or trade stocks that Morgan Stanley does not cover unless they are on an approved third-party research firm’s buy list.
The decision to change independent-research providers comes as Morgan Stanley and other big brokerage firms increasingly encourage their brokers to use model portfolios devised by firm strategists rather than come up with their own investment recommendations. “I’m a dinosaur,” said the veteran broker who objects to the change. “I still pick stocks and I work with my clients on it.”
Morgan Stanley has distributed Morningstar stock research in the past.
S&P and Morningstar were among the four independent firms whose research Smith Barney agreed to provide customers as part of the between 10 Wall Street firms and regulators. Smith Barney was subsequently purchased by Morgan Stanley.
The pre-merger Morgan Stanley initially distributed third-party research from S&P and seven other independent firms, which did not include Morningstar, to fulfill its settlement obligations. Morningstar was subsequently added to the list but dropped when the independent research requirement ended in July 2009. Morgan Stanley continued, however, to distribute S&P stock research.
Morningstar stock analysts cover about 1,700 equities, using the same one-to-five-star rating scale familiar to mutual fund investors, according to one of the Chicago-based firm’s websites. The stock ratings are meant to uncover “value,” with a five-star stock “significantly undervalued” and a one-star stock “significantly overvalued.”
The website says Morningstar has about 120 equity and credit analysts, but does not distinguish between those who cover stocks and those who cover bonds. The analyst force makes Morningstar “one of the largest independent equity research teams in the world,” the website says.