Morningstar's mutual fund rating system is proving a boon to bank investment sales programs, according to a prominent bank mutual fund executive.
"Banks were not seen as places for investment advice," said Lawrence S. Kash, a vice chairman and director of Mellon Bank Corp.'s Dreyfus Corp. unit.
"Now people are going there (to banks) because Morningstar's outside endorsement gives them credibility."
Morningstar's "star" ratings system offers investors-who have grown increasingly wary of the advice they get at banks and other advisers-an easy way to understand mutual funds, Mr. Kash said. The Chicago-based company, which assigns stars to individual portfolios based on their past performance, has a stellar reputation as an objective source of investor information, he said.
"Morningstar changed consumer behavior," Mr. Kash said.
The head of distribution for the $79 billion Dreyfus funds, Mr. Kash urged bankers to advertise in their branches the highest-rated funds they sell.
This type of "billboarding" is responsible for between 15% and 20% of Dreyfus' sales, Mr. Kash said.
Mr. Kash's comments came during a panel discussion Friday at the Investment Company Institute's annual conference here.
Many banks with highly rated proprietary funds do try to attract assets by touting their stars. When Union Bank of California wanted to start selling its funds outside of its traditional market, it advertised its four-star-rated value momentum fund. The bank, which had virtually no name recognition in the locales it wanted to enter, relied on Morningstar's mass appeal.
Still, few experts say following the stars is the best way to invest.
In an interview on Monday, Morningstar president Don Phillips said his company's rating system is most useful as a first screen in choosing appropriate investments. But customers' research should not end there, he said.
"It's healthy that they're not just putting dollars into the funds with a lot of money in ad campaigns," Mr. Phillips said. Morningstar offers a valuable way to look at a fund's long-term performance, while taking into account its risk and costs, he said.
"Most people agree completely that it's a better short cut than the ones it replaced," Mr. Phillips added, "but it's not the be-all and end-all for investment research."
Burton J. Greenwald, industry consultant and managing director of B.J. Greenwald Associates, Philadelphia, said a disproportionate amount of money invested in mutual funds goes into those that sport four or five stars- Morningstar's highest honors.
He conceded that the star system offers a "quick and dirty" way of looking at mutual funds. But, he said, professional advisers are still better equipped to sort through the thousands of options available to consumers today.
"I'd pick a restaurant or movie based on stars, but I sure wouldn't lay out tens of thousands of dollars based on stars alone," Mr. Greenwald said.
