Navigating Private Markets: How Morningstar's Enhanced Tools Help Advisors Balance Risk and Reward

The rise of private investments—from alternative funds to direct equity stakes—has created both opportunities and headaches for financial advisors. While these assets promise higher returns, their lack of liquidity, complex fee structures, and evolving regulatory landscape have made portfolio integration a high-wire act. Enter Morningstar's Direct Advisory Suite, which now offers a suite of enhancements designed to help advisors mitigate risks, navigate compliance, and capitalize on private markets' growth.

Risk Management: Quantifying the Invisible

Private investments are inherently riskier than public equities, but quantifying that risk has been a guessing game—until now. Morningstar's Portfolio Risk Score now factors in private capital funds, breaking down risks into two dimensions: volatility (traditional market risk) and liquidity constraints (the inability to exit investments quickly). This dual metric allows advisors to visualize how private stakes affect overall portfolio stability.

For instance, an advisor might discover that 30% of a client's portfolio is in semiliquid funds like interval or tender-offer vehicles, which may impose quarterly redemption limits. Armed with this data, they can rebalance to avoid overexposure. The suite's Scenario Builder takes this further, letting advisors simulate how liquidity freezes or market downturns would impact returns—a critical tool for stress-testing portfolios in volatile environments.

Regulatory Compliance: Meeting the New Standards

Regulatory scrutiny has intensified as retail investors increasingly dip into private markets. The Compliance Dashboard now flags proposals that don't align with the SEC's Client Fee Rule (CFR) or Regulation Best Interest (Reg BI), ensuring advisors document why a private fund is in a client's “best interest.” The Best Interest Scorecard adds another layer, analyzing 401(k) plan fees and rollover options to avoid conflicts of interest.

Advisors must also navigate the “know-your-product” (KYMP) and “know-your-client” (KYC) requirements. Morningstar's Risk Ecosystem integrates KYMP data on private funds' fee structures, leverage ratios, and liquidity terms with KYC insights on client risk tolerance. This ensures recommendations are not just compliant but client-appropriate.

Fee Transparency: Cutting Through the Opacity

Private investments often carry opaque fee structures, with hidden costs like leverage-driven management fees or “catch-up” provisions that enrich managers disproportionately. Morningstar's enhancements shine a light here. The State of Semiliquid Funds Report reveals that these funds charge fees three times higher than traditional open-end funds. Advisors can now use the suite to compare fee ratios, highlight red flags (e.g., borrowed-asset fees), and demonstrate cost savings to clients.

The Medalist Ratings for semiliquid funds (introduced Q3 2025) add another layer. These qualitative ratings—based on fund managers' track records, governance, and strategies—help advisors identify funds with sustainable performance despite high fees. For example, a Gold-rated interval fund with a transparent fee schedule and low leverage might justify its cost, while a Bronze-rated peer with hidden fees could be a red flag.

Investment Strategy: Where to Focus

1. Target High-Quality Semiliquid Funds: Use Medalist Ratings to prioritize funds with strong governance and reasonable fees. For example, nontraded BDCs with Gold ratings offer exposure to private credit without excessive risk.
2. Leverage Liquidity Metrics: Use the Risk Score to cap private investments at 10–20% of a client's portfolio, depending on their liquidity needs.
3. Educate Clients on Trade-offs: The Alternative Investments Hub aggregates Morningstar's research, making it easier to explain risks like lock-up periods or valuation uncertainties.
4. Compliance as a Competitive Edge: Proactively document fee comparisons and scenario analyses to preempt regulatory audits.

The Bottom Line

Private markets are here to stay, but their complexity demands rigor. Morningstar's tools—by quantifying risk, demystifying fees, and streamlining compliance—empower advisors to harness these assets without overstepping boundaries. The key is to use the suite not just as a compliance shield but as a strategic compass: allocating selectively to high-quality, transparent private funds while keeping portfolios balanced for both reward and resilience.

As investor demand grows—25% of retail investors now hold private equity—the advisors who master these tools will position themselves as trusted guides in an increasingly opaque landscape. The question isn't whether to engage with private markets, but how to do so with clarity and confidence.