WASHINGTON -- Peruse the mutual-fund advertisements, and you won't have trouble finding fund companies that trumpet thumbs-up ratings from the popular

Morningstar

service.

And if you cruise Internet financial sites for mutual-fund information, you'll likewise see that fund-ranker

Lipper

is a big name.

Indeed, Morningstar and Lipper are the nation's best known mutual-fund evaluators, and millions of investors rely on their evaluations before choosing where to invest. Both firms have stressed the objectivity of their ratings.

But, it turns out, both have growing business relationships with many of the companies whose funds they evaluate. As reported

earlier, the rating services are increasing the amount of revenue they generate from various services that they provide to fund companies.

As conflicts in the financial world go, these ties may not be the most egregious. Still, they represent another strand in the web that binds major financial services players together in ways many investors don't realize.

Investor advocates say the ties call into question the raters' independence, and could mean that they might pull their punches when writing up a company that is paying it fees for nonrating services. As a result, they say, investors should be more wary.

"It can be difficult to divine the true situation," says David Butler, a spokesman for

Consumers Union

, the nonprofit publisher of

Consumer Reports

. "Any time consumers take any kind of advice, we urge them to be very cautious, and to do the homework to determine if there is vested interest."

The fund raters are getting a nice piece of business from fund companies that need to comply with the Investment Company Act of 1940, a major chunk of federal law governing the mutual-fund industry. The act requires that directors of mutual funds, when contracting with investment advisers to run the funds, must evaluate key investor concerns like fund expenses and performance.

There has been pressure, including from the

Securities and Exchange Commission

, for fund companies to farm out these reviews -- known as 15(c)s for the portion of the act requiring them -- rather than doing them in house and painting a too-rosy picture.

That's where Morningstar and Lipper come in. They perform the 15(c) analyses for the mutual funds, producing glossy reports and fat binders of statistics for fund directors to mull. Lipper is acknowledged as the leader in the field, and Morningstar has been making a push more recently. The question as to whether these reviews are rigorous enough, however, is a separate matter.

Though Morningstar and Lipper do these analyses for thousands of mutual funds, the size of this cottage industry remains unknown.

Despite repeated attempts, Morningstar and Lipper executives could not be reached to discuss the potential conflict this business represents. Neither company makes a secret of its 15(c) work -- in fact, both firms openly advertise it.

"There's certainly no conflict, I can assure you of that," says Morningstar public-relations director Stephanie Kerch.

Chicago-based Morningstar bills itself as "an independent company" for "unbiased data and analysis, and candid editorial commentary." While it says it does not "own, operate or hold any interest in mutual funds," it doesn't directly disclose its business with mutual-fund companies.

Lipper, a unit of

Reuters

(RTRSY)

, bills itself as the industry's "trusted guidepost."

Morningstar is perhaps best known for its star ratings, which attempt to measure how well a fund has balanced risk and return. The company also offers news stories, commentary and reviews, and publishes books with fund ratings.

Lipper's offerings center on somewhat more mechanical fund rankings, but the firm still has latitude in deciding how to assess performance and in assigning funds to categories.

Category assignment, in fact, can be key to performance ranking, because a fund will face a more or less crowded field depending on its category. Lipper's rankings also show up in ads, and the company's mutual-fund data is a staple on many financial Web sites, including

TheStreet.com

.

The firms' evaluations are so influential that they help steer billions of dollars worth of investments.

The raters' business ties to the funds may not necessarily produce flagrant abuses, like suppressing a negative rating , says Mercer Bullard, former assistant chief counsel in the SEC's investment-management division who now heads an advocacy group for mutual-fund investors.

But there may be more subtle, insidious consequences, he says. "Relying on the industry for a whole lot of their revenue has an effect on their willingness to do anything radical," he says.

If the raters insist on mixing evaluation with other business, he says, "You've got to have disclosure."