Success in the wealth management industry comes down to age-old principles of strategy, such as competitive advantage and high barriers to entry, according to Morningstar’s inaugural issue of Financial Services Observer.

The research report examines the competitive shifts in the U.S. wealth management industry as well as companies’ responses to industry changes following the financial crisis. It also highlights companies that Morningstar analysts think are poised to be a boon for shareholders.

The report, entitled “Financial Services Observer” analyzes the competitive factors of the wealth management industry, various business models, the effect of global economic growth and ever- changing regulation requirements and client needs. It includes specific “economic moat analysis” for 10 companies—Ameriprise Financial, Bank of America, Charles Schwab, Morgan Stanley, Northern Trust, PNC Financial Services Group, Raymond James Financial, TD Ameritrade, US Bancorp and Wells Fargo.

“Our research team views wealth management as a profitable business with high shareholder returns, because these firms tend to have wide economic moats, or strong competitive advantages, which we attribute to long-standing client relationships and falling costs as production increases,” Jim Sinegal, Morningstar’s director of financial services equity research, said in a statement. “Over the last few years, the financial services sector has experienced significant change, including rising capital requirements and lower interest rates. As a result, competition has increased. In our report, we look at ways these companies are distinguishing themselves in the market, their strategies, and how they are revamping their business models.”

There were takeaways for advisors on both ends of the spectrum: mass affluent and ultra high-net-worth. Notable points outlined in the report include:

• The high-net-worth customer segment—with between $1 million and $20 million of investable assets—is increasingly competitive. U.S. households in this category control more than half of U.S. investable assets. Wealth controlled by high-net-worth individuals in the United States is expected to rise at a compound annual rate of 7.3% through 2015. It is becoming increasingly difficult, however, for firms to distinguish their offerings from competitors in this crowded segment.

• Financial services firms with the strongest economic moats are those that serve ultra-high-net-worth investors—those with more than $20 million in investable assets—which offer comprehensive financial products that are difficult for other companies to replicate. Northern Trust and Morgan Stanley are two such players because of their strong brands and reputations, and often high switching costs.

• Charles Schwab is a more successful wealth manager for the mass affluent customer segment—those with less than $1 million in investable assets—while Bank of America’s large size and scope of services could create a strong competitive advantage for serving both high-net-worth and mass affluent clients.

• Raymond James is a financial services firm that is well positioned to compete in the high-net-worth customer segment, because of the firm’s unique business model in employing advisors.

• Financial services companies are competing for advisors as well as clients. A majority of advisors have moved from wirehouses to independent advisor networks. This is due, in part, to the regulatory environment having increasingly required significant investments in technology and compliance systems, and the market has become more segmented as wealth managers focus on the type of investor they can best serve. Firms have also seen a definitive swing from commission-based to fee-based revenue models.

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