Morningstar today published its inaugural issue of Financial Services Observer, a research report examining the competitive shifts in the U.S. wealth management industry, companies responses to industry changes following the financial crisis, and which companies Morningstar equity analysts think are poised to be a boon for shareholders.
Notable points from the first Financial Services Observer issue, “Differing Strategies Will Contribute to the Evolution of Moats in Wealth Management,” include:
• 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;
• 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;
• 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; and
• Charles Schwab is considered as 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.
“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.”
In addition, the Financial Services Observer also 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. Specific economic moat analyses for 10 companies—Ameriprise Financial, Bank of America, Charles Schwab, Morgan Stanley, Northern Trust, PNC Financial Services Group, Raymond James Financials, TD Ameritrade, US Bancorp and Wells Fargo—are included.