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Morningstar Equity Analysts Identify Companies Poised To Succeed In Wealth Management Industry; Examine Competitive Advantages In Latest Report

CHICAGO, Sept. 3, 2013 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published its inaugural issue of Financial Services Observer, a research report examining the competitive shifts in the U.S. wealth management industry, how companies are responding to industry changes in the years following the financial crisis, and which companies Morningstar equity analysts think are positioned to fare well for shareholders.

Financial Services Observer is part of Morningstar's newly expanded Observer series, in-depth sector research reports that harness Morningstar's focus on a long-term investment horizon and economic moats—or sustainable competitive advantages—to analyze complex investment trends across sectors.

Key takeaways of 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, defined as those with more than $20 million in investable assets, and offer comprehensive, sophisticated suites of financial products that are difficult for other companies to replicate. These companies, like Northern Trust and Morgan Stanley, also have strong brands and reputations, and often high switching costs;
  • The high-net-worth customer segment, defined as investors with between $1 million and $20 million of investable assets, is increasingly competitive. U.S. households in this segment control more than half of U.S. investable assets, and wealth controlled by high-net-worth individuals in the United States is expected to rise at a compound annual rate of 7.3 percent through 2015. However, it is becoming increasingly difficult for firms to distinguish their offerings from competitors in this crowded segment;
  • Morningstar analysts identify Raymond James as 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 experiencing competition for advisors in addition to clients. Significant numbers of advisors have moved from wirehouses to independent advisor networks, as the regulatory environment has 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
  • Morningstar analysts consider Charles Schwab as a more successful wealth manager for the mass affluent customer segment, defined as 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. "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."

The Financial Services Observer also analyzes the competitive factors of the wealth management industry, various business models, effect of global economic growth, and the changing nature of regulation 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 also included.

Morningstar publishes editions of its Observer series regularly throughout the year, focusing on various topics across sectors, including basic materials, consumer goods and services, energy, financial services, healthcare, industrials, and technology. The company recently published its first utilities and consumer sector editions: Utilities Observer, which explores demand, pricing, and competitive forces in the Texas power markets; and Consumer Observer, which studies the competitive dynamics between consumer product firms and retailers. Morningstar also published its latest Energy Observer, which examines the key drivers of U.S. natural gas demand and focuses on the power generation, industrial, and export markets; and its most recent Healthcare Observer, which delves into the dynamics and competitive advantages of the lucrative pharmacy benefit management (PBM) industry. Later this month, Morningstar plans to publish its second Technology Observer, which will explore global demand for the personal computer industry and the outlook for hardware and software companies in the new era of computing.

The Financial Services Observer is available at All of Morningstar's Observer publications are published in Morningstar Direct SM, its global investment analysis platform for institutional investors; and Morningstar Select, the company's institutional equity research portal.

Morningstar launched its equity research in 1998 and now has about 120 global equity and credit analysts who provide qualitative analyst coverage of approximately 1,600 companies. Morningstar also provides quantitative ratings and reports for more than 30,000 companies globally.

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