Research Identifies Top Wealth Management Firms
NEW YORK (MainStreet) What firms stand out in the wealth management arena? It seems the competitive advantage depends on the industry segment a firm is targeting, but Morningstar, the investment research firm, has identified what it believes to be the top-tier performers in the U.S. wealth management industry.
"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," says Jim Sinegal, Morningstar's director of financial services equity research. "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."
Morningstar identified the key factors that solidify each firm's long-term investment potential by examining sustainable competitive advantages. The study reports that financial services firms with the strongest business strategies are those that serve the ultra-high-net-worth segment, defined as investors with more than $20 million in assets. These firms offer "comprehensive, sophisticated suites of financial products that are difficult for other companies to replicate."
Northern Trust and Morgan Stanley led the field in this segment as Morningstar said the firms "have strong brands and reputations, and often high switching costs."
In the high-net-worth customer segment, defined as investors with between $1 million and $20 million in assets, the competition is especially vigorous. The study says 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% through 2015.
With such a crowded market, the study says firms are finding it increasingly difficult to distinguish their offerings from competitors. But Morningstar analysts identify Raymond James as being well-positioned to compete in the high-net-worth customer segment due to its unique business model in employing advisors.
"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," the report says. "Firms have also seen a definitive swing from commission-based to fee-based revenue models."
The firms' 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.
--Written by Hal M. Bundrick for MainStreet