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November 09, 2022 at 02:00 PM
Banks, asset managers, broker-dealers, credit-services providers and financial data providers perform a broad range of services to millions of individuals, and a select few have a competitive edge in the industry — resulting in a wide Morningstar Economic Moat Rating.
One reason for this is switching costs, which are the financial and non-financial costs incurred by a consumers when they switch brands, products, services or suppliers. Once established with a bank or asset manager, for example, clients are unlikely to leave.
Another advantage is the network effect: The more people using a particular credit card or index, the more valuable it becomes.
Cost advantages, which come with size and scope, also work to advantage of a financial services provider. The same is true for intangible assets, such as brand names that inspire customer confidence.
Nineteen financial services firms made Morningstar’s Best Companies to Own list in 2022. These companies earned their spot on the list by both carving out wide moats and making smart decisions with their capital, the research firm says.
Morningstar noted that its list is built for use by long term investors rather than to identify presently undervalued companies. Thus, it may not be the right time to buy all the names on it. “Still, we believe they are strong choices for an investor’s watchlist,” it said.
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