Fidelity lost its title as the largest mutual fund manager to archrival Vanguard Group in 2003, and in the race for RIA assets, Fidelity also plays second fiddle — in this case, to Charles Schwab & Co.
But if you put all of its businesses together, including its retirement business, privately held Fidelity can lay claim to being No. 1, with more than $5 trillion in assets.
Thirty years ago, Fidelity was primarily known as a mutual fund company. Managers like Peter Lynch, legendary skipper of Fidelity Magellan (FMAGX), were household names. Today, Fidelity Magellan has $15.5 billion in assets, about as much as it had when Mr. Lynch retired in 1990 and down from $44 billion a decade ago.
Which is not to say Fidelity doesn't still have star managers. Fidelity Contrafund (FCNTX) is managed by the company's current star, Will Danoff. It has $107.4 billion in assets that generate about $700 million in revenue for the firm a year. The firm's largest fund is the Fidelity Government Cash Reserves (FDRXX), with $136 billion in assets.
All of this is impressive, but Fidelity is still nearly a trillion dollars in mutual fund assets behind Vanguard, which counts $3.5 trillion under management. Fidelity's changes are partly due to the shifting landscape of investment management: Investors have become convinced by overwhelming academic evidence (and personal experience) that red-hot outperformance is usually followed by ice-cold underperformance.
"Fidelity has faced headwinds with the shift to passive management and seen tremendous outflows from actively managed funds," said Morningstar Inc. analyst Katie Rushkewicz Reichart.
Last year, Fidelity's actively managed stock funds saw $57.7 billion flee, although that was partly offset by $19.1 billion of net inflows to passive funds. The company's largest stock fund today? Fidelity 500 Index (FUSEX), with $116.6 billion in assets and an expense ratio that ranges between 0.02% and 0.10%.
Somewhere along the line, Fidelity decided that it can be just as profitable — or even more so — by acting as a middleman, or service provider, in the investment business instead of as a producer of investment products. "Fidelity now manages $5.4 trillion in customer wealth," said Avi Nachmany, co-founder of research firm Strategic Insight. "They are the largest wealth management company in the U.S."
As large as it is, Fidelity's RIA business is an also-ran compared with Schwab, the industry leader. It was, after all, Schwab that began the outreach to RIAs, and they remain loyal to the company.
Fidelity doesn't report its $1.7 billion custody and clearing revenue separately, but research firm Aite Group reported that Fidelity custodied $882 billion in RIA assets in 2015, compared with Schwab's $1.06 trillion. The two firms controlled 70% of the market, according to Aite.
Not just RIAs
Fidelity is quick to point out that RIAs are just part of its clearing and custody business. "We have two other segments, broker-dealers and banks, and we're seeing tremendous growth in those areas as well," said Sanjiv Mirchandani, president of Fidelity Clearing & Custody Solutions. The division saw $112 billion in net new flows last year.
Wresting RIA business from Schwab isn't simply a matter of cost or performance. "It's about trust, not just cost," Mr. Nachmany said. Many Schwab RIAs have been with the company since inception, and Schwab has given them little reason to leave.
One area where Fidelity may have an edge over Schwab is its technology, something Fidelity has been investing in for several decades. Last year, Fidelity spent $2.5 billion on technology across the company.
"Technology has always been a hallmark strength at Fidelity — in some ways, it's a technology company with a fund cloak around it," said James Lowell, editor of Fidelity Investor, a newsletter. "They have always outspent any competitor on technology."
And that, Mr. Lowell said, is always aimed at the adviser — a direction that came from Edward C. Johnson III, who stepped down from the top of the company in November, and is carried on by Abigail Johnson, his daughter and the current chair of Fidelity. "It's Abby's understanding that they are gatekeepers, and she understands that if they provide the right tools for advisers, they are increasingly likely to be good gatekeepers," Mr. Lowell said. And that not only attracts new assets, but helps retain current assets.
Jonathan Pond, head of an eponymous advisory firm, uses both Fidelity and Charles Schwab, but prefers Fidelity's platform. "It's more robust," he says. Fidelity, for example, sends an email when a client deposits money, something that requires a few moments' search on the Schwab platform.
One recent effort in technology has been Wealth-scape, a single "front door" to Fidelity's Streetscape and WealthCentral workstations. The Wealthscape portal lets advisers tap into advanced analytics and financial planning tools as well as a suite of portfolio management solutions. Wealthscape will integrate with eMoney, a digital platform that counts LPL Financial, SEI Securities and AIG among its clients.
Wooing advisers is a high-touch business, and something that Fidelity seems to have difficulty with. "Fidelity is never going to take you out for a steak dinner — they are super conscious of conflicts of interest," Mr. Lowell said. "In a business with lots of glamour and glitz, they're a classic New England profile — blue suit with brown shoes. It gets in the way of seducing advisers."
Part of that may be old-fashioned caution. "The Johnson family is very conservative," said Tim McIntosh of PVG Asset Management. "It was a very lengthy process when they looked at us."
Fidelity said it's looking for quality, not necessarily quantity. "We're looking for firms that are a good fit, and those generally are larger firms," said David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions. Mr. Canter succeeded Bob Oros in January. "We have a rigorous vetting procedure for clients because we want companies that are stable and are protecting their clients."
Fidelity also has to fight against geographic bias. Mr. Pond said that about 60% of his assets are with Fidelity, and 30% are with Schwab. "We're an East Coast firm," he said. "I don't have a single West Coast client that isn't with Schwab."
That's not to say that Fidelity isn't trying. "That's probably a bit of an aged perception," Mr. Canter said. "We have a very large Western regional center, and some of our largest new clients are from California."
And Fidelity has the resources to try harder. Unlike Schwab, it doesn't have public shareholders to please every quarter. And unlike Vanguard, whose mutual structure ensures that profits go back to its funds, Fidelity can spend its money largely as it pleases. Much of that comes down to Abigail Johnson, who has worked since 1988 at Fidelity — where, like her father, she began as an analyst.
Fidelity is trying to woo new advisers via a strategic alliance with Peak Advisor Alliance, started by uber adviser Ron Carson, which offers a two-year program to train new RIAs. Peak members receive one-on-one and group coaching support; various resources, strategies, systems and tools; custom-marketing services; and participation in a growth-minded community of top advisers.
And as an ongoing aid to advisers, Fidelity also has rolled out a mystery-shopper program. The program uses real investors who meet a firm's predefined profile. The investors then give feedback on what worked and what didn't work for them. According to Cerulli Associates, investors are far more impressed with high-touch service and a warm and personable image than an exclusive image.
In its most recent shareholder update, the closest thing Fidelity issues to an annual report, the company said it aimed to increase efficiency — a move driven by fee competition. Fidelity has offered a buyout program for its older workers, the first in the company's history.
Competitors would be wise not to count Fidelity out, according to Dan Wiener, CEO of Adviser Investments. "Being No. 2 makes you fight a little harder," he said.