Fidelity officials share business concerns with RIA, broker clients

Firm to limit some alternative securities; discusses revisions in referral program

May 3, 2009 @ 12:01 am

By Jed Horowitz

Leaders of Fidelity Investments' adviser and broker-dealer clearing businesses pointed fingers at themselves and at clients last week for retreating from customer contact during the most chaotic periods of their business careers and hinted at changes to come in several key services.

“It's tough to talk to clients,” Charles Goldman, president of the Boston-based mutual fund giant's institutional products group, told more than 300 registered investment advisers and brokers at the firm's annual Executive Forum in Orlando, Fla. “At Fidelity, we haven't done as good a job as we could ... Getting out to you is a challenge.”

Despite deep-seated uncertainties about what to do to repair client portfolios and their own businesses amid falling revenue and keen regulatory oversight, Fidelity's institutional clients will succeed in restoring confidence only through more client hand-holding, Mr. Goldman said.

“All of our brands, even those that are good, are under scrutiny,” said Mr. Goldman, who joined Fidelity in January after leading The Charles Schwab Corp.'s dominant RIA custody business.

Ironically, he added, the devastation provides the best opportunity to take market share because “all of our competitors are on their heels.”

Schwab's recent decision to stop holding alternative investments in custody for advisers (see Page 29) “has become an opportunity for us,” Michael Durbin, president of the institutional wealth services division for registered investment advisers, said in an interview, adding that Fidelity is getting some “face time” with large Schwab clients.

Mr. Goldman, who said that despite some internal cost cutting, Fidelity is intensely focused on improving client services, noted in an interview that Fidelity next year may add new products with low minimum-investment requirements to its alternatives platform. Getting face time with clients at his former employer isn't an issue, because most big advisers use multiple custodians, he added.

But in a sign of how difficult it is to design strategies for gaining market share in this environment, Mr. Goldman also said that Fidelity isn't actively “chasing” new alternatives business, because it knows that custodians' oversight of hedge funds and other vehicles is coming under increased regulatory scrutiny. Indeed, while it remains committed to helping advisers find more uncorrelated and absolute-return strategies for their clients through alternatives, Fidelity also is putting limits on some securities whose values or even existence are hard to verify.

The company said that it is likely to stop accepting promissory notes, is reviewing its acceptance standards for offshore funds (it accepts them if the fund's adviser is based in the United States) and other vehicles, and is likely to raise pricing. Fidelity, Schwab and other large custodians said that they make little profit on alternative investments, offering the service as an “accommodation.”

In another pricing change, Mr. Durbin acknowledged a report in InvestmentNews that Fidelity over the next several months expects to begin charging advisers who participate in the Fidelity Wealth Advisor Solutions referral program. This will occur even as Fidelity works to upgrade it through better coordination with the company's discount-brokerage branch system. The program, which was the subject of a pre-conference session last Wednesday with selected advisers, refers high-net-worth self-directed clients to advisers who meet experience and assets-under-management criteria.

Unlike San Francisco-based Schwab and Omaha, Neb.-based TD Ameritrade Holding Corp., Fidelity has not shared in the fees advisers have gleaned from referrals, Mr. Durbin said. Fidelity is likely to require advisers to share a part of the revenue they derive annually from referred clients, a formula that is more equitable to some advisers than a flat asset-based charge, since they make less on managing fixed-income assets rather than equities.

TD Ameritrade charges 15 basis points of the revenue advisers receive from referred clients; Schwab's charges are asset-based, but the basis take tiers down as assets grow.

Several advisers and some Fidelity employees at the conference said Fidelity is also considering a 15-basis-point assessment, but Mr. Durbin said neither that move nor the timing of the charge has been decided.

He also said the firm will not lower its standards for participating in the referral program, noting that advisers must be aware that the ultimate aim of the program is to serve end clients, not to line advisers' pockets. Mr. Durbin admitted that his unit has to tread carefully with such programs so as not to antagonize the retail channel. “We have to work together better, though we are natural enemies in some places,” he said.

Indeed, at a public session, one adviser pressed Mr. Durbin to ex-plain what the company is doing to discipline registered representatives in branches who try to poach advisers' wealthy clients. He said in the interview that he regretted his answer that such solicitations are “a big issue, and we don't like it” but said that there is little the firm can do to control it.

At the public session, the RIA unit's sales chief, Scott Dell'Orfano, and his relationship management counterpart, Joe Giordano, said the firm has a “hands-off” policy, but that turnover in the branch system has been so high recently that many brokers may be unaware of it. “We have to police and monitor it more effectively,” Mr. Giordano said.

Mr. Durbin said in the interview that the issue is not significant, and added that advisers should be aware that their role is also to help overburdened representatives.

Mr. Goldman, meanwhile, said that Fidelity is also likely to upgrade security features on its platforms for advisers and brokers, such as requiring more password resets and possibly using digital token identifiers to log in.

E-mail Jed Horowitz at


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