Fidelity belatedly joins the game with array of new services

Fidelity Investments has taken the wraps off an array of new services for well-heeled investors in a move that is more than good business – it’s a matter of survival.

Catering to the rich has turned into a tidal wave-size trend across the industry, pitting the biggest names in the business against one another in a zero-sum game.

Independent advisers, however, may have the most to lose.

“They are trying to compete in the same market that many of their advisers are in,” says Robert Glovsky, president of Mintz Levin Financial Advisors LLC in Boston, which keeps some $600 million in client assets at Fidelity.

“You can’t help but look at this and ask yourself, `Why are they doing this, and what kind of impact could it have on my business?”‘

Intense competition

The push comes as Fidelity’s bread-and-butter product is hitting the skids, thanks largely to the tough stock market and the maturing of the mutual fund business.

The company’s actively managed stock funds shed $1.5 billion during the first five months of this year, compared with net inflows of $1.7 billion during the same period a year earlier, according to Alpha Equity Research Inc.

“I think it’s an indication of how much Fidelity is really struggling,” says David O’Leary, president of the Portsmouth, N.H., firm, which tracks Fidelity funds.

With the move, the largest U.S. mutual fund company is making it known that it intends to become a major player in the high-stakes business of managing the assets of rich Americans.

But Fidelity is late to the game in an already crowded market.

San Francisco-based Charles Schwab & Co., Fidelity’s main rival in selling funds directly to investors, was the first to send shock waves through the industry when last year it acquired U.S. Trust Corp., a blue-blood trust bank.

Just two weeks ago, Lawrence J. Lasser, chief executive of Putnam Investments, said the Boston fund company intends to offer tailored accounts for wealthy investors on a trial basis beginning this summer.

The same week, Stanley O’Neal, president of Merrill Lynch & Co. Inc.’s private-client group in New York, said that intense competition has been forcing companies to lower minimums on alternative-investment strategies favored by wealthy investors.

Merrill Lynch, the top U.S. brokerage house, two weeks ago said it will change its compensation structure and pay more to brokers who manage clients paying fees based on their account size rather than the number of trades. Merrill last week unveiled an advertising campaign to promote its wealth management services.

Pamper me silly

It is nearly impossible to find a brokerage firm, mutual fund company, bank or insurer that isn’t hot on the trail of affluent investors.

State Street Global Advisors, the investment arm of Boston’s State Street Corp., is among dozens of relatively smaller players that also are courting wealthy investors.

The firm, which oversees about $23 billion in assets for the rich, last year purchased Bel Air Investment Advisors LLC, a Los Angeles money manager catering to celebrities.

State Street Global is also considering plans to offer family office services in cities, starting with Boston.

Family offices traditionally were private operations started by old-money families to handle their finances and household needs.

In recent years, such companies as Merrill and New York’s Citigroup Inc. have opened their own versions of family offices. Those offices offer everything from bill paying to advice on buying a yacht. “It is an increasing focus” of the market for wealthy investors, says State Street Global president Timothy Harbert. “The demographic trends are there.”

Indeed, they are. North American households with at least $1 million to invest are expected to hold about $13 trillion in assets by the end of 2004, up from $8.8 trillion at the end of last year, according to Cerulli Associates Inc., a financial services consulting firm in Boston.

Fidelity says it is trying to appeal to a wide range of investors, from the cash-strapped do-it-yourselfers to the pamper-me-silly affluent.

But in reality, Fidelity – like everyone else in the investment business – is more interested in the rich.

Who can blame them?

About 50% of Fidelity’s retail asset base is held by about 5% of its customers, specifically those with a minimum of $500,000 invested through the company. That means some $250 billion is owned by 240,000 of its 4.8 million customers.

Fidelity has identified another 150,000 of its customers that have more than $500,000 to invest but are housing those assets elsewhere.

“The market presents a great business opportunity for us,” says Dan Geraci, president of Fidelity’s private-wealth-management group. “The leverage is clearly there in terms of opportunity in the high-net-worth space.”

New supermarket

Fidelity is pulling out all the stops to make sure it gets its hands on those assets – through advisers or on its own. The company last week said it has begun offering separate accounts for the first time to clients with at least $1 million to invest.

It’s also considering plans to manage stocks in separate accounts, which are popular among the wealthy because of their tax efficiency.

Fidelity also said it would open nine investment centers this year, bringing the total to 87, including offices in New York and Chicago, where wealthy clients can meet with representatives by appointment.

The Boston company, which is hiring 350 people to support its efforts, also plans to develop a host of services aimed at advisers with affluent clients who have $500,000 to $10 million to invest. Later this year, the company intends to launch a separate-account supermarket, which would give advisers access to between 50 and 100 non-Fidelity money managers.

It also intends to experiment with a program allowing advisers to offer clients trust services through Fidelity. And it intends to offer advisers access to sophisticated risk-management strategies – such as derivative investments – through third-party investment banks.

The nearly 41,000 individual advisers and brokers who have at least some of their client assets under custody at Fidelity oversee about $118 billion in such assets for wealthy individuals, the company says.

Related Topics: Fidelity Investments