TAKING ON SCHWAB, IT SEES $300M BY 2000: FIDO UNWRAPPING ITS WRAP ACCOUNTS

In a direct assault on Charles Schwab Corp. and other rivals, Fidelity Investments is rolling out a program this month that will link affiliated brokers and financial advisers with private money managers.

The move will allow Boston-based Fidelity to retain assets that might otherwise be directed to Wall Street brokerage wrap accounts, which refer customers to institutional money managers. It will also pit the nation’s largest fund company directly against San Francisco-based Schwab, which launched a similar referral service five months ago.

“We’re quite used to people copying us,” says a spokesman at Schwab, which in recent months has also seen its nascent separate account strategy mimicked by such houses as San Diego’s Waterhouse Institutional Services (formerly Jack White & Co.) and Denver-based Datalynx.

But Fidelity’s new separate account program, which has a $100,000 minimum, won’t be a carbon copy of Schwab’s. While Schwab manages its own separate account efforts, Fidelity has enlisted the help of wrap specialist Brinker Capital of Radnor, Pa.

The program will work like this: Fidelity-affiliated registered reps or advisers who want to open a separate account for a client will be referred to Brinker, which will evaluate the client’s needs and suggest four to six separate account managers from the 35 it does business with.

Fidelity is being tight-lipped about how much the program will cost, but those familiar with the program place its price tag at between 2% and 3% of a portfolio’s total assets. The fee will be split among the adviser or rep, Fidelity, Brinker and the money managers.

Fidelity’s wrap fee is more expensive than the 1.8% Schwab charges on average, presumably because of Brinker’s involvement.

doing due diligence

Unlike Schwab, Brinker will assume the liability of due diligence. It will also provide advisers and reps with quarterly statements as well as formal training to familiarize them with wraps.

In fact, the program won’t even bear the Fidelity name. It will be called the Brinker General Securities Wrap Program.

“By bringing in Brinker, (Fidelity officials) get to tap into the resources of an organization that is familiar with the wrap business,” says Donald Trone, president of financial advisory firm Investment Management Council in Chicago and a widely recognized expert in wrap programs. “It’s a very smart move.”

Another major difference: the markets Fidelity and Schwab are targeting with their separate account strategies.

While Fidelity’s program will be open to advisers, it will be aimed primarily at the 35,000 to 50,000 registered representatives that tout the firm’s products through brokerages, banks and insurance companies. Schwab,

which doesn’t use commission-based brokers, pushes its program to 5,300-plus advisers.

“We don’t see it as being a hot product in the adviser market,” says Robert P. Mazzarella, president of Fidelity’s Institutional Brokerage group. “That market just isn’t there yet, in terms of being ready for wraps.”

He may be right. Schwab’s much-hyped separate account program — known as Managed Account Connection — appears to be off to a slow start, drawing just $20 million in its first five months, according to industry estimates (InvestmentNews, March 22).

Schwab officials bristle at the notion that the program is not going as well as they had hoped, but the company refuses to reveal what it has garnered in assets.

Instead, it maintains it has more than $3 billion under custody in separately managed accounts, though it acknowledges the money came through a variety of other sources, including partnerships it formed several years ago with such wrap specialists as Portfolio Management Consultants Inc. of Denver and Lockwood Financial Group of Malvern, Pa.

“The demand in the adviser market is small but growing,” concedes Skip Schweiss, president of Datalynx, a mutual fund supermarket in Denver that is launching its own wrap program for advisers next month. “We’re lucky it’s not the main part of our business.”

The new program is actually Fidelity’s second attempt to crack the wrap market. Two years ago, Fidelity joined with PMC to offer its reps — and not its advisers — a wrap. But it was forced to stop marketing the program when PMC ran into financial problems soon after. (The Denver firm eventually was sold to Ziegler Cos. Inc. of West Bend, Wis.) A spokesman for Fidelity describes assets in that program as “minimal.”

Fidelity expects the new wrap program will already have attracted money by the time it is unveiled later this month.

At least $50 million will come from Carillon Investments, a Cincinnati broker-dealer with 335 registered reps nationwide. Carillon, which has used Fidelity as a custodian for its accounts for six years, offers wraps through Richmond, Va.-based Wheat First Union. But it expects to begin transferring those assets to Fidelity in a few weeks.

“It’ll make things a lot easier on our reps,” says Elizabeth Monsell, president of Carillon, a subsidiary of Cincinnati’s Union Central Life Insurance and Investments. “It’ll allow them to have their clients’ accounts under one roof.”

Minneapolis brokerage Offerman & Co., which has 120 reps, has also signed up early to use Fidelity’s new wrap program. “We’ve seen some pent-up demand for a product like this,” says Carin Offerman, the firm’s president.

Chuck Widger, a managing partner at Brinker, is extremely confident in the program’s success.

“By the end of the year,” he says, “we should have close to $300 million in assets, maybe more.”