Fidelity CEO eases requirements for adviser biz’s profit margins

SAN FRANCISCO — Edward C. “Ned” Johnson III has given the adviser services business at Fidelity Investments approval to loosen temporarily constraints on its profit margins in a bid to gain market share among advisers.
The chairman and chief executive of the Boston-based company is exercising the power he enjoys in the absence of public shareholders, Jack W. Callahan, president of Fidelity Registered Investment Advisor Group, said in an interview.
Publicly traded companies must answer to shareholders on a quarterly basis when profits are sacrificed in the name of investment, which potentially stints innovation, analysts say.
“Where the privately held [nature of Fidelity’s ownership] comes in is that Ellyn [McColgan, president of distribution and operations] and Ned say, ‘OK, we’re going to allow you to reduce your [profit] margins, because we’re going to invest a lot of money in your technology budget,’” Mr. Callahan said.
With profit margin requirements set aside, Mr. Callahan can aggressively work to close what industry observers say is a gap between Fidelity’s custody platform and that of industry leader Schwab Institutional of San Francisco, which had $524 billion of assets in custody as of March 31. Fidelity Registered Investment Advisor Group had $277 billion of assets in custody as of April 30.
Up and coming
Mr. Callahan expects Fidelity to have the strongest platform in the adviser custody business within four years, though he doesn’t expect to close the asset shortfall as quickly.
“Our technology budget is four times what it was four years ago,” he said. “I know what Schwab’s number is, and it’s significantly higher than Schwab’s, and it’s being spent in all three businesses [:trust, third-party administrators and advisers].”
But J. Thomas Bradley Jr., president of TD Ameritrade Institutional of Jersey City, N.J., said that Fidelity has a history of big talk about tech spending for the adviser business.
“We have a record of doing more with less, and we continue to do that,” he said. “I’ve heard our competition beating its chest before, but I’m not sure I’ve seen [results].”
But Fidelity is pounding its chest in earnest this time, said Richard Stone, a Fidelity customer and chief executive of Salient Wealth Management LLC in San Rafael, Calif., which manages $450 million.“They don’t want to catch Schwab,” he said. “They want to be better.”
Fidelity’s spending plans don’t threaten Schwab, according to Charles Goldman, president of Schwab Institutional.
“We plan to continue to spend what it takes to deliver a great platform to advisers,” he said. “The key for us is the leadership position we have in the industry and our ability to deliver services to advisers to help them grow their businesses,” Mr. Goldman said. “You can’t buy leadership with technology.”
Certainly, technology investment alone isn’t going to close the gap between Fidelity and Schwab, said James H. Lowell, chief investment strategist for Adviser Investment Management Inc. of Newton, Mass., a Fidelity customer that manages $1 billion. He also publishes Fidelity Investor, an independent newsletter in Needham, Mass.
“That’s how E*trade [Financial Corp. of New York] and Ameritrade tried to compete against Schwab, and it didn’t work,” Mr. Lowell said.
But when Mr. Johnson ramps up tech spending, success follows, according to Mr. Callahan.
“Think of the 401(k) business. Think of the retail brokerage business,” Mr. Callahan said.
“For years, Ned Johnson allowed these [Fidelity] businesses to run at lower profit margins, because he felt there was a great market opportunity that would eventually be realized by investing so much in the platforms,” Mr. Callahan said.
The decision to allow profit margins to be relaxed on the two businesses — both now among the industry leaders — occurred in the 1980s, according to Stephen Austin, a spokesman for Fidelity.
It would be a mistake to underestimate Mr. Johnson’s ability to play catch-up, said Gary E. Adams of Anchor/Russell Capital Advisors LLC of Boston, which manages $7 billion and keeps some of those assets in custody at Fidelity. “He’s a visionary, and he has the money to do it, and he doesn’t have [Wall Street] analysts all over him,” Mr. Adams said.
Indeed, this time, the stakes are considerably higher now that advisers have become critical to Fidelity’s strategy for retaining most of the million-dollar accounts on its 401(k) and retail-brokerage platforms. It sees those customers as vulnerable to competitors, because they soon may seek deeper advice than Fidelity can provide.
“Fidelity went into business to sell mutual funds, and lo and behold, some of those people got rich,” Mr. Adams said. “They want us to be [customer] retainers, and roll up our sleeves and talk to people.” To prevent poaching, Fidelity is seeking to hand over accounts to advisers through referrals, Mr. Adams added.
Fidelity is convinced that it can set a new standard for efficient work flow for advisers by melding technologies onto a single platform, Mr. Callahan said. The company’s recent release of Redwood City, Calif.-based Oracle Corp.’s Siebel customer relationship management software and its integration of NaviPlan, the financial planning software from Emerging Information Systems Inc. of Winnipeg, Manitoba, are two examples of the kinds of efforts it is making.
Both efforts focus on industry-leading technology with the assurance that anything typed in by advisers will be picked up by other software applications, Mr. Austin said.