Fidelity Takes New Diversification Tack
May 19, 2003
BOSTON - Fidelity Investments Vice Chairman and COO Robert L. Reynolds has the Midas touch when it comes to the firm's 401(k) business, but can the No. 2 man at the country's No. 1 fund firm duplicate his success?
The fund giant, which is stumbling like the rest of the industry, is attempting to diversify its businesses and explode its international asset base to equal the size of its state-side asset anchor. In an exclusive interview with Money Management Executive, Reynolds spoke about Fidelity's planned expansion, how the firm intends to capture the $11 trillion in Baby Boomer retirement wealth and why regulators are "unfairly" targeting the mutual fund industry.
Reynolds, who entered Fidelity on the separate accounts side and only later became exposed to mutual fund operations, said a lot of new businesses Fidelity is getting into are not market related, to create a buffer for volatility. With good reason, as Fidelity has seen its asset base drop dramatically and profits plunge since the bear market began.
Although the firm oversees custodied assets of $1.4 trillion - including managed assets of $799 billion for 18 million investors worldwide through more than 11,500 retirement plans and 5,500 financial intermediaries - times have been tough. Profits for 2002 were down 39% for the second year in a row. Since the top of the market, when Fidelity had more than $1 trillion under management, assets have declined 20%, whereas the industry has seen a 14% decline. However, Reynolds would rather compare Fidelity's current situation to before the bear market, in 1998, since which time the firm's profits are up 40%, he said.
Last year, the firm pared 5% of its workforce down to 29,000, after having cut 2% in 2001, with the biggest cuts coming in its brokerage division. And two weeks ago, Fidelity announced that for the second time in three years, employees earning more than $75,000 could expect no raise.
Fidelity is also losing ground to some of its foes. While the firm had the biggest market share of long-term assets in 1996 at 13.9%, well ahead of Vanguard's second-leading 8.6% market share, Vanguard has steadily been gaining on Fidelity since that time. Today, Vanguard is narrowly ahead with a 13.8% slice of the market, a hair in front of Fidelity's 13.4%.
And while Fidelity is the top dog in many business areas, don't think it doesn't keep an eye on the rearview mirror. The 57-year-old company is so enormous that it doesn't identify a single overall nemesis, but it does consider half a dozen firms to be competitors to its various divisions, Reynolds said. In the direct-sold, retail space, Fidelity considers its two strongest competitors to be Vanguard and T. Rowe Price, he said. In the discount broker space, Reynolds named Charles Schwab as Fidelity's greatest opponent. Among fund companies primarily sold through intermediaries, Fidelity's biggest contenders are American Funds, Putnam Investments and MFS. When it comes to benefits outsourcing, Hewitt is the greatest challenger, he said.
Expect to add a few more competitors to the list in the future as Fidelity is looking into becoming a bigger player in a number of other businesses.
Sitting in a small conference room in an eerily quiet part of Fidelity's understated Boston headquarters, Reynolds, a jovial and likeable man who livens his conversation with an occasional wink, turns serious when discussing his company's future. Fidelity will remain the premier mutual fund company in the nation, he said, through diversified revenue streams combined with more conservative, income-generating products to capture the $11 trillion in Baby Boomer retirement wealth. As a privately held firm with tremendous capital at its disposal, Fidelity, unlike its competitors, is in a unique position to invest in products and services that may not bring yields until years from now, Reynolds said. Attracting this wealth from the 78 million Baby Boomers who begin retiring in 2010 will be critical for Fidelity, as 65% of its managed assets are retirement savings.
"More and more of the wealth of this country is going to be in the hands of older people," Reynolds said. "I don't think it's going to exclude equities, because the life expectancy is 20 to 30 years beyond retirement, and that's a long-term horizon" that warrants an equity investment tolerance, he said. "But I do believe there will be a greater focus on instruments that can generate income."
As the man who largely built Fidelity's 401(k) business, having served as president of Fidelity Institutional Retirement Services Co. from 1989 to 1996, Reynolds has the experience to appeal to this aging retirement market.