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Fidelity Brokerage Arm Outmuscles Schwab, Merrill


Borrowing a strategy straight from the playbook of its longtime chairman, Edward "Ned" Johnson III, Fidelity Investments has quietly built one of the industry's biggest brokerage houses.

Led by Wall Street veteran Ellyn McColgan, who was tapped from within to lead the firm's brokerage assault in October 2002, the Fidelity unit has used a "spend now for profits later" philosophy to muscle aside rivals Charles Schwab and Merrill Lynch, Business Week reports.

Operating almost entirely online, Fidelity's brokerage has landed more than one million retail accounts over the last two years and 9.9 million customers as of the end of 2004. Fidelity's numbers are 40% better than Schwab and 10% greater than Merrill Lynch. Fidelity closed the year with $1.13 trillion in assets in its brokerage accounts, which marks the first time it has surpassed Schwab and sends a veritable shot across the bow of Merrill and its $1.36 trillion in assets.

The Fidelity unit has been able to grab market share, experts told Business Week, because it aggressively cut operating costs, spent millions of dollars on new technology and customer service, and then rolled out ruthless price cuts. As a result, Schwab has forfeited nearly 10% of its brokerage accounts, while E*Trade Financial has lost 20% of its accounts.

Fidelity, however, has one distinct advantage over its brokerage competition: the privately held firm can spend more up front without answering to shareholders. For example, last year its brokerage unit shelled out $700 million for a technology upgrade and then dropped another $500 million on acquisitions to become more competitive in the institutional segment. New branches have also been springing up across the country; 10 last year alone and six of them within a half-mile of a Schwab office.

But for all of its success, the Fidelity arm has not been able to wrestle away Schwab's sleeper hold on independent financial advisers, a segment where the San Francisco fund supermarket has actually been able to widen its lead. So McColgan told Business Week she's going headhunting for an energetic executive who can help Fidelity chase down Schwab. Whomever Fidelity manages to leash, they'll likely encounter an inviting atmosphere, as McColgan has pledged to spend "a lot more" to enhance its service for advisers.

"We shoot for No. 1," she said.

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