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Week in Review

Fidelity Reduces Profit Goals for Adviser Services

Fidelity Investments Chairman Edward "Ned" Johnson has told the firm's adviser services division to reduce its profit margin targets so that the company can use the money to improve its custody platform to boost its market share among advisers, Investment News reports.

Johnson made the decision since the company is not public and does not have to answer to shareholders about sacrificing profits to reinvest back in the business, said Jack W. Callahan, president of Fidelity Registered Investment Advisor Group.

"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 margins because we're going to invest a lot of money in your technology budget," Callahan said.

Industry insiders said that Fidelity is looking to upgrade its custody platform to compete with Charles Schwab, which oversees $545 billion in custody assets, versus Fidelity's $277 billion.

Callahan said he expects the platform to be strengthened within four years, although he believes it may take longer to boost assets. "Our technology budget is four times what it was four years ago," Callahan said. "I know what Schwab's number is, and [ours is] significantly higher than Schwab's, and it's being spent in all three businesses [trust, third-party administrators and advisers]."

But Schwab isn't taking the threat lying down. "We plan to continue to spend what it takes to deliver a great platform to advisers," said Charles Goldman, president of Schwab Institutional. "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. You can't buy leadership with technology."

Few Very Wealthy Invest In Mutual Funds, ETFs

Although many mutual fund companies pursue wealthy customers, they are likely to have a hard time winning them over, as the very wealthy prefer to invest in hedge funds, private equity and start-up companies, The Wall Street Journal reports.

A report from Prince & Associates found that the wealthy, those with between $500,000 and $1 million to invest, do flock to exchange-traded funds and mutual funds, with two-thirds investing in ETFs and more than half in mutual funds.

But their tastes diverge at the $5 million to $10 million mark, with only a scant 1% investing in mutual funds and 17% in ETFs. Among those worth $20 million-plus, none invest in mutual funds and only 1% in ETFs.

Instead, among those with $20 million or more to invest, more than a third invest in start-up companies and two-thirds in hedge funds.

Major Indexes' Returns Put Enhanced ETFs to Shame

With the major indexes performing so well, enhanced exchange-traded funds are having a hard time making a case for themselves, the Associated Press reports.

Portfolio managers of enhanced ETFs are going to have to make some smart calls if they hope to compete against regular ETFs and index funds, which are not only offering strong performance right now but are commonly sought for their lower fees and tax efficiencies.

The S&P 500 Index reached a record high it has not seen since 2000. Likewise, the Russell 2000 and Dow Jones Industrial Average indexes have also been continually reaching record highs for a number of months.

Enhanced index funds very often invest in smaller companies that fall outside of the index due to the outsize gains they can deliver, said Joel Dickson, a principal at Vanguard Quantitative Equity Group. "One of the reasons that these types of strategies have become so popular in recent years is because they've performed well," Dickson said.

But Tom Roseen, an analyst with Lipper, said investors are better off holding enhanced ETFs in the short term. "If you're pretty good at calling market rotations and you have the knack to do that, then I think enhanced index funds can work," Roseen said. "They're made for people who do want to place a bet. Certainly, this is not for the person who just buys and holds."

Active' ETF Filings Show Scant Differences in Funds

Two asset management firms are giving it another try with the Securities and Exchange Commission to introduce actively managed exchange-traded funds, but the funds' difference from existing enhanced index, or semi-active ETFs is only subtle, The Wall Street Journal reports. And that is exactly how they hope to win SEC approval.

AER Advisors, an affiliate of Alpha Equity Research, proposes using a rules-based system to pick stocks and announcing changes to its portfolio once a week on Fridays. XShares would announce its holdings from the previous day after the market has closed.

Half of S&P 500 CEOs Earn $8.3 Million-Plus