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Fidelity Jumps Feet First Into The Fray



On a cool day in October, 1991, 50 top managers of Boston's Fidelity Investments gathered at a Cape Cod resort to consider an unsettling problem: After years of steady growth, Fidelity's retail business had plateaued at 6.2 million accounts. True, the booming stock market had boosted revenues, profits, and assets under management. But executives feared they were out of sync with small investors--their core market--a trend that could arrest future growth. Recalls Fidelity Chairman Edward C. Johnson 3rd: "We knew we were doing something wrong."

The outcome of that gathering has been a dramatic revamping of Fidelity's strategy. Historically, the company had focused on mutual funds. Now, it is moving toward serving all its customers' financial needs. Fidelity wants to become a vast clearinghouse that sells both its own and others' financial products, from credit cards to insurance. "We set a goal of being our customers' primary provider," says Roger T. Servison, president for retail marketing.

That will mean competing head-on with the likes of Citicorp, Prudential, and Merrill Lynch. Yet few financial-services companies are positioned as well as Fidelity. The largest mutual-fund company, with $172 billion under management, it is also one of the biggest success stories in the industry. Last year, the private firm, best-known for its marketing savvy, posted record revenues of $1.5 billion, up 16% from a year earlier, and record profits of $90 million, up 182%. Because Fidelity is privately owned, those profits may be understated.

NEW TACK. The key to maintaining or even accelerating that growth, Johnson believes, is redefining Fidelity's relationship with its customers. Its 1980s tack was to sell to investors--mostly well-to-do individuals--who made their own financial decisions. But Johnson thinks that in the more uncertain 1990s, investors want more guidance. By helping them solve specific problems, such as how to save enough for retirement or education, he contends, Fidelity will win more of their assets and handle more of their transactions. And it hopes to recruit more business from aging baby boomers with inherited wealth, an attractive new market for Fidelity.

This shift has in turn required big changes in Fidelity's marketing approach. During the '80s, it stressed direct-marketing: large newspaper ads and 800 numbers. Now, it is adding a wide range of new marketing channels to reach a broader range of customers. It's expanding its network of brokerage offices--15 new ones are planned this year--to develop face-to-face contact with customers. Fidelity won't be providing detailed investment recommendations, just a bit more personal service and guidance than other mutual-fund companies now give. If customers want more detailed advice, Fidelity will refer them to a roster of affiliated financial planners, which it sees as a more popular alternative to brokers. Fidelity is betting that most investors don't like dealing with opinionated, hard-sell stockbrokers. "We're rewriting the rules for how financial services are marketed in the 1990s," says Servison.

But will the new strategy attract more customers? It's a risky, costly move that could amount to tinkering with a winning formula. In opening branches and giving advice, it could lose its distinctive image. And it's far from clear that Fidelity's strength in direct-marketing can be transformed into a successful campaign to steal significant market share from well-entrenched banks and brokerage houses. Moreover, Fidelity seems behind the curve on several of its plans. Charles Schwab & Co., for instance, has already signed up some 3,000 advisers and planners to sell its mutual funds, brokerage services, and asset-management accounts.

DISCOUNT DRAW. But perhaps the largest potential drawback could be price. To pay for the added services, observers speculate, Fidelity will have to hike fees. With more price-conscious investors, Fidelity could end up losing customers to lower-cost competitors, which have recently been the big winners in mutual-fund sales. "At some point, their customers are going to ask whether it's worth paying all that money just so Fidelity can bring more shareholders into their funds," says Vanguard Group of Investment Cos. Chairman John C. Bogle. Vanguard's retail-customer base has grown 46% between 1987 and 1990.

Johnson says brokerage-division profits--not just fund profits--will pay for much of the new strategy. And he bristles at Bogle's complaints that Fidelity's fees are too high. "That's undiluted bull," he snaps. "If you're sick, and you go see three doctors, you don't pick out the one with the best price," he says. "We'll see who has the best performance with its funds." As a group, Fidelity's equity funds have performed better than other managers. Servison sees little risk in the new approach. "It's not as if we're Sears and have fallen out of the No. 1 slot," he says. "We think it's easier to change when times are going well."

Diversifying beyond mutual funds has been a longtime goal for Johnson. He launched a discount-brokerage operation in 1979. In 1986, he bought a bank that issues credit cards. The next year, he picked up a small insurance company.

But the idea never gathered much momentum. The reason was a debilitating feud between marketing executives and those running the brokerage division. Brokerage executives believed their division should be the engine of expansion. Fidelity's powerful marketers opposed a big increase in branches--with beefed-up advisory services and product lines--on the grounds that newspaper ads were the most cost-effective way of recruiting customers.

As a result, Fidelity's brokerage operation, No. 3 behind Schwab and Quick & Reilly Inc., failed to become a significant sales generator for the company. Although Fidelity's branches almost doubled in number from 1987 to 1990, the increase had little impact on mutual-fund sales.

One of Fidelity's biggest disappointments was the Ultra Service Account, Fidelity's central asset account for mutual funds and brokerage, credit-card and checking accounts. Merrill's Cash Management Account and the SchwabOne account have been far more successful.

Some Fidelity executives blame Rodger A. Lawson, the former head of retail marketing and brokerage, for the slow progress. A longtime direct-marketing executive at Fidelity, he had little interest in selling through the branch network, they say. "He didn't understand the brokerage business," says David Carriseo, former president of Fidelity's brokerage services and now Citibank's global mutual-funds director. Lawson, who resigned last summer, denies he impeded growth. Starting in 1990, he says, the branches accounted for an increasing share of Fidelity's new retail business.

CALL FOR COUNSEL. To run retail marketing, Johnson recruited Servison, a strong marketer who had left Fidelity in 1990 after 14 years at the firm. To run brokerage, he promoted Gordon T. Watson, a veteran brokerage executive and former Merrill Lynch managing director.

The new approach will be readily apparent at Fidelity's branches later this year. Instead of rows of fund prospectuses, the service counters will be piled with brochures for retirement-planning and college-savings devices. Fidelity's phone operators, once mere order-takers, are being retrained to give recommendations. When Fidelity installs new workstations, they will have access to detailed customer and market information. Phone reps will be able to counsel customers on specific investment options tailored to their profiles, including Fidelity and non-Fidelity products, from mutual funds to insurance.

This is a facet of a much broader plan to target products and services more precisely to specific customers. So far, Fidelity's custom services have been aimed exclusively at its richest clients. Investors with at least $100,000 can get a personal adviser. Those with $250,000 in Fidelity accounts can get premium services, such as faxes of account statements and overnight mail delivery of cash withdrawals.

But the major strategic push is bolstering its brokerage arm and broadening its nonfund services. To lure business from other brokers, Fidelity will soon initiate its own electronic stock trading system, called the Investor Liquidity Network. When possible, the ILN automatically matches buy and sell orders from its brokerage and fund operations and from outside institutional investors. The hoped-for result: cheaper executions. Says ILN designer Timothy F. McCarthy: "We know the technology works, and we think it has tremendous potential."

Fidelity plans to use a redesigned USA account as a vehicle to sell a variety of financial products to its customers. "Eventually, people will have one account for all their financial services," says Johnson. Fidelity plans to expand its credit-card operation by dropping the annual fee on its gold MasterCard to existing customers. It has only 154,000 credit cards outstanding, but that's up 70% from last year. And Fidelity is pushing insurance products. It had $271 million in revenues from selling variable annuities last year.

HALF-EMPTY? To competitors, Fidelity's strategy is full of pitfalls--especially the possibility of higher costs and prices. Some Fidelity fees and loads are low, but others are close to industry averages. Its best-performing funds charge loads of 2% or 3%. Although Fidelity will make major pricing changes later this year, Johnson won't say whether prices will rise.

Brokerage competitors further question the effectiveness of relying heavily on a sales force of phone reps without a personal relationship with customers. Asks an executive at a Fidelity rival: "Can they really compete on a full-service basis without full-service people?"

Fidelity's Servison has an answer: "We will always demand that our clients take more responsibility for their personal finances than they have to with a full-service broker. We think, for the 1990s, that's a better place to be positioned than: 'Trust me, we'll do everything for you.' "

Servison has a lot riding on that assumption. Certainly, Fidelity's marketing instincts have been right in the past. In the view of many observers, it wrote the book on marketing mutual funds in the 1980s. But the book on marketing financial services in the 1990s will have a lot more authors than Fidelity.Geoffrey Smith in Boston, with Leah Nathans Spiro in New York

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