Finance: Mutual Funds
Can Fidelity Spend Its Way Back to Fast Growth?
As rivals retrench, Bob Reynolds bets big on new technology
Robert L. Reynolds, chief operating officer of Fidelity Investments, is sitting in the catbird seat. All across Wall Street, competitors are firing employees or scraping to cut costs in the wake of last year's stock market decline. But Reynolds is going on the attack. After taking over Fidelity's top operations post seven months ago, he's aiming to make his mark and boost growth--which averaged 25% in the 1990s--for Fidelity with sharply stepped-up spending on technology. "We're on a total offensive right now," he says.
Fidelity needs the boost. Insiders says Fidelity had a record year for revenues and profits last year, led by its retail and institutional brokerage units. But other parts of the business could use some help. For instance, Fidelity's assets under management dropped 4% last year, to $920 billion. The company was hobbled by a tough stock market, defections of key fund managers, and mediocre performance by its core U.S. diversified growth funds. After frequently ranking among the nation's top funds in the 1990s, Fidelity's growth funds slipped to ninth among the top ten fund families, according to Chicago mutual fund analysts Morningstar.
Luckily for Reynolds, Fidelity is privately held. Without public shareholders to worry about, owners Chairman Edward C. "Ned" Johnson III, 70, and his daughter Abigail, 39, are ready to step up investments when times are tough. The tactic, designed to pressure rivals who are forced to retrench to keep earnings up, has paid off in the past. "Fidelity has a big advantage right now being private," says Greg Smith, online financial services analyst for J.P. Morgan Hambrecht & Quist. "This is an industry where scale is going to matter more as time goes on, and smaller firms will only have it tougher."
Fidelity's spending plans are indeed a daunting challenge for competitors. Its technology budget will rise 20% this year, to $2.3 billion. That's more than three times last year's net profits of Charles Schwab, E*Trade, and Ameritrade put together. Spending on Internet development will jump over 30%, to $350 million, and Fidelity will spend another $350 million, a 35% increase, on telephone support staff. This year, as the rest of the brokerage industry lays off workers, Fidelity expects its own overall staffing levels to rise 10%, to 36,000.
The bulk of Reynold's investments are targeted at Fidelity's brokerage and institutional operations--particularly online business, where the company sees the most promising opportunities for growth. Consider retail brokerage, in which Fidelity lags behind Schwab. Fidelity is developing Web-based financial-planning tools that will allow customers to incorporate assets held in accounts with other banks and brokers. Such aggregation, as it is called, is offered by many financial institutions as they strive to persuade customers to move more assets to them. What Fidelity brings to the party is to let clients use the raw data for financial planning.GIVING FUNDS A BOOST. Corporate customers, too, will be offered enhanced services. For instance, they will get a Web portal that lets employees view their entire array of benefits online, whether Fidelity administers them or not. The company plans to bolster its wireless services beyond basic account access and trading and let client companies such as General Motors give their employees wireless access to their retirement or benefit accounts. Also, Reynolds is spending heavily on a new e-payroll product launched in November that enables small businesses to do their payrolls and handle all the routine record-keeping chores of benefits administration online.
Fidelity's funds unit will get a boost as well. Reynolds says ad spending will rise for funds, but remain flat for brokerage. There's no mystery in the priorities he has set. Fidelity's fund business is sputtering, while brokerage is booming. Reynolds says the company will spend in excess of $100 million on advertising this year.
Reynolds grew up in West Virginia, the son of a Metropolitan Life Insurance salesman and former mayor of Clarksburg. He received a B.S. from West Virginia University, and started his career as a trust officer for Wheeling Dollar Bank, staying on when Wheeling was bought by NCNB Corp. of Charlotte, N.C., which later merged with the Bank of America. He was a college football referee for 15 years, but now spends his spare time skiing in Utah or fishing for bluefish and bass off Nantucket.SHOT AT THE TOP? When the 48-year-old former top executive of Fidelity's 401(k) unit replaced 65-year-old James C. Curvey, he came with an impressive track record. In 11 years of running Fidelity's 401(k) business, he grew the assets it had under management to $224 billion from $9 billion, making it the nation's largest 401(k) manager measured by assets. "He's a focused manager who does whatever is necessary to get the job done," says Ward Harris, a former Schwab national sales director who now heads the McHenry Consulting Group in Berkeley, Calif.
Despite his title, Reynolds doesn't have charge of the actual investment performance of Fidelity's mutual funds. That's the responsibility of Robert C. Pozen, head of Fidelity's fund unit. But Pozen reports to Reynolds on most aspects of fund marketing and distribution.
Reynolds' performance as COO will be key in determining whether he will get a shot at Fidelity's top job eventually or not. Right now, Johnson's most likely successor is his daughter Abigail, who is now a senior vice-president. While not yet committed to replacing her father, Abigail was recently nominated to become one of 14 trustees who oversee Fidelity's 242 funds. Even if she does take over, Reynolds could be secure in his new job for many years--provided his expansion plans pay off.By Geoffrey Smith in Boston; By Joshua Kendall in Boston, with Phoebe Eliopoulis in WashingtonReturn to top