When Fidelity Investments announced its latest management shakeup on Apr. 19, much of the reaction focused on the retirement of Chief Operating Officer Robert L. Reynolds, No. 2 in the firm under Chief Executive Edward C. "Ned" Johnson III. Largely overlooked was a far more telling detail: the ascension of brokerage President Ellyn A. McColgan, who was handed increased responsibility over sales of Fidelity funds by other companies. McColgan's expanding portfolio highlights how the biggest challenge facing Fidelity is no longer its fund performance, but the firm's inability to adapt its sales efforts to changing investor needs following the three-year stock market slump.
The problem is that a fundamental shift in investor behavior has driven a wedge between the Boston firm and many of its traditional customers. The bear market scared many away from do-it-yourself fund-picking and into the arms of brokers and independent financial advisers. That's the market Los Angeles-based American Funds has cultivated for years with an emphasis on steady, reliable results and avoidance of fads. Vanguard Group Inc.'s low-cost index funds also appeal to that segment. Meanwhile, Fidelity's effort to sell directly to investors is seen as competition by some advisers. "The idea of a one-stop shop is now working against them," says Louis S. Harvey, president of Dalbar Inc., a fund-marketing consulting firm.
Johnson acknowledged the changed landscape in the Apr. 19 announcement, citing an "increasingly complex and competitive" market for distributing funds. "It is imperative that in this environment we take a step back and adapt our structure and sharpen our focus," he said in a statement. Johnson and other top Fidelity executives declined to be interviewed for this article.
Performance has improved at some Fidelity funds, but that still hasn't brought in a lot of new business. Two of its largest funds, the $69 billion Fidelity Contrafund (FCNTX ) and $49 billion Fidelity Diversified International Fund (FDIVX ), posted better results than similar American offerings over the past five years. That may be why the recent reorganization left in place the three Fidelity managers charged with improving fund performance. Yet even when Fidelity outperforms, American outsells it. American's Growth Fund of America brought in $19 billion last year, vs. $2 billion at Contrafund, according to Financial Research Corp. in Boston. And American's EuroPacific Growth Fund took in $12 billion, vs. less than $7 billion for Fidelity's offering.
McColgan, 53, who joined the company in 1990, already oversaw Fidelity's sales efforts to individuals through the firm's own brokerage arm. Now she'll also be in charge of indirect sales via large brokerage and advisory firms, where American and Vanguard dominate. Fidelity's brokerage unit under McColgan last year brought in $45 billion for the firm's own funds, or three-quarters of the entire company's $60 billion of net fund sales. The institutional unit she's taking over contributed less than $8 billion. Abigail Johnson, Ned's daughter, remains in charge of sales through workplace savings plans—another Fidelity strength, but one that's less important as the Baby Boom generation heads toward retirement.
Hard-charging McColgan, the daughter of a pipefitter and first member of her family to attend college, could steal a page from her brokerage playbook by spending big to improve customer service and develop new online tools for companies to provide to their customers. She could also try to expand existing relationships with major businesses for which the brokerage unit provides back-office and record-keeping services.
If she pulls it off, McColgan will burnish her position as a candidate to run all of Fidelity once Ned Johnson, who turns 76 in June, decides to retire. Says Fidelity watcher Jim Lowell, who edits the newsletter Fidelity Investor: "It's hard to see whose light is shining brighter than hers."
By Aaron Pressman