Fidelity.Com Gets Serious

It amasses a big war chest to battle online brokerages

Fidelity Investments rarely makes big strategic mistakes. But in May, 1996, the company's brokerage unit was caught napping when archrival Charles Schwab & Co. launched Internet-based stock trading. Fidelity didn't offer a Net service until January, 1997, and it has paid dearly for being late. Schwab, which ran in lockstep with Fidelity as the nation's two top discount brokers for nearly two decades, has now captured 27.5% of the online trading market. Fidelity is in fifth place, with 9.3%, trailing upstarts like E*Trade Group Inc. and Datek Online Holding Corp. (table).

CRUCIAL TEST. But Fidelity is gearing up for a renewed assault on the Internet. On June 17, the privately held firm raised $1 billion in a bond offering, providing a war chest that will be used in part to fund new initiatives online. And Fidelity is planning a slew of new online services aimed at regaining ground lost to Schwab and others, including a Web site for active traders and new services for Fidelity's 6 million customers with 401(k) accounts. "Second doesn't work--we want to be first," says Robert P. Mazzarella, president of Fidelity Brokerage Services Inc.

Fidelity's Internet strategy is a crucial test for the Boston giant, which manages $856 billion in mutual funds. Led by 69-year-old Chairman Edward C. "Ned" Johnson III, the firm has been an innovator in the financial world, creating such things as 24-hour phone service and sector-specific mutual funds. But lightning changes brought by the Internet have left it scrambling to catch up, and competitors are rapidly mobilizing. Merrill Lynch & Co. recently announced plans to offer Internet trading at prices competitive with Fidelity and Schwab, both of which charge $29.95 per trade. And Internet-only powerhouses, such as E*Trade and Intuit, are moving much more aggressively than Fidelity in areas that may be critical for attracting online investors in the future, such as Internet banking.

To be sure, Fidelity has plenty of customers, but they tend to be the cautious, buy-and-hold sorts. So Fidelity is rolling out new online tools in hopes of wooing active traders--which the firm defines as those making at least 36 trades per year. These investors account for less than 3% of Fidelity's 2.3 million online customers, even though Fidelity charges them only $14.95 per trade. More important, these are the type of customers who are fueling the growth of online brokers like E*Trade and Datek, and Fidelity would like to have more of them.

Its new active trader site, to be rolled out later this month, combines extensive investment information with a pop-up trading window accessible from a single screen. In addition to constantly updated news, it lets users set price triggers for key securities and get E-mail alerts when stocks hit the target. Unlike many online brokerages, investors can place trades without having to jump to a special screen.

This fall, Fidelity plans to upgrade its active trader Web site with NASDAQ Level II screens, a feature popular with day traders, the sort who jump in and out of stocks as often as 50 times in one day. These screens show the actual up-to-the-second buy and sell orders of NASDAQ stocks as they take place during the trading day. The Level II screen "is an added service that will be attractive to active traders," says Tracey Curvey, executive vice-president of online brokerage and daughter-in-law of Fidelity President James C. Curvey. Fidelity's $14.95 trades are still sharply higher than many firms that woo day traders. Fidelity also hopes to draw a much larger number of online customers by rolling out new services for its 401(k) investors. Later this month, those who have Fidelity 401(k) plans will be able to access their retirement accounts online through a Fidelity brokerage account. That will make it easier for retirement customers to keep tabs on a larger swath of their family finances.

At the same time, Fidelity also plans to launch Portfolio Investment Review, which reports on investment returns, analyzes the composition of portfolios, and allows investors to test how different types of holdings might affect long-term performance. Curvey claims the portfolio review will be the most sophisticated analytical tool offered by any of the online brokers.

Fidelity executives hope their new efforts will win their online brokerage some long overdue recognition. Mazzarella is frustrated that Fidelity's online innovations have gone unnoticed. He claims it was first with pager access to trading, online bill payment, and the first to distribute initial public offerings to retail customers. "One of the challenges we have is that we're not followed as much as E*Trade and Schwab," he gripes. That's because those two are closely watched public companies, while Fidelity is private.

Despite Fidelity's innovations, most analysts who track online brokers say that in building its online business, Fidelity has lagged behind Schwab. Just as Schwab has built its Web site around a heavy dose of investment advice and information, Fidelity has followed suit. But while Fidelity and other brokers play a constant game of one-upmanship in offering new features and services on their Web sites, Schwab has always come out on top. "Fidelity has been following the leader, and Schwab has just done a better job of providing an easy-to-use Web site," says Daniel Burke, senior brokerage analyst at, an online rating site.

Curvey responds that Fidelity received the top rating among online brokers in an investor survey earlier this year by Forrester Research. And she adds that Fidelity is spending heavily--she won't say how much--toward improving its Web site and "personalizing" its features to meet the needs of different types of investors through a wide range of information and services that can be accessed online. "We have our act together," she says.

LOYAL CUSTOMERS. Fidelity also has a trump card that significantly boosts its chances of being a top online broker: its customer base of 15 million fund investors. "That is without a doubt our most valuable asset" that the online unit can mine customers from for years, says Curvey. She estimates about half of Fidelity's 2-million-plus online customers have come from the fund side of the company. Indeed, in assets and accounts, Fidelity is second only to Schwab.

Fidelity executives say they are not eager to move too rapidly online if it results in the kind of service problems or computer outages that have plagued some competitors. Fidelity has so far avoided the service blackouts that have dogged many in the industry.

Even if Schwab continues to trump Fidelity, it may not matter much, says Daniel W. Latimore, director of financial-services industry research at Mainspring Communications Inc., an Internet consulting firm in Cambridge, Mass. "Fidelity is an established industry leader, and their real challenge isn't to expand but to make sure that their customers don't defect." If Fidelity proves to be a Net innovator rather than follower, new customers might even sign on.

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