Individual investors’ fascination with the markets produced its share of bold new winners in 2020. Few had more to gain than one of the more traditional money managers, Fidelity Investments.
Fidelity ended the third quarter with $8.8 trillion in assets under administration, or what investors held in brokerage and retirement accounts on the firm’s platform, and in its funds. That is up from $8.32 trillion in December 2019. The firm processed 2.2 million trades a day through September 2020, nearly twice what it had during the year-earlier period, and has added more than 3.5 million new accounts since the end of 2019.
Fidelity’s tally of new accounts ticked even higher in the fourth quarter, according to the firm.
But there is a big caveat. A large chunk of the new money coming in pays little or no commissions or fees. Fidelity’s strategy has been to attract as many new investors to its platform as possible with low- or no-cost services. Once they are in, the firm is betting many will graduate to more lucrative offerings such as financial advice.
Whether it works won’t be known for some time.
Many firms in the investing industry have seen inflows from popular products reverse or have watched enthusiasm for the stock market ebb with account balances. It is also easier than ever to move money across firms and strategies, reducing the client inertia Wall Street has long relied on. Signing up new clients to accounts is a vital step in firms’ futures, but keeping them and migrating them to more expensive services is a more daunting challenge.
Fidelity executives say their plan is on track. The firm says the number of customers asking for financial advice, connecting with call centers, visiting the website and accessing their accounts from their mobile device are all up. Fidelity’s full-service wealth-management unit now oversees $1.4 trillion.
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“We’ve seen unprecedented engagement,” said
Fidelity’s head of wealth management and digital advice.
Executives say Fidelity has an advantage over competitors because it is privately held, with fewer pressures to churn out short-term profits—and because it already manages more than 76 million accounts across its businesses, including being the nation’s largest brokerage and administrator of 401(k)-type retirement plans.
“A lot has to do with scale,”
Fidelity’s chief executive, said last month at the Barron’s Executive Briefing conference. “We are able to do core back-office processing at lower unit costs. We can spread costs over more transactions.”
Fidelity isn’t alone in reaping the benefits of a surge in investor interest that took hold of markets last year.
From the market’s dizzying climb to record highs, to the multibillion-dollar mergers that reshaped the wealth-management industry, to the emergence of a new generation of day traders at startup online broker Robinhood Markets Inc., 2020 was a banner year for the individual-investing world.
an analyst with JMP Securities, says individual trading volume hit a record high last year, with many brokers and wealth managers adding two or even three times as many new accounts as in 2019.
Moves by Fidelity and many rivals to slash commissions on many trades to zero in late 2019 set the stage for the large uptick in 2020. Those cuts, along with other innovations like the industry’s broad embrace of trading in fractional shares, was then coupled with a transition to remote work that gave many Americans the spare time to place bets.
“A couple years ago, the sense was the brokerage industry was consolidating and the business was dying,” said
director of wealth management at Javelin Strategy & Research. “Now you have the perfect storm.”
The latest wave of newcomers has skewed younger and is more diverse than what many wealth managers normally attract, Mr. Ryan said. “They’re incredibly important customers,” he said. “Younger investors are, on balance, going to have smaller accounts. But the earlier investors start, clearly the greater the potential for substantial income growth.”
Their arrival has raised the stakes in asset management. Many in the industry have for years fretted over a future beyond wealthy baby boomers. But now there is an opportunity to attract younger customers just as they enter the market for the first time, and firms are trying to position themselves to benefit.
Fidelity’s strategy during this boom appears to be to offer as much as possible, knowing some of those services will bring in little or no fees.
Whether this strategy is working already is tough to tell. Controlled by the Johnson family since 1946, Fidelity offers few disclosures on the profitability of its businesses. How exactly the firm matches up with its publicly traded rivals such as
Charles Schwab Corp.
remains a mystery to most outside Fidelity’s Boston headquarters.
FMR LLC, the firm’s parent company, earned $6.87 billion in 2019 on $20.9 billion in revenue.
There are some clear strategic differences between Fidelity and rivals in how they make money.
In 2015, Fidelity stopped taking payments from market-makers for routing stock trades their way, an industrywide practice. Fidelity did keep its own market-making desk, allowing the firm to match its clients’ orders and collect the spread between the bid and ask prices. Fidelity doesn’t own a banking unit, limiting how much interest income it can collect from customers’ cash.
The company gets a cut of the fees other money managers charge clients who buy their funds on the Fidelity platform. The bigger that platform grows, the more bargaining power Fidelity wields with managers that want to stay there. The firm is also paid to manage the back-office operations for independent advisers and brokers. And when a customer ends up turning to one of those firms for advice, Fidelity can earn a referral fee.
Despite the big year, some aren’t so sure Fidelity is getting more than its share of potential individual investors.
editor of Fidelity Monitor & Insight, an independent investing newsletter, said Fidelity’s Women’s Leadership Fund, a mutual fund that invests in companies that value women leaders, recently caught the attention of his 30-year-old daughter. As for his son and stepson, each still in college: They both set up Robinhood accounts this past year, he said.
“What I don’t know is if it’s the kind of place young people want to go,” he said. “They view these larger firms as somewhat ‘old school.’”
Write to Justin Baer at [email protected]
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