The quiet success of Fidelity Investments

0:00My colleague Emma Dunkley is the FT's asset management reporter. That means she writes a lot about the major asset managers, groups like Vanguard and BlackRock. These are all massive financial institutions. So she's pretty used to seeing some big figures when she reports on these companies' annual results. But earlier this year, she came across something that surprised even her. So we saw some staggering numbers, as one of the financial services firms in the U.S. reported$32.7 billion of revenues last year. And we were actually blown away by this because the revenues turned out to be 50 % or so more than the amount that BlackRock, the world's largest asset manager, had reported.

0:42And that wasn't the only figure that surprised her. And then in the second quarter of this year, the company showed assets under management of$6.4 trillion, which positions it as one of the largest asset managers globally. These figures come from the U.S.-based group Fidelity Investments. Now, Emma knew Fidelity a bit, but not as well as some of its competitors she covers regularly. I knew it was a large asset manager in the US, but they certainly don't caught attention like their higher profile rivals. And that got me and the editors thinking, we don't actually do a huge amount on Fidelity and they're not hugely well known.

1:21So we thought, how does it make its money and what is its secret sauce? So we decided, let's dig into Fidelity.

1:34I'm Michaela Tendera from the Financial Times. Today on Behind the Money, how Fidelity Investments became a financial powerhouse while keeping a low profile.

1:56Emma, welcome to the show. Thank you. To start off, let's talk a bit about this company's history, because something that I find quite interesting is that the company is today run by a woman named Abigail Johnson, who is the granddaughter of the group's founder. And in short, three generations have run this business. So, Emma, take me back to the beginning and the first Johnson. Well, it started off in 1946 in Boston, and it was founded by Edward Johnson II, originally to manage the Johnson family's existing wealth. And then by the 1960s, we had the era of the nifty-fifty stocks in the US, these fast-growing US equities.

2:39And the firm was doing pretty well. It had a range of funds focused on US stocks, often managed by very high-profile stock pickers. And so the firm really built its reputation on active asset management and stock pickers who are running mutual funds, which we also deem sort of active investing. Okay, so Fidelity got its start in active management, i.e. stock picking, but it's known for a lot more these days. Personally, I know about Fidelity because it was in charge of my retirement plan at a former job that I had. That's absolutely accurate. And over time, it has evolved, which is partly what makes Fidelity so interesting.

3:15So when we look at Fidelity's brand and what we associate it with, I'd say that for many people, their first introduction to Fidelity might actually be through their corporate retirement fund. So when you receive money, your company retirement statements will often say perhaps Fidelity somewhere there in the branding. And then people think, OK, Fidelity there is behind the scenes. So you mentioned that Fidelity has this history of working with retirement accounts. Those are 401ks often in the U.S. for our British listeners. When does Fidelity enter that sphere? They were very early players, actually.

3:54When 401k retirement plans were launched in 1978, it's fair to say Fidelity was an early adopter. And that sort of laid the foundations, arguably, for its future dominance. Not only do they run retirement money for both individuals and for companies, But they also do something called record keeping, which involves maintaining member information such as employee contributions and benefit payments. So they almost become a one-stop shop for the employer. And of course, each time they offer new services, they generate more fees. So just to cut in, the record keeping we're talking about here isn't just tallying things in a book, which you might think hearing that term.

4:31But what we're talking about here is a part of Fidelity's business that is a fee generating powerhouse. Exactly. Perhaps in the olden days, it was a case of making tallies in a book. But nowadays, it's all very much digital. And whilst it might fundamentally be rooted in keeping member information and recording basically administrative documents and the like, ultimately, it provides a relationship for Fidelity, which then allows them to cross-sell, in effect, other services. Got it. OK, so they're breaking into this market of corporate retirement savings in the late 70s, early 80s. What else are they doing around this time that's innovative?

5:12Yes. So in 1974, Fidelity also became the first company to sell retail mutual funds directly through a toll-free telephone line, which was actually seen as a huge innovation at the time. So rather than having to go through brokers, you could just go directly to Fidelity. Ah, so this basically means that if I wanted to buy a Fidelity-branded fund, I could call Fidelity up on the phone and do that. Yes, exactly. And then just a few years later, it launched its own discount retail brokerage arm for trading stocks and shares. And obviously, back then, things went online, so it was very much telephone-based.

5:47And this paved the way for its modern-day brokerage, which offers customers online trading of shares, for example, as well as funds, digital assets, and research. And this is clearly a powerful tool for them to offer their own products and generate fees from, again, trades and other related services. So Fidelity built its brand by becoming synonymous with America's retirement investments. Plus, it made pioneering moves in the brokerage space. And expanding in these two areas, Emma tells me, pays off big time. So Fidelity's presence in the corporate retirement market, as well as brokerage, gives the company a huge say in the lives of millions of Americans that actually most other asset managers just simply cannot match.

6:30And this takes Fidelity from being what was originally a conservative fund manager group focused on stock picking to a sprawling financial services beast. Now, a lot of that is kind of old history at this point. But Fidelity's recent eye-popping numbers have been driven by its current CEO, Abigail Johnson, who I mentioned before. She is one of the richest women in America, thanks to her stake in Fidelity. And she's been the CEO of the firm for over a decade. And under Abigail, we've seen the business diversify even more, and it's grown into the behemoth that it is today. She actually more than tripled Fidelity's assets under management since taking the helm.

7:11Of course, I wondered if Emma had the chance to interview Abby Johnson as she reported on Fidelity this year. So in an ideal world, obviously, we would love to interview Abby and hear directly from her how she's managed to achieve this and how she's executed it. But much in keeping with the family's reputation for being private, she declined to interview. She's really quite different from the pack of other leaders. As I say, the CEO and chair of BlackRock, Larry Fink, is often on TV. He's in the media, whereas you rarely see Abby Johnson. Despite not being able to interview Abby directly, Emma tells me that she interviewed a wide array of current and former executives, as well as experts in the industry, in order to figure out the company's secret formula to its success.

7:56And through that reporting process, Emma tells me she learned a lot. And actually speaking to former employees, they really respect her work ethic. And in fact, external people as well admire the fact that they just sort of keep almost to themselves and just quietly crack on. And it really is quite an impressive trait in that regard. I did ask around and try and get a bit more information on what Abby's like, and I heard that she really enjoys skiing. But apart from that, it does seem she's quite a quiet sort of secretive character almost. Yeah, I mean, it really is actually just such an anomaly of a success story that it has passed from grandfather to son to daughter from there.

8:37I mean, when you look at other family businesses and their track records, usually by the third generation, it just isn't performing at the same level it once was when the founder was involved. This is a really good point. And actually, what's quite interesting is there is a document written by Edward Ned, inverted commas, Johnson, who said of his father who founded the company that one thing he really instilled in the family is to really oppose orthodox thinking. It's almost like it's instilled within their work ethos to be creative and innovative. And you could argue that's also what's paved the way for the company to become diversified over the years and for Abby and Ned to branch out beyond the traditional roots of Fidelity, which arguably has been a key part of its success.

9:23So how has that family mantra or this idea to reject orthodoxy played a role in how Abby's run the business? So she's actually pushed the company beyond its stock picking, active investment routes and interpassive investing. That includes things like index trackers and exchange traded funds, which tend to deliver the returns of an index rather than relying on, say, a stock picker, which is actually Fidelity's heritage. So despite Fidelity's roots being in active fund management, its largest fund is now the Fidelity 500 Index Fund. I see. So pushing into passive investing, that's been part of those efforts to diversify the business and has made it so successful over the years.

10:03So what else did you learn about how the companies reach new heights? Former employees told us that it's actually the company's status as a private and family-controlled company that's a key part of its secret sauce. Most of Fidelity's rivals are listed companies, meaning they do have to report in detail, crucially, their financial earnings quarterly. And this means management is actually quite often held to account by external shareholders and others on things like revenues and costs and how a company's management and money is spent, which arguably makes it harder to work on longer-term plans and innovate.

10:38And so this is absolutely a positive for Fidelity in as much as they can work on longer-term projects and innovate and allocate resources and money to these ideas behind the scenes without a backlash from shareholders and all this extra scrutiny. So fair to say that staying privately listed, plus this mantra of opposing so-called orthodox thinking, have really played a key role in Fidelity's success. This is a very good point, and absolutely it seems that this family mantra has inspired her to diversify the active asset management business that Fidelity was traditionally known for. So can anything stop Fidelity?

11:19That's what we'll be looking at next.

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11:57Okay, so at the beginning of this year, Fidelity published such eye-popping numbers. Certainly, you know, this firm is not in trouble by any means. However, you can never be complacent. So what is Fidelity thinking about right now on the horizon? Well, despite Fidelity's fantastic market share and position in all the markets it operates, there are, of course, a couple of challenges ahead. So the first one is very industry-wide. And this is about how do these incumbent asset managers, how do they appeal to a younger generation that's coming up through the ranks and might have very different saving and investment habits.

12:37The other issue, which is perhaps more Fidelity-related and specific, is the broader push into private capital. Let's start with that first industry-wide issue you mentioned of appealing to a younger generation. Tell me more about that. Well, this is it. So Fidelity and many of its rivals, the so-called incumbents, that have been around for a long time, they're all now focused on trying to attract the next generation because as it stands, they're sort of seen as an established, solid player that very much serves the slightly older America that has more of the wealth. So younger generations will be going to some of the digital upstarts, like the Robin Hoods of the world, which very much have an online and digital presence and also cater more towards the trend of younger people, which perhaps seems to be trading more frequently.

13:26They also tend to offer things like crypto in a way that it's more accessible, arguably, and their brands are perhaps more present on social media. So how exactly is Abby Johnson trying to crack this younger market? So this is the part of the issue with Fidelity's structure. We don't have that level of detail in the accounts, but it certainly seems to be something that they're working towards and is on the agenda because former employees told us that it was certainly something that Abby was pushing towards. And actually, during COVID, they credit her with getting Fidelity involved in Reddit sub-threads to help engage with the younger generation and help answer some of their questions about investing and what to do with money during this turbulent period.

14:09And at the same time, she's also got the firm working on newer crypto products. And they also plan to launch a stablecoin. So she's very much working on things behind the scenes. That's really interesting. I mean, thinking about the whole meme stock phenomenon that was happening around COVID times, a lot of that was, you know, I'm thinking of like the Wall Street Bets subreddit, that kind of thing. I didn't realize Fidelity was on there, too. This is it. They may have been answering very different types of questions, but nonetheless, it seems like it was a shrewd move, at least certainly the former employees say, in relation to engaging with this younger, dare I say, more digital cohort of potential future Fidelity customers.

14:50Now, of course, a lot of wealth tends to sit within the older generation that Fidelity already has as clients. Meanwhile, younger people tend to have fewer assets and can make riskier investing decisions. So is there any hesitancy from Fidelity's perspective in moving full speed toward this younger generation? Well, even though the wealth sits most of the time with the older generation, I think increasingly, Fidelity is becoming aware of the need to appeal to this younger generation, as we said. And even if there's more of a pattern of trading and faster churn rather than long-term investing habits, I think actually Fidelity can still benefit from this, partly through the fees generated through trading activity.

15:35But crucially, it's also worth noting that if this is the type of behaviour of the younger generation, Fidelity could still cater to that and know that over time, as these people get older and as their financial behaviors change, Fidelity can then serve their needs over their lifetime as they become more complex. So actually, this is another key part of Fidelity's secret sauce, which is it develops its financial relationships with customers in a way that it can continue to serve their various evolving needs throughout a lifetime. Right. So it sounds like they're not necessarily trying to become Robin Hood per se.

16:17They're charting their own path to appealing to younger investors. I think that's fair. I think they're acutely aware of the need to remain relevant for future generations. But nonetheless, it doesn't mean they need to rip everything up and become a Robin Hood. It means that it's just another strand to their successful bow. So let's talk about the second challenge that you mentioned, the need to push into private capital. Why do they need to do that? Well, this is really interesting. Partly, it's a broader industry trend. We're seeing a shift in policy. US President Trump recently shook up the US corporate retirement market actually pretty dramatically by deciding in August to open up this space to private capital, as well as other alternative investments like property deals and crypto assets.

17:04And this move really does reshape the retirement market, because essentially it means the likes of Fidelity and others will increasingly turn to offering private assets to their customers. So that basically means I myself as a US worker could one day in my 401k have some sort of private equity investment. Is that sort of what we're talking about here? This is exactly it. I think it's fair to say that until now private markets which can range from private credit, private equity, infrastructure, real estate, they've largely, not exclusively, but they've largely been the preserve of wealthier individuals.

17:44But now, with this order from President Trump, the market is opening up and certainly will open up more broadly to basically millions of ordinary Americans who suddenly could find themselves more exposed to private markets through their 401k corporate retirement plans. Now, you mentioned this is a Fidelity-specific issue. So why is the Trump administration's policy change to 401ks not affecting other asset managers in the same way? Well, this is a good point because once again, we don't have a huge amount of transparency on Fidelity's thinking, given that they are a private company. Now, some might argue that Fidelity is a bit behind the curve because although they do have some product offerings in the private asset area, their rivals are actually aggressively gearing up.

18:29So for example, BlackRock, Vanguard, T. Rowe Price, Franklin Templeton, they're either acquiring private market managers or they're forming joint ventures in this space. Do we know if Abby Johnson, Fidelity, how are they trying to break into this space of private capital then? This is what's so intriguing about Fidelity. You can imagine that given they've been so innovative over the years, they must surely be working on doing something bigger in this space. But much in line with their secretive business model, we don't actually know what exactly Abby's working on and what she's planning on doing here.

19:04What we do know is that the firm does offer private market products for institutions as well as individuals. But again, we don't know the scale of her expansion plans in this area and whether they'd make, for example, an acquisition. So taking into account all of your recent reporting on Fidelity, what does this tell you about the asset management sector more broadly right now? Well, what it says to me more broadly is that the asset management industry needs to evolve. And to be fair, in many cases, it is evolving, but certainly to evolve and develop in order to offer access to private markets for individuals, not just through brokerage, for example, but as we said, through retirement accounts and not just private markets, but also push further into digital assets.

19:50So in your opinion, do you think Fidelity is going to succeed at conquering these two challenges that we've talked about, attracting younger investors as well as moving into the private capital space and offering that to retirement savers? How do you think they're going to handle these challenges? I think ultimately they will succeed if only because they have such vast resources and firepower to throw at these challenges. And as we've seen from the previous generations of Johnsons, and as history tells us, Fidelity has been hugely successful in innovating and diversifying its business. And as I said, part of the family mantra seems to be oppose orthodox thinking.

20:36So it very much seems as though Abby would be working on something behind the scenes. I think the key really is just how Fidelity goes about executing its plans and how long it might take them to do this. What happens if they can't do those things? Well, if they can't, for example, appeal to a younger generation and capture a bigger client base of younger customers, then there is a real risk that Fidelity fails to essentially bring on board the next generation. And then ultimately, this means it could lose market share, they could lose fees, and then their brand just becomes associated with an increasingly aging population and they seem to lose relevance.

21:13This does seem a worst case scenario, though. And as I say, Fidelity has shown it's really been good at evolving and innovating over the years. So looking ahead to next year, what will you be watching for just as you continue to cover this company and the space? Well, it would be certainly interesting to see what they do on the private assets front and if they actually come out with anything else than their existing stable. and it will also be interesting to see what they do in terms of their crypto developments behind the scenes. But ultimately, I think we'll be looking at Fidelity's next set of annual results to see if they're still shooting the lights out.

21:49Thanks for coming on the show, Emma. Thanks for having me. Behind the Money is hosted by me, Michela Tindera. This episode was produced by me and Safiya Ethmed. Fact-checking by Simon Greaves Special thanks to Jonathan Ely Sound design and mixing by Kelly Gary Original music is by Hannes Brown Topher Forges is the FT's acting co-head of audio Thanks for listening. See you next week.

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