Will top down Fidelity embrace bottom up investing?
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24 February 2015William Trout
In my last post, I commented on the leadership transition at Fidelity and the firm’s tie-ups with firms like Betterment, LearnVest and eMoney. Here I look at some of the obstacles that might get in its way as it heads down the digital path. These obstacles relate to the firm’s legacy practices; specifically, Fidelity’s historical focus on product and performance and its top down marketing orientation. Can a firm like Fidelity really change from within, even when a new leader mandates it? Corporate cultures are resilient and resistant to change, unless, of course, they are focused on driving that change itself. Google and Amazon are firms that constantly reinvent themselves. Fidelity’s core businesses, on the other hand, remain rooted in some very traditional thinking. Despite launching several passively managed ETFs over the past few years, the firm still hews to the legacy of active management embodied by Peter Lynch and his Magellan funds. This is not to criticize active management per se; as I’ve noted before, I do think that betting against the market can make sense for investors. The issue for Fidelity is that active investors define themselves in terms of beating a benchmark, or at least, achieving some sort of absolute return. This is a far cry from the goal oriented thinking espoused by investors today. The fact that we still think of Peter Lynch today underscores the fact that Fidelity is a marketing juggernaut. Decades and dollars have been spent promoting the proprietary and third-party funds Fidelity sells to investors. This top down approach has its roots in the macho sales culture of the retail investments sales business, and reflects the need to differentiate product in a very crowded universe. Automated investing, on the other hand, is a bottom up phenomenon in which client demand drives adoption. Does anyone think for a minute that CEO Abigail Johnson woke up one day and decided that the Betterments of the world would have an impact disproportional to the miniscule share of assets they’ve accrued to date? Far more likely that comments from the retail investor base floated up through the Fidelity advisor network to headquarters in Boston, i.e. when is Fidelity going to offer an automated investments platform? Whatever the genesis of this mindshift, it is refreshing to see Fidelity embrace 21st century modes of investing. But how deep does desire for change really run? Is there enough internal support to change the underlying sales culture? As countless firms have found out, it is hard to fly when you cling to your roots.