From the April 2005 issue of Investment Advisor • Subscribe!

April 1, 2005

THE GLUCK REPORT, Part I: Finding an RIA at Fidelity

Our columnist plays man-on-the- street and tries to get a referral

My wife, my 11-year-old son, and I walked into a Fidelity branch recently and approached the reception desk. "Hi, I'd like to speak with someone about your services," I said. "Just wait one moment while I get someone to help you," said the receptionist.

I went to the branch to experience firsthand how a customer seeking investment advice is pitched when visiting a Fidelity branch. We waited in the lobby for no more than a couple of minutes. A pleasant-looking man in his mid-30s--we'll call him Bob--appeared, introduced himself, and ushered us into his office with a friendly, "So how can I help you?"

I explained that I had a financial advisor but it was time for a change. I told Bob I had a portfolio of about $650,000, plus a company retirement plan containing personal assets as well as those of my employees.

"Do you mind my asking what happened between you and your advisor?" he asked.

"It was a personal matter between us," I said.

With that, Bob began probing to find out which of Fidelity's solutions were right for me. He began by describing self-directed options, Fidelity's Web-based tools, and their ability to let me pick any mutual fund I wanted. But I was not there to learn about do-it-yourself investing options. What I wanted to hear was his pitch for Fidelity's advice products, so I quickly disposed of any notion that we were interested in managing our own money. "Bob, my wife and I are doing some construction in our home and we just went to a place to pick a door," I said. "What kind of door you think we picked, fiberglass or wood?"

"Wood," said Bob, wondering where I was going. "No, we chose fiberglass," I answered. "And do you know why we're fiberglass people? Our current door is falling off the hinges because we do nothing to maintain it. My wife and I don't want to do anything. We're too busy. And we're too busy to do anything with our portfolio."

"Okay, I understand now, and we have just what you need," said Bob. "We can work with you by picking mutual funds--both Fidelity funds and non-Fidelity--and help you allocate your assets properly."

Over the next 20 minutes, Bob told us that Fidelity would manage my portfolio for 1% annually. They would rebalance my portfolio and send me reports. And they would manage my downside risk with alacrity because they have the research and institutional power of Fidelity behind their advice. "Anyone can make money when the market is going up," Bob explained. "But it's when the market is going down that we will help you the most."

I asked about planning. The advisor I had been doing business with had linked my investments to my goals--college funding and retirement. Would Fidelity do the same? "You'll meet with a regional representative who will help you with all of that and help you manage your portfolio," Bob said. The regional representative would not actually write my financial plan, however. He would send it to the "corporate office." While the regional rep would handle the technical work on my investments and plan, Bob would be my "quarterback" and main contact.

When I expressed an interest in individual stocks, Bob explained that Fidelity had a relationship with Lehman Brothers. Lehman would pick a portfolio of stocks for me, he said. But after a couple of questions, I learned that I could not put a portion of my portfolio in funds managed by Fidelity, and another portion in stocks managed by Lehman, and have all of it run as one portfolio. "It would probably be best if you did one or the other, have it all in stocks or all in funds," Bob suggested. I was not interested in that, and after I left the branch it occurred to me that Bob never once told me about AdvisorAccess, Fidelity's program for referrals to independent advisors. Never once did Bob ask if I'd be interested in meeting one of the local advisors Fidelity has signed up to participate in that program.

Jennifer Engle, a Fidelity spokesperson, said the branch rep may just have been responding to my story. "You mentioned you had a personal difference with your advisor," she said. "It's possible the rep deliberately did not make a referral on his first conversation with you. He was listening to your needs and trying to respond appropriately."

That may be so. But Bob never asked me if I might still be interested in working with another advisor--even though the portfolio I told him I had far exceeded the AdvisorAccess minimum of $500,000. If he was trained to do what Fidelity would have advisors believe--sell RIA services along with Fidelity solutions--I would never have known it.

For the record, Fidelity is a firm that refers advisors to my company. But the issue of how Fidelity positions its own retail advice versus advisory services from its network of RIAs is a touchy one for advisors and all of the discount brokerage firms serving them. Much has been written about Charles Schwab's advice products and its uneasy relationship with advisors, which hinges partly on its ability to balance serving RIAs while competing with them for clients. I have sometimes felt it was unfair to single out Schwab for competing with advisors, but understood why many were upset with the firm's retail advisory offerings.

Schwab helped invent the independent advisor business by designing the first mutual fund supermarket in the early 1990s and then creating the best technology platform to support RIAs. After becoming the dominant broker providing custodial services to RIAs, it quickly became the No. 1 retail discount broker. Since then, Schwab has said that it aims to become the No. 1 advice-giver and money manager among discounters. Because of all this history, Schwab has been the focus of criticism from advisors who resent the way it has positioned itself as a competitor while building its own advisory business.

In recent years, however, Fidelity's RIA business has become a much more important force in the RIA world, growing rapidly to $132 billion in assets and serving 2,650 RIAs. In the race for new assets with Schwab and Waterhouse, Fidelity has, in fact, grown its advisor business faster than its rivals. Capitalizing on Schwab's image problems with those RIAs who feel that the San Francisco firm double-crossed them by buying U.S. Trust and diving into the high-net-worth asset management business, Fidelity has grown rapidly.

Even though it has its own retail advisory business, Fidelity has not been the target of similar criticisms. I wanted to figure out why and be fair to Schwab by covering its biggest competitor in the lucrative RIA business. So when I set out to write this article I requested an interview with a Fidelity executive responsible for the company's retail advice products. However, what Fidelity told me about its retail advice program and how it positions its array of retail advice products did not agree with what Bob in the branch told me or with what you'll find when

you look through Fidelity's marketing materials.

Before I visited the branch, Fidelity agreed to put me in touch with Sarah Libbey, a senior vice president working on Fidelity Portfolio Advisory Service, which manages $30 billion in mutual funds for retail clients. Engle also said that the conference call would include Gary Gallagher, a senior vice president in charge of Fidelity's AdvisorAccess referral program.

I explained that I was not interested in Fidelity's referral program, just researching its retail advice offerings. But Engle insisted Gallagher be included in the interview because the advisor referral program was an integral part of Fidelity's retail advice offerings. "We want to emphasize the continuum of services we provide on the retail and advisor side," she said, adding that this includes the Fidelity Registered Investment Advisor Group and Portfolio Advisory Services. "If you look at our brochures, it talks about this continuum of services."

Indeed, Fidelity marketing materials do emphasize a continuum of services. Just go to Fidelity's Web page and you'll see a wide range of retail services offered. Move from the home page to "Getting Guidance" and you'll see a range of options--from "do-it-yourself tools and world-class research" to "professional portfolio management." Nowhere is a retail client or prospect seeking guidance told that Fidelity can refer you to an advisor. It's not easy to see that the continuum includes independent advisors.

If you go from the home page to other links where investors who are seeking an advisor might look for help, it's the same story. Click on the link from the home page for "retirement and guidance," and you'll see nothing but self-directed product information. There is nothing about AdvisorAccess. Nor is there information about working with an RIA on the "overview" page under "investment products," either.

I did find a link for AdvisorAccess, but overlooked it the first two times I visited Fidelity online. To view the area that markets the services of an independent RIA, a retail investor must first click in the Fidelity home page on a link for "investment products," and then on a link for "managed portfolios." That page contains a link to AdvisorAccess; only when you get to this page will you see a brief description of the program and a toll-free phone number to call to make an appointment with a Fidelity branch rep. By contrast, Charles Schwab's home page has a prominent link for "investment advice." Click on that and you're on a page containing a link for Schwab Advisor Network along with the broker's U.S. Trust unit and its own advised investing services.

The continuum of advice that Fidelity emphasizes was also missing in all of the retail brochures I was sent. Take the workbook for Fidelity's Retirement Income Plan. This is a service that allows retirees to determine their income needs. After retail clients fill out the workbook, a report is generated assessing your income needs, recommending asset allocations, and ultimately recommending a model fund portfolio. On page 20 of the sample Retirement Income Plan sent to me by Fidelity is a section entitled "Additional Fidelity Products and Services For Retirees." The additional resources include PAS, Fidelity Mutual Funds, Fidelity Fixed Income Products, and Fidelity Brokerage Trading. No mention is made of Fidelity's advisor referral program. None of the brochures I received in the branch marketed money management by RIAs, either.

So what are RIAs working through Fidelity to think? Fidelity is putting a marketing spin on its retail products that is to its advantage with retail clients and using another marketing stance with RIAs to sell them on its custodial services. Fidelity seems to be doing what's probably in its best interest: trying to accumulate as many retail assets itself by selling its products. Perhaps this explains why the AdvisorAccess program, which makes referrals to 150 advisors who are signed up for the program, has garnered only $2.5 billion since it was launched three years ago.

Although I only visited one branch and spoke with one rep, who may have been trained poorly, my experience highlights the broader issue of how custodians serving advisors also compete with them. All the discount brokers marketing to RIAs--Fidelity, Schwab, Waterhouse, and Ameritrade--walk a fine line by competing with advisors for clients. RIAs need to see through the marketing spin these firms put on their advisor referral programs and be skeptical about how these firms say they market advice to prospective clients.

The only way you're going to do that and see how good a job Fidelity or any other custodian does in selling retail clients on your services is to do what I did: Visit a branch and hear the pitch. So much hinges on these conversations in the branches, and conversations can be so easily steered in one direction or another.

Advisors must also examine the marketing materials of their custodial firms. Determine whether your custodian is doing the right thing for you. If not, talk with your institutional sales rep, ask questions, and make suggestions about how to improve the program. These firms will do what's best for business.

I don't think Fidelity is failing to market AdvisorAccess properly on purpose. Engle says that branch reps do not receive product-based compensation, and that there is no difference whether they recommend Fidelity or non-Fidelity funds or if they refer retail clients to PAS or AdvisorAccess. Still, you have to keep in mind that Fidelity gets all of the fees it charges on PAS--an average of 0.85% on $30 billion--while it pockets only a portion of the fee when an advisor gets the client.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. He can be reached at agluck@advisorproducts.com.

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