Fidelity Investments Institutional Brokerage Group (IBG), the second-largest custodian of RIA assets, recently issued a press release saying it had lured about 300 new advisors to its fold in 2001 and that it is committed to supporting the independence of its RIA clients. Normally, a release like this would not be news. But competition has heated up between Fidelity and the number one custodian, Charles Schwab’s Services for Investment Managers unit (CSSIM), and Fidelity’s release sends an important message about that competitive battle.
“While RIA firms of all sizes joined Fidelity in 2001,” Jay Lanigan, who runs Fidelity IBG, is quoted as saying in the release, “the one thing that we heard consistently from those new firms was their need for independence.”
Lanigan, in an interview, refused to speak directly about Schwab. Specifically, he would not talk about Schwab’s recent decision to only sell new licenses of Centerpiece, the popular portfolio reporting software owned by Schwab, to RIAs doing business with Schwab. Nor would he comment on Schwab’s decision to reform its AdvisorSource branch referral system by splitting fees with an advisor in perpetuity when one of its referrals becomes an RIA client.
However, in saying that it is committed to the independence of advisors just as Schwab is being eyed more critically than ever by RIAs, Fidelity is shrewdly exploiting an opportunity to gain ground in the RIA business. This could benefit advisors because it will force all custodians to compete for the right to be called the most enlightened, supportive, and advisor-friendly custodian.
Until Schwab Institutional came along in the early 1990s, there was no platform for independent financial planners and investment advisors who targeted investors with portfolios in the $100,000 to $5 million range. Fidelity IBG followed Schwab’s lead but has been a distant No. 2 to Schwab for many years. In the mid- and late-1990s, Fidelity IBG steadily grew its business but still lagged Schwab. Fidelity seemed almost uninterested in or incapable of mounting a serious threat to Schwab. In the last 18 months, however, Fidelity has gained momentum.
At the end of 2001, Fidelity held $58 billion in assets managed by RIAs compared with $52 billion at the end of 2000. In the same period, Schwab went from $234.1 billion in advisor assets to $235 billion. Assuming advisors at Fidelity are about as talented at managing market risk as they are at Schwab, losses and gains due to market exposure should be about equal at both firms. But Fidelity’s advisor business grew by more than 10% in 2001, while Schwab Institutional basically stood still. Fidelity is gaining traction.
Fidelity is growing because the three big RIA custodians–Schwab, Fidelity, and TD Waterhouse–have become more alike in terms of the services they offer while technology has made it easier to do business with multiple custodians. Fidelity has integrated the Internet into its business process for advisors. Furthermore, advisors’ tech skills are improving, making it easier for RIAs to do business with Fidelity. And, along the way, Fidelity’s offerings and service have become more competitive. My guess is that these trends are likely to continue over the next couple of years.
Lanigan gave me a preview of coming technology and service offerings at Fidelity. Perhaps the most significant technology change that Fidelity is about to implement is an interface with financial planning software giant NaviPlan. In all fairness, NaviPlan deserves most of the credit, but Fido deserves a pat on the back as well for embracing this path and being the first RIA custodian to do so. And the move ties in with Fidelity’s stated commitment supporting the independence of RIAs.
NaviPlan is almost always on the list of top planning programs in trade press reviews and it has by far the largest base of users–some 35,000 of them. Fidelity is the first of the RIA custodians to launch an interface that will let you directly download client account data into a financial planning package. This means that one of the big obstacles to using planning software–the time it takes to manually input data–will be reduced significantly.
Making it easier for advisors to use financial planning software represents a big step for the profession. Money managers might be more willing to provide planning services. Also, since the NaviPlan interface is also being launched through National Clearing Corp., Fidelity’s huge correspondent clearing operation, it will put the same capabilities in the hands of tens of thousands of reps. That’s a big deal for the progress of the financial planning profession. NaviPlan’s Rob Eby says the software company will be rolling out such an interface with other broker/dealer back offices, but Fidelity is the biggest. Its move will undoubtedly trigger other custodians to make similar deals, all of which will support the goal of advisor independence.
Custodians and B/Ds serving independent advisors have two choices in building tec hnology systems. They can build their own and make their advisors use it or they can partner with outside vendors. Partnering with NaviPlan is a decision to do the latter and that could ultimately mean giving the independent advisor more choices.
You each do things your own way. You may like ACT for contact management but don’t want to use it for e-mail. You may like Morningstar’s fund research application but prefer Wiesenberger’s hypothetical modeling function. Or maybe you’d like NaviPlan’s investment planning capabilities but not its Monte Carlo functions. The point is, you want choice. The way to get maximum flexibility is not from a proprietary system but to become the glue that allows advisors to knit together many technology pieces. Fidelity is taking a step in that direction by creating a NaviPlan interface.
“Understanding the nature of the proposition value that advisors build their businesses on, their need is to give unencumbered advice to clients,” says Lanigan. “We think that needs to be demonstrated by allowing advisors to have choice in the products and services that they think best meet their clients’ needs.”
In contrast to Schwab, which is building a proprietary technology platform, Fidelity says it is moving to support an open platform that will let advisors choose the tools they want. “If they [advisors] want a portfolio management software program and tell us they want to build their business in a certain way, we need to be flexible in how we support them,” says Lanigan. He says he is not leaning toward building an in-house portfolio management system.
While NaviPlan is the financial planning interface today, Lanigan says interfaces to other planning software tools could be offered in the future. That means, Lanigan says, giving advisors choices of portfolio management systems, financial planning software, prime brokerage and research, and other tools and services. “We’re serious about making sure our clients have choice,” he says.
If Fidelity promotes an open platform and choice, that will push other custodians to move in the same direction or create differentiation that could be attractive to independent RIAs.
Meanwhile, other technology moves by Fidelity are sure to be welcome. For instance, Fidelity is launching an improvement to its advisor-only Web site that will let RIAs see real-time market data on positions. Apart from the “gee-whiz factor” of being able to tell a client the current prices of his positions, you can tell the client what would happen on an after-tax basis if he or she sells a particular security.
If a client has GM stock and has purchased it in three or four lots over the past five years, you can see what would happen if the client sold the entire position at this second on an after-tax basis. “It brings positions together with live market data,” explains George Baumgarten of Fidelity.
The Fidelity IBG site has also added an account service center where an advisor can go to manage standing instructions on clients. For instance, say you and your client have set it up so that his paycheck hits a Fidelity IBG account on the first day of each month. You can use this area of the site to set up a standing instruction on what funds to invest in after the check hits the brokerage account. You can see all instructions from each client in one place. The service center on the site can also be used to track assets coming in and leaving from sub-accounts. In addition, an advisor can set up e-mail alerts to remind you when a stock has hit a target price or to take other required actions on a client account.
According to Patrick Jancsy, a senior VP at Fidelity IBG, a new account transfer monitoring system aimed at tackling the messiest part of the securities industry’s back-office business will be added to the site. In the fourth quarter, advisors will be able to initiate account transfers from other B/Ds and track the transfers’ progress over the Web.
Furthermore, Fidelity recently implemented a 403(b) technology platform that takes advantage of Fidelity’s positioning as one of the nation’s top sponsors of 403(b) plans.
Managing 403(b) assets is difficult for RIAs because the assets are held separately. You can’t easily download assets from a plan into Centerpiece or Advent or make trades across several accounts if you have a number of clients in the same plan. But RIAs clearing through FIIBS can do that.