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Rating:Is Fidelity Entering a New Era? Not Rated 4.0 Email Routing List Email & Route  Print Print
Tuesday, August 21, 2007

Is Fidelity Entering a New Era?

Reported by Sean Hanna, Editor in Chief

Fidelity Investments’ dedication to "kaizen," the Japanese business concept of improvement through continuous change, makes inevitable executive suite turnover an opportunity for the firm to move forward, spokeswoman Anne Crowley said following the Aug. 7 departure of distribution czar Ellyn A. McColgan.
- Pensions & Investments, Aug. 21, 2007
A string of high-profile, top executive retirements from Fidelity has mutual fund insiders scratching their heads -- so far not one of the watchers claims to know the details of the master plan at the Boston Behemoth. That lack of knowledge should not be surprise considering that Fidelity Chairman Ned Johnson's lifelong penchant for secrecy has created the expectation in the market that no Fidelity outsider, or Fidelity insider, will ever understand the moving pieces of the Johnson family plan.

Yet the lack of specific knowledge of Ned's thoughts is not stopping the speculation. Indeed, some of the stories that have made their way down I-95 from Boston to Wall Street -- including a story of a Ned-Abby pow-wow in Cape Cod (we will explain later) -- intriguingly hint that there is a master plan in motion.

The people moves that have Wall Street whispering started with the New Year in January when Fido investment chief Steve Jonas announced his retirement.

The next surprise retirement came on April 19 when Bob Reynolds, Fidelity's vice chairman and COO as well as its chief 401(k) architect, announced his retirement. Reynolds and Ellyn McColgan had been seen by Fidelity-watchers as possible successors to Ned's job.

Those watchers who thought Reynolds' sudden-retirement cleared a path for McColgan got their surprise earlier this month when McColgan herself unexpectedly retired.

All of these retirements are premature (to say the least). Reynolds is all of 55 years old, as is Jonas. McColgan is a relative youth at 53. Indeed, all three are at least two decades younger then Ned.

The Retirement Flu is Catching

The troika of Jonas, Reynolds and McColgan are only the biggest of many names to depart Fidelity this year. High-profile departures in Fidelity's retirement business this year included the Boston Behemoth's Guy Patton (he is leaving next month), Jeff Carney and William Carey -- all of whom are former presidents in its retirement business. According to the grapevine, there will be more resignations coming from both the retirement unit and other businesses inside Fidelity within the next month. (When presented with specific names, a spokesperson has denied that the individuals named in the rumors are leaving, so we will chalk up the talk as rumors from "wacko" sources, at least for now).

Why are so many denizens of Devonshire Street being bitten with the retirement bug at this moment in time?

His competitors in the fund industry point to Ned's longstanding practice of eliminating leaders who he sees as having grown too powerful. In other words, they say he is eliminating rivals.

Yet that explanation rings hollow. At 76, Ned is at a lifestage where Fidelity's clients would seemingly be encouraged to leave their $1.5 trillion of assets in place by knowing how the 44,000-employee, 414-mutual-fund sponsoring firm will operate in the event that there is an unexpected change at the top.

The troika's departure eliminated all but one of the heirs Fidelity has groomed for the top job over the past decade. The sole exception -- Ned's daughter Abby -- has yet to gain the confidence of her peers and is seen by those willing to speculate on the matter as a potential chairman but not as a CEO, according to the "conventional wisdom" in the mutual fund industry .

A second theory making the rounds -- and the financial press -- is that Ned is turning to a handful of trusted confidantes from Fidelity's 1980's heydays.

Ned's Old Boys

Ned's boys (for want of a better name) include Rodger Lawson, a 60-year-old Brit who recently traded in his vice chairmanship at Prudential Financial to rejoin Fidelity as, of course, vice chairman. Lawson's last tour of Devonshire Street started in 1985 and saw him build the firm's Spartan Funds, asset allocation funds and marketing machine before the tour ended in 1991.

Another returnee is James Curvey. Curvey retired at the end of 2002 after serving 21 years at the Boston Behemoth (he stayed on as a trustee). One former Fidelity senior executive who declined to be named told the MFWire that Curvey is again playing a key role in running Fidelity day-to-day.

In April, Ned also brought back John Remondi as chief administrative officer. Remondi served as Fidelity's CFO from 1983-1991. He had also served as president of Fidelity Investors Management, the firm's private equity arm.

Fidelity watchers speculate that Reynolds and McColgan left at least in part because they lost their direct contact with Ned as he brought figures from his past back to the firm and cut off their lines of promotion. However, neither Reynolds nor McColgan are talking about their retirements, so those theories are speculation at best.

Meanwhile, the people moves are not the only changes taking place in Boston's financial district.

Earlier this summer the Boston Globe noted that some Fidelity shareholders had agreed to swap their shadow shares for cash and debt in June (and that a similar deal was offered in December). The paper interpreted the buyout of shadow stock holders as a way for the Johnson family to "tighten its grip" and potentially trim the "corporate tax bill by hundreds of millions of dollars a year" through a conversion to S-Corp status.

At the time, Fidelity spokesperson Ann Crowley explained to the paper that the offer "... is a way to simplify the company's capital structure."

A Cape Cod Meeting of Minds?

Two sources have told the MFWire that the stock buybacks are playing a role in the recent departures at the firm, and that the Johnsons are indeed trying to retake a stronger grip on the family business.

Whether those sources are correct could be seen in the next month. They say that the Johnsons have set a deadline in mid-September for some of the remaining shareholder employees to decide whether they will stay with Fidelity or take a buyout offer. One of those who is thought to be leaning towards taking the offer and heading into retirement is another of Reynolds' top lieutenants from the buildout of FIRSCo.

There could also be a non-tax reason for the Johnsons to be pursuing the share purchases -- and yes, it leads to Cape Cod. According to one source with contacts in Fidelity's top ranks, the buyback stems from a new alliance between Ned and Abby.

That source says that the story began last year at a time when Abby was spreading her wings and moving to implement some of her ideas that Ned disagreed with. To build support, that source says that Abby began to recruit shareholders to her side in case her strategic disagreement with Ned led to a proxy fight.

One of those approached -- a key executive in the succession struggle -- saw Abby's move as a potential opening and tipped off Ned to her recruiting efforts.

That executive's gambit failed when Ned and Abby retreated to Cape Cod to discuss the matter during a family vacation and returned as allies. Rather than fight with Abby over her play, Ned embraced her, says the source. The two Johnsons also agreed at that time to take power out of the hands of the executive who tipped Ned to Abby's efforts, claims the source.

The share buyback, under this theory, would return enough shares to the Johnsons to minimize the threat of any intra-family squabble and keep Fidelity from going down the path the Bancrofts let Dow Jones go down.

A New Focus on Profits?

Increasing turnover in Fidelity's top ranks would also have a bottom-line benefit, say those sources. The top executives who are leaving do not only hold shadow shares; they are also well-paid. Their departures may help boost the bottom line.

Under Reynolds, Fidelity long ran its retirement unit a far smaller margin than its rivals. By keeping margins low through high spending and investment in technology, Fidelity was able to push many other fund firms out of the 401(k) and defined contribution space and to greatly expand its market share over the 15-year DC plan boom.

On June 8, Standard & Poor's dropped Fidelity's credit ratings to AA- from AA with a stable outlook. While the rating remains strong, the change had to catch the attention of the Johnsons.

S&P's analysts wrote that:

The downgrade reflects the company's stagnant earnings and weak profitability metrics compared with those of peers. FMR, the management company for Fidelity Investments, restructured its core asset management and research operations in mid-2005 with the aim of restoring the luster of its equity division. But a quick turnaround has not been forthcoming. Net asset flows and investment performance at many of the larger mutual funds have been weak in the past two years despite strong domestic equity markets.


After noting strong revenues driven by its strong brand, distribution and its retail discount brokerage and DC plan franchises -- as well as a critique of Fidelity's Pro-Build home building business -- the analysts added more words of warning:

Despite strong revenues, profitability metrics are below those of peers, which is a major disappointment given the power of FMR's franchise and its large economies of scale. Net earnings have stagnated because of high expenses as the company continues to hire investment and research professionals for its core asset management business and makes additional investments in its distribution capabilities.


In retrospect, that downgrade may have been a key point in Fidelity's evolution if it had the effect of pushing the firm to increase its margins.

Even with the top brass turnover and the potential for even greater change when Ned no longer controls the reins, Fidelity is unlikely to lose its top spot in the fund industry.

Before leaving, Reynolds and his top brass built a deep bench in the retirement side of the business. Those executives include Scott David, who headed Deutsche/Scudder's retirement business before landing at Fidelity (he now runs FIRSCo) and other former top executives from the industry, including Steve Ulian (also a Deutsche/Scudder alum), Steve Patterson (an ex-Schwabbie who now heads retirement client service) and former mPower CEO Steve Deschenes.

Just last November, Fidelity hired Patrick Goepel -- a 45-year-old ADP and Ceridian veteran and former CEO of Advantec -- to head its HR Services business. In April Goepel became president of Fesco's outsourcing operations.

In the words of one retirement industry insider: Reynolds was collecting talent after the 2001 bust when it became available, even if he did not immediately know how to put it to use.

Now is the time to look for that talent to come off the bench. 

Correction: An earlier version of this story mistakenly identified which executive joined Fidelity FIRSCo from Schwab. The executive was Steve Patterson, not Bill McDermott (see article).

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