Fidelity's Search for the Technology of Tomorrow

SUNDAY 20 OCTOBER 2019

FIDELITY Fidelity’s search for the technology of tomorrow Buffeted by falling fees and rising costs, the asset manager is investing heavily in an effort to remain competitive ROBIN WIGGLESWORTH – BOSTON

crawled flow charts and west nature and the Boston a mission statement for institution’s conservative blockchain adorn the image. But Ms Johnson is now Smeeting room, while an spending about $3bn a year early bitcoin mining processor on tech to modernise every stands on a table next to a business line, from trading to dispenser of M&Ms, Skittles retirement planning. and spicy pumpkin seeds. “Financial services is Swivelling, speech-sensitive becoming another winner- video conferencing cameras takes-all industry, so you need add to the sense of earnest to spend a lot of money on tech feng shui. tech to get the advantages of It could be a scene from scale and play both offence any sketchy Silicon Valley and defence,” says Huw van cryptocurrency endeavour. Steenis, a veteran industry Yet this is a room at the analyst who now works at UBS. plush Boston headquarters of But the question is whether Fidelity Investments, a storied an organisation as big, but historically staid corner of established and complex — the finance industry. and with a culture as ingrained The venerable money the world. All told, Fidelity “Across all financial services, as Fidelity’s — can evolve manager has since its founding administers another $7.7tn the trend is towards fee quickly enough to navigate by Edward Johnson in 1946 on behalf of various clients, compression . . . Every aspect the industry’s ferocious become a byword for the making it one of the biggest, of the business, customers headwinds. mutual funds that rose to broadest and most powerful expect you to do more in “Every business house prominence and dominated financial groups in the world. terms of service and offerings, has to change,” Ms Johnson markets over the past half- The investment industry has and they expect to pay less admits. “If you don’t change, century. Several generations come under intense pressure for it,” Ms Johnson says. “It you’re by definition either on of superstar stockpickers like in recent years, buffeted means that we’ve got to be your way to atrophy or you Gerald Tsai, Peter Lynch and by falling fees and rising ahead of that. We’ve got to do are atrophying. The world today William Danoff have costs. Abigail Johnson — the more with the same number of changes. You have to evolve helped expand its assets under founder’s granddaughter people every year.” your business and challenge management to $2.8tn. who picked up the reins Its dabbling in crypto– yourself to say, ‘Where are But that is merely one part five years ago — is trying to currencies — Fidelity mined things going?’” — albeit a big, lucrative one — reforge Fidelity for a new era, its first bitcoin in 2014, which of a vast empire that services where technology permeates now sits on the corporate The finance industry can millions of investors, traders, and reshapes every aspect balance sheet — has attracted often appear surreal to banks and retirees across of the company’s disparate the most attention, given outsiders, but Fidelity is businesses. the clash between its wild- exploring whether virtual © THE FINANCIAL TIMES LIMITED 2019 FIDELITY

reality can make it more 2013. It proved a damp squib, once mocked by her father. sprawling, and in many cases palatable to consumers. and was quickly discontinued. Fidelity now has about $530bn growing more rapidly than Adam Schouela at the But Fidelity’s work proved in passive funds, making it the heartland. At the end of Fidelity Center for Applied valuable when Apple unveiled one of the biggest providers. June, Fidelity boasted 33m Technology enthusiastically its own smartwatch in 2015, Last year Fidelity sent asset workplace and healthcare shows off a virtual space that helping the asset manager managers’ shares tumbling plan participants and 22m customers can use as a fun way have an app ready on its when it introduced the first retail client accounts. There to plan their financial future. launch. free index fund, escalating the are another 10m accounts, The gaming-like environment The technology centre is price war. with other investment may still be at an early stage, also where Fidelity’s initial In another sign of the times, intermediaries, on its clearing and currently mainly used bitcoin experiments took Fidelity last year promoted and custody platform. to train Fidelity staff. But Mr place, which last year evolved Steve Neff, its chief technology “The pace of technological Schouela sees it as emblematic into a standalone company, officer, to lead its $2.8tn change is accelerating, and of the company’s willingness to Fidelity Digital Asset Services. asset management division. I think it will go even faster. test out-there technologies and What was initially just a “fun” Although he had worked The question is how we can see if they might be relevant to experiment is now being rolled Fidelity. out as a major service to the “One of the requirements cryptocurrency industry, Ms for a project is that we must Johnson says. legitimately not know what Managing money remains the answer is going to be. If Fidelity’s biggest business, I know for sure it is going to but there too changes are work, then it’s probably not afoot. Although her father for us,” he says. “In going Edward “Ned” Johnson was all the way to the extreme, himself a bit of a tech geek — we can actually see things Fidelity was one of the first that we might otherwise not big asset managers to install a necessarily have seen.” mainframe computer in 1965 Sometimes an initiative may — the company is today seen initially appear like a waste as somewhat old-fashioned, of resources, such as building and dependent on mutual a Fidelity application for funds. the Pebble smartwatch that However, Ms Johnson has launched to great fanfare in embraced the index funds

in that unit before, Mr Neff accelerate as well,” says Kevin had never done a front-line Barry, head of workplace investing job himself. investing, which provides “What I bring to the table retirement, investments and is how the technology and benefits solutions to more the digital transformation than 20,000 companies and the company is going millions of employees. “The through applies to the asset technology that got us here management business,” he isn’t the technology that will says. “Many problems are get us to the future.” now addressable through Fidelity Institutional, technology, so we can expand which sells brokerage, our horizons.” custody, tax and reporting Although asset management services to financial advisers, is the biggest money-spinner, insurers, family offices and the Fidelity empire is even some hedge funds, last

year launched Wealthscape used.” Integration Xchange. This is a Upgrading Fidelity’s core kind of digital store that wealth tech infrastructure — which managers can use to build was largely developed in the their own platforms using both 1980s — is time-consuming Fidelity services and more and expensive. “We did the than 100 third-party ones. same thing everybody in the According to Michael Durbin, industry did, which was you head of Fidelity Institutional, started creating apps and we the “fintech explosion” is put the apps on top of the old changing almost every aspect technology,” says Ms Johnson. of its offering. “And it works, but then at some point you realise OK, Many “quantitative” this is not the best way to do investment groups are things.” sceptical that traditional Moreover, Fidelity employees companies like Fidelity will be are steeped in a certain way able to spray money at modish of doing things that goes back tech projects and retool their generations. That will be hard business in a meaningful way, to change, though Fidelity is comparing it to turning an also attempting to retool its ruefully admits that she fits division, and Ms Johnson oil tanker in a tight canal. By culture. four of those clichés. relocated her office to the that logic, Fidelity is an ageing The finance industry as a “Humans are wired for bias,” unit’s 11th floor home so she supermax vessel. whole is attempting to improve she says. “It’s an industry could keep a closer eye on the “It’s genuinely difficult,” its image and become a issue, not just for Fidelity. We group herself. especially on the asset broader, gentler church, and need a reputation makeover as “I’d like to remind everyone management side of Fidelity, Fidelity in particular has a an industry.” that we have no tolerance at according to an industry reputation for being dominated But she hopes that our company for any type analyst, who declined to by male, Irish-American, technology can help here too. of harassment. We simply be named. “A lot of asset middle-class, beer-drinking For example, Fidelity is using will not, and do not, tolerate managers are spending a lot of Red Sox fans. Even Amy artificial intelligence to write this type of behaviour, money on computer scientists, Philbrook, the company’s head more neutral job ads shorn of from anyone,” she said in a and they don’t end up being of diversity and inclusion, subconscious biases, to test company-wide message at the the outcomes, and to better time. target job sites that might have The shake-up is even taking more prospective hires from place in the physical and minorities. organisational realm. Fidelity “It’s a little fraught, but I’m Personal Investing in 2017 excited about how technology embraced the fad for “agile can help disrupt human bias in working”, carving out “squads” the decision-making process,” of 5-10 people, scrapping she says. “But that requires cubicles and embracing hot- that you are diligently auditing desking. This is now being the technology itself to make rolled out across more areas. sure that bias isn’t hard-wired “Changing the physical into it. You have to constantly layout was a big thing,” says screen and rescreen your Ram Subramaniam, head of algorithms for biases.” brokerage and investment This became more pressing solutions at Fidelity Personal after Fidelity let one of its star Investing. “It isn’t enough to stockpickers go in 2017 amid use new technology. To become accusations of inappropriate a truly digital company, we behaviour. That led to a wider need to change how we work.” shake-up of the equities

Financial comfort gives they’re so profitable that they she says. fee compression in . . . areas Fidelity a good springboard to can afford to invest a lot on Nonetheless, Fidelity’s chief of the business, that scale, make some big leaps. Last year upgrading their technology.” executive is confident that the that depth and breadth of it reported record operating Yet Ms Johnson admits that breadth of the family company the clients that we serve, the income of $6.3bn. That’s even profits may be hit. “You’ve — which none of its main rivals marketplaces that we’re in, the more than BlackRock’s $5.5bn. got to have your nose to the can match — will ensure that adjacencies that we can build, “They have a lot of grindstone to keep your cost she can hand it over to the even if they’re small today, ingredients for success,” curve ahead of the expected next generation of Johnsons in they might grow huge,” she says the industry analyst. fee compressions. That is not a even better shape. says. “[Fidelity] has scale, and recipe for expanding margins,” “Even though we might see

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