Based on family history, and her own work ethic, Abigail Johnson’s tenure as head of Fidelity Investments is probably going to be a long one.
Johnson, the 55-year-old chief executive of the Boston financial giant, assumed the chairman’s role in December, but only after her famous father, Edward C. “Ned” Johnson 3d, stepped down — at age 86.
Her grandfather, Edward C. Johnson 2d, founded the privately held company in 1946 and was president for more than a quarter century.
Abigail, after 29 years at the firm, is just getting started, according to people who know her.
But the mutual fund and brokerage company that her father built into a money-making machine now operates in a rapidly changing environment that’s causing Fidelity to dramatically shift how it pursues business. Johnson faces challenges that her father never had to confront, requiring her to manage the family enterprise with the discipline of a public company, more than ever before.
Consider just the past month: The company reported record operating profit of $3.5 billion for 2016, despite an ugly year for its flagship actively managed mutual funds. Revenue was still on the rise, but expense cuts helped push Johnson’s first earnings results as chairman higher.
Last week, Fidelity slashed the fees it charges for online brokerage trades, sparking a bruising price war with a top rival, Charles Schwab Corp., and doubling down on a bet that it can win with volume over margins.
The firm also unveiled its first-ever buyout plan, in hopes of enticing up to 3,000 of the company’s 45,000 employees over age 55 to leave and make way for millennials.
“It fits the pattern’’ of what large, publicly traded Fidelity rivals are doing, said Neal Epstein, a senior credit officer at Moody’s Investors Service, a New York bond-rating agency. He cited the cost-cutting efforts of BlackRock Inc. and Franklin Resources Inc.
“What we’ve seen around the industry is firms like BlackRock and Franklin also taking steps to reduce certain areas of their employee base,’’ Epstein said, and investing in higher-growth areas due to “obvious industry changes.”
Those changes include constantly updating technology and adapting to investors’ growing taste for passive index funds, which electronically track groups of stocks like the Standard & Poor’s 500, rather than relying on human judgment. BlackRock is a big indexer, but, like Fidelity, is finding that demand for its more profitable active funds is shrinking.
Ned Johnson ridiculed index funds, especially at the height of Fidelity’s dominance in the 1990s. But his daughter does not have that luxury. Instead of counting on hot mutual funds to fuel growth, she is positioning Fidelity as a kind of financial hub that reaches into the lives of more than 26 million investors, from retirement and health care savers to active traders and families setting aside money for philanthropy.
The firm is, as always, using its size to exploit opportunities, like gaining access to promising startups before they go public, as it did in the recent stock offering of Snapchat’s parent. With $2.1 trillion in assets under management, Fidelity also has a faster-growing business that involves handling the records and servicing of $5.7 trillion in accounts.
Meanwhile, Johnson is throwing down the gauntlet on fees, in a street fight to win customers at the nation’s fourth-largest investment firm.
Fidelity in recent months has cut expenses on index funds and exchange-traded funds, as it tries to gain market share in a field virtually owned by Vanguard Group. In February, the company dropped its online brokerage commission for stocks and ETFs to $4.95 from $7.95. Schwab matched the move within hours. Fidelity’s touting the “value” of its lower prices in full page newspaper ads.
Some call this a race to the bottom. But, said Morningstar Inc. fund analyst Katie Reichart, “If lower costs are going to draw investors to their platform, it’s probably good for them overall. And lower costs are always good for investors.”
Fidelity is looking to protect its standing as the largest US online brokerage firm, with 17.9 million accounts and $1.7 trillion in client assets.
“The end goal is long term,” Ram Subramaniam, Fidelity’s president of retail brokerage, said on the day the price cut was announced. “It’s not about the next month or the next quarter.”
Fidelity has pockets deep enough to take risks, current and former executives say. And, unlike some of its peers, it does not have to restrain its ambitions to keep Wall Street happy.
The Johnsons own 49 percent of Fidelity’s closely held shares, according to people familiar with its ownership details. Fewer than 100 top executives hold the other 51 percent of the voting shares.
In general, employees must sell their shares back to the company when they leave, and the kind of stock that rank-and-file workers receive as part of their compensation does not come with voting privileges.
But being shielded from shareholder pressures doesn’t mean Johnson doesn’t have to deal with the same business realities as her competitors.
In recent years, Fidelity has has been selling off some of the farflung private equity-backed businesses Ned Johnson invested in, companies that Moody’s says add risk to its balance sheet. For instance, it sold the Boston Coach limousine service and a large building materials supplier, ProBuild Holdings. It still owns a Maine tomato farm and a telecom company, Colt Technology Services, among others.
Fidelity also has been calling in from some high-ranking retirees millions of dollars in debentures — high-yielding bonds that are perks for top employees and pay 10 percent to 20 percent annual interest, according to people who have owned them.
Fidelity is considered to have relatively high leverage, with $2.8 billion in outstanding debt, according to Bloomberg data. That adds up to tens of millions of dollars in annual debt payments, and big chunks of money that will come due over the next decade and beyond.
That doesn’t count the sums paid on the debentures, which the Johnsons also own, according to a Moody’s report in October. Those payouts have driven the company’s interest expense to “very high levels” compared with other traditional asset managers, Moody’s said.
“Our balance sheet is very strong,’’ said Vincent Loporchio, a Fidelity spokesman. “Ensuring Fidelity’s financial condition is something we take very seriously.”
People who follow the company closely and evaluate its risks note that for the first time in decades, there is no obvious heir at Fidelity. Johnson’s children are in high school and college, and there is no clear No. 2 executive. Loporchio said the six-member board is “confident in our governance process.”
John Bonnanzio, a longtime Fidelity watcher who edits the independent Fidelity Insight newsletter in Wellesley, believes Johnson eventually has to come to grips with whether the company can remain independent and be successful.
“The big, bold stroke that she could make is either taking the company public,” or doing a strategic merger, he said. But in the near term, “Do I think that’s likely? I don’t.”Beth Healy can be reached at email@example.com. Follow her on Twitter @HealyBeth.