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Next generation, new challenges at Fidelity

Abigail Johnson was named Fidelity’s president in 2012. She faces fierce competition and increasing regulation.
Abigail Johnson was named Fidelity’s president in 2012. She faces fierce competition and increasing regulation.Essdras M Suarez/Globe Staff/File 2012/Globe Staff

For much of the past quarter-century, tracking the education and progress of Abigail Johnson as she moved through executive posts at Fidelity Investments was a favorite pastime of Fidelity watchers, spiced with questions of whether she would ultimately succeed her father, Edward C. “Ned” Johnson 3d, as the head of the company.

Most of that speculation faded in 2012 when she was named Fidelity president and whatever doubts remained were put to rest this year when Ron O’Hanley, the last top executive to enjoy equal footing with her, left the company. In a memo to employees, he noted, “The leadership transition to Abby as president is complete.”


Now poised to take full control of Fidelity Investments, Abigail Johnson will oversee a company that is far different than the one her 83-year-old father, still chairman and chief executive, took over from her grandfather. Today’s Fidelity is a sprawling, international company with some $4.6 trillion in assets that it manages or administers and more than 41,000 employees spread across the United States and nearly a dozen foreign countries.

She faces far different and perhaps greater challenges, including fierce competition, increased government regulation, sluggish investment flows, and the rise of passive, low-fee investment funds that cut into profits. How she leads the Boston financial services company will hold particular interest for the state economy and the 5,500 people employed by Fidelity in Massachusetts.

“There’s a decade of hard work and challenges facing her,” said Jim Lowell, publisher of FidelityInvestor.com, an independent newsletter that tracks the company. “Is Abby Johnson up to the task? I think so. But it’s not going to be easy.”

Fidelity declined requests for interviews with the Johnsons. It also declined to talk about any of Fidelity’s future succession plans.

To get a better idea of what lies ahead, it’s important to first examine just how fast and big the company has grown since Ned Johnson took over Fidelity in 1972, 26 years after his father started the firm shortly after World War II.


Ned Johnson, who has worked at Fidelity since 1957 and managed its flagship Magellan Fund in the 1960s, inherited from his father a company that had just one unit: Asset Management, spread among a number of mutual funds with combined assets of less than $4 billion. Today, Fidelity manages more than $1 trillion in mutual funds and related institutional defined-benefits funds, with the figure rising to nearly $2 trillion when money-market funds are included.

Over the decades, Johnson consistently adapted to and even forced changes that transformed the company into a diversified financial services firm. Fidelity has three other units: Personal Investing (which oversees IRA accounts, personal online brokerage services, college savings plans, and other individual-investor products); Workplace Investing [which oversees Fidelity’s robust 401(k) and 403(b) retirement businesses, and the back-office human resources and payroll services it sells to employers]; and Fidelity Institutional (which oversees its broker-sold funds, custodial services, and trading in capital markets).

Fidelity’s fund management business is now, in terms of total assets, smaller than the $2.7 trillion in assets under administration at its other three units. Managed assets, however, with their considerably higher fees, continue to be the main driver of Fidelity’s revenues and profits.

Although asset management remains the core of Fidelity’s business, it has long been under pressure from rivals such as Vanguard Group, the Pennsylvania-based mutual fund company known for its low-fee index funds. Index funds don’t require more expensive — and profitable — active management, long a Fidelity specialty. Vanguard surpassed Fidelity as the nation’s largest mutual fund company in terms of assets in 2010.


Like other asset management companies, Fidelity also has struggled with investors pulling money out of funds following the financial crisis of 2008. Fidelity saw a combined net outflow of $64.88 billion in 2010 and 2011.

Fidelity has recently begun to stem this tide. In 2012 and 2013 combined, investors put $11.5 billion more into Fidelity funds than they withdrew, according to Morningstar Inc., a Chicago-based investment research firm.

But Katie Reichart, a senior analyst at Morningstar, said Fidelity still has its work cut out, particularly in terms of the performance of stock mutual funds, which have lagged behind peers and various benchmarks before and during the recent financial crisis. Fidelity’s fund performances have rebounded in the past few years, she said, but “we’d like to see more consistency.”

Fidelity’s sheer size — it has more than 560 equity, bond, money-market, high-income, and exchange-traded funds — makes it harder for Fidelity to avoid having some funds that perform poorly, she said. “It’s hard to be good all the time with so many funds,” she said.

Over the years, Fidelity has tried to offset slower growth in its mutual fund business by expanding aggressively into other business. It continues, for instance, to fight for market share in the investment advisory business against Charles Schwab Corp. and other brokerage firms.


Fidelity Institutional, for instance, offers registered investment advisers a number of services, including custodial, administrative, trading, and even technological support. Such services may not be as lucrative as asset management, but they are profitable.

John W. Morris, managing partner at Crestwood Advisors LLC in Boston, says he’s impressed with Fidelity’s services to his registered investment adviser firm — and its willingness to compete for business.

“Fidelity is now a multifaceted company,” said Morris, whose firm oversees $1.3 billion in assets and closely works with Fidelity Institutional to administer his firm’s funds. “They have created a very broad, dynamic company with a lot of different services to offer.”

Kathy Murphy, president of Fidelity’s Personal Investing division, which oversees nearly $1.3 trillion in assets, rejects the notion that Fidelity has grown too big. Fidelity remains the top provider of workplace retirement plans [such as 401(k)s] and IRAs in the in the nation, as well as in other categories, she noted.

“We feel very optimistic about our future,” said Murphy, who has headed Fidelity’s Personal Investing unit since 2009. “Fidelity is very well positioned.”

In many respects, industry and company officials said, Abigail Johnson is already overseeing the day-to-day operations of Fidelity, with the four main division leaders answering directly to her.

A big plus for her as she slowly takes more control at Fidelity is that the company has remained private, sheltering her from the short-term pressures of meeting the quarterly expectations of Wall Street and providing more flexibility and time to solve problems and tackle new challenges, industry analysts said.


But John Bonnanzio, editor of the independent Fidelity Monitor & Insight newsletter in Wellesley, said Fidelity faces immediate challenges, such as government proposals to change money-market rules, a very touchy subject for Fidelity, as the overseer of more than $400 billion in money market assets.

The Securities and Exchange Commission is also reviewing proposals that could lead to Fidelity and other asset managers being declared “too big too fail” institutions, a designation that would lead to more regulations and government oversight, Bonnanzio said. (Late last year, Fidelity blasted that idea in a letter to the SEC.)

How Abigail Johnson navigates these challenges could provide an early test of how she will lead Fidelity into the future, Bonnanzio said.

“One never really knows until she faces a major crisis, but I’m confident she can do it,” said Bonnanzio. “This is a story that will play out over years and years. A lot of people are going to be watching Fidelity.”

Jay Fitzgerald can be reached at jayfitzmedia@gmail.com