Fidelity Mutual Fund Distribution Strategy 1996

July 1996
Fidelity to End Sale of Funds By 3d Parties Like Schwab


Fidelity Investments, in a major shift in how it markets its mutual funds to individual investors, will stop selling its most popular funds through third-party retail channels, including Charles Schwab & Company's Mutual Fund Marketplace and similar programs at other discount brokerage firms, Fidelity said yesterday.

Fidelity, which has been working on its new product-distribution policy for close to a year, plans to outline the new strategy next week.

Paul Hondros, president of Fidelity's Institutional Services Company said "The plan is an attempt to place all of the clients using our funds at parity, with one set of product policies."

The move by Fidelity, will take effect at the end of the year. It goes against a major trend in the fund industry, where more and more companies are beginning to sell their products through every available channel.

But that trend has shifted the balance of power away from companies like Fidelity, the country's largest seller of mutual funds, to fund distributors like Charles Schwab, whose fund supermarket and brokerage operations have greater control over investors who buy funds through them than do the fund companies in which the money is invested.

By restricting availability -- creating what the industry calls a "closed architecture," so that an investor has to go to Fidelity or an authorized dealer to buy its funds --

Some executives said they did not expect Fidelity to succeed in bucking this industry-wide trend toward broader distribution. "The trend is toward more choice, and the future of the fund business is toward supermarkets,"

"we don't think trying to fight that will work."

The move by Fidelity is apparently also intended to channel more investors to its Adviser funds, which are sold through brokers for a sales charge, or load. That business has recently been growing much faster than the Boston-based fund family's traditional retail business, which includes well-known funds like Fidelity Growth and Income and the Fidelity Puritan fund; those are generally available to investors without a load.

Fidelity felt pressure from some of its biggest clients, like the giant brokerage firms Merrill Lynch and Smith Barney, a Travelers Corporation unit, to make changes in the availability of its no-load funds, Mr. Hondros said.

Those brokerage firms, which sell 401(k) plans that include Fidelity Adviser funds to small-and midsized companies, have complained that they must compete against independent 401(k) marketers who, by directing investors through companies like Schwab, can offer both the Adviser funds and the better-known no-load retail funds.

Schwab, which operates the largest discount-brokerage seller of mutual funds, expressed dismay at Fidelity's plan yesterday.

"We regret the move toward a closed architecture," said John McGonigle, senior vice president for Schwab's Mutual Fund Marketplace. "It is not in the best interest of customers, and it goes against current industry trends that we think have been very positive for customers."

Fidelity accounts for $3.5 billion, or 5 percent, of the $70 billion in third-party mutual fund assets that Schwab has sold through its Mutual Fund Marketplace. Fidelity funds are sold through Schwab for a transaction fee, but are not part of Schwab's One Source no-fee program.

The changes in Fidelity's distribution strategy will most affect two sets of customers: those who buy mutual funds through stockbrokers, banks or insurance companies, and those who buy funds through the discount brokerage programs. By and large, those customers will now have access only to the Adviser funds, not the no-load retail funds.

Investors who currently own Fidelity's retail, no-load funds through discount brokerage accounts will be able to continue to buy additional shares in those funds, Mr. Hondros said. But beginning next year, no purchases of new no-load funds will be available through those channels.

Registered investment advisers, who buy funds for clients and charge a percentage of assets under management, are likely to continue to have access to both the no-load retail funds and the load-based Adviser funds under Fidelity's new plan, Mr. Hondros said.

But details of the plan are not yet final, and Mr. Hondros added, "we will be emphasizing the Adviser funds with additional educational support" and the like aimed at investment counselors and planners.

Fidelity's move against the industry tide represents something of an about-face: It was one of the first companies to try to expand the number and type of distribution channels through which its funds were sold.

More than 10 years ago, Fidelity began selling its funds through third-party channels, like brokers, banks, insurance agents and registered investment advisers, in addition to sales directly to customers.

Now, Fidelity is pulling back from what is the fastest-growing distribution channel, the discount brokerage firms. "That might cost us some assets, sure," Mr. Hondros said. But the company was likely to keep its biggest customers, the full-service firms like Merrill and Smith Barney, happier.

Mr. Hondros said that of Fidelity's $450 billion in assets under management, $100 billion has been sold through third-party distributors. But only $7 billion flowed to Fidelity through discount brokerage firms.

To bolster its Adviser business further, Fidelity plans to expand its offerings there, Mr. Hondros said. It plans to add more than a dozen new funds, including some industry-specific Select funds, beginning late this year.

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