After years of work to gain parity with Schwab RIA custody, Fidelity is ready to show fruits of its $250 million move to gain an edge

Brooke’s Note: Perhaps the most seminal decision that an RIA makes is which custodian will hold its assets. Because of that, we wrote profiles of each custodian for RIA shoppers. They are a little outdated, partially because not many newsworthy changes occurred and partially because other news has absorbed all our bandwidth. But Fidelity has been busy enough reinventing itself that we are publishing this new edition of a profile.

Like any middle child, Fidelity Inc.'s RIA asset custody unit has two big problems — its older sibling and its younger sibling.

The older sibling in this instance is broad-shouldered Schwab Advisor Services, which seemingly grows inexorably by dint of its $1 trillion-plus in assets.

But no less daunting is TD Ameritrade Institutional, which just keeps coming and coming — sometimes seeming to defy the physics of its late start and humble beginnings. With its more than $300 billion in custody, it’s no longer unthinkable that it could overtake Fidelity in terms of RIA assets in custody. See: TD Ameritrade CEO sees RIA custody competitors adjusting to his killer strategy — even as he whips his in-house RIA into shape.

Asset opacity

Though Fidelity declines to disclose RIA assets in custody, it does disclose that it has about $1.5 trillion in total clearing and custody assets. Historically clearing and custody were about 50/50 at the firm so its custody assets would be $750 billion by that rough calculus.

The firm also used to provide guidance that RIA assets were about 50 to 55% of total custody assets, with trust companies, third-party administrators and other entities holding the other 45% or 50%. By this rough calculus, Fidelity’s RIA assets may stand at around $375 billion or more.

Meanwhile, at a semi-safe rearview distance Pershing Advisor Solutions lurks — with a more than occasional win of a big breakaway and an ally in BNY Mellon that has a natty appeal to certain RIAs. See: BNY Mellon is arming Pershing’s RIA unit to the teeth with banking products for ultra high net worth clients.

But in this crucible of competition, Fidelity Institutional is hardly standing still though it has had little in the way of product evolution to show for its behind-the-scenes machinations of late. Even Schwab, which doesn’t claim to be exactly a digital innovator, has had more to show — rolling out a robo-for-RIAs last July. See: Schwab’s robo spikes suddenly to nearer $5 billion as 500 RIAs sign on.

New Englanders to unveil the Fute-chah

Jim Lowell: The last thing you
want in a financial crisis is
for the custodian itself to be
in crisis. I’d rather bet on
strength and safety in numbers.

Next week, a Fidelity contingent will travel to T3 armed with the beginnings of what could be a breakthrough custody offering — at least to the extent that technology can be a difference-maker.

Its executives will introduce the firm’s technology future at the conference, held Feb. 10 to Feb. 12 in Ft. Lauderdale, Fla. It will be nothing less than a new platform to replace WealthCentral and bring the custodian into the robo age. WealthCentral was the first effort by an RIA custodian to wire various third-party software products into a more one-stop, plug-and-play user experience. Most of the firms that adopted it were ones formed by breakaways accustomed to a single smooth-functioning system.

But though WealthCentral got buzz and attracted imitators of its system that included Pershing’s NetX360, TD Ameritrade’s Veo and Schwab’s Intelligent Integration, the whole effort never made a big enough leap in advisor productivity to quicken their pulses. See: Technology review: Fidelity’s WealthCentral is solid and smart but still has seams.

But what Fidelity is poised to begin rolling out may be a big step in changing that, according to Joel Bruckenstein, host of T3 who has been granted some access to Fidelity’s plans and technology.

“I think this is fairly major,” he says. “The sense that I get is this is not an incremental change.”

The way Fidelity’s RIA effort left off in 2015 was with the completion of the merger of Fidelity’s clearing and custody units into one and with the departure of Mike Durbin, previously chief of RIAs, for a Fidelity shell company containing prized acquisition eMoney and a blank-check mentality conferred by Abby Johnson, CEO of the company. It was she who cut through bureaucracy to send Durbin to head up eMoney and see to it that the first big check she wrote as CEO did not get hung around her neck like an albatross.

As head of Fidelity Wealth Technology, Durbin is in a separate group under Mike Wilens, who leads Enterprise Services and reports to Johnson.

The next, new platform

Fidelity expects to roll out its post-WealthCentral software in stages over 2016 and 2017. Until T3, the firm is playing its cards close to its chest. Fidelity has not confirmed any of the platform’s features, nor provided solid details on the role digital advice will play, and has not specified any firmer release schedule. It is also not clear if advisors should expect changes in how Fidelity prices services on its platform.

It has even taken the effort to quiet the tech contractors to whom it afforded peeks of the platform’s capabilities. Multiple technology consultants contacted for this article begged off from answering questions, citing strict non-disclosure agreements.

Bruckenstein is among those legally muzzled but was willing to speak in generalities.

“I would think that they’re looking to leverage eMoney’s technology in a lot of ways — account aggregation, client experience software and, to the extent they think is appropriate, their financial planning expertise.” See: With eMoney in its back pocket, Fidelity Investments won’t exercise its option to continue Betterment deal as it nears launch of its own robo.

In other words, Fidelity may be pulling aspects of eMoney beloved by its users into the core of the RIA experience as custodial clients with nifty dashboards and the ability to afford clients broad views of assets that don’t look like Soviet Union offerings circa 1980 in contrast to what they get for free from Mint.com.

Winterberg of discontent

But Bill Winterberg, principal of FPPad.com, says Fidelity will do well helping RIAs with even more fundamental business challenges — like getting clients onboard efficiently.

“Account opening processes and electronic support have been big disappointments in the industry,” says Winterberg. “There’s no reason for Betterment Institutional to have such a better system for account opening. Table stakes today are that all custodians should be able to provide the same account opening standards for all customers.”

Winterberg sees Fidelity’s new platform as an attempt “be first” in innovation, getting to where some robos already live and to keep the other custodians “playing catch up.” See: What exactly are robo-advisors, why did they steal the 2014 show and what will a 2015 repeat take?.

Robo FOMO

Coincidentally, the expected launch of Fidelity’s new platform comes just three months after the firm announced its partnership with the New York-based robo advisor Betterment had fizzled. Part of the problem with the deal appeared to be the lack of integration between the two platforms. Fidelity advisors using Betterment’s services had to custody those assets on the robo advisor’s platform. See: With eMoney in its back pocket, Fidelity Investments won’t exercise its option to continue Betterment deal as it nears launch of its own robo

Advisors also had no ability to customize the portfolios, ceding every investment decision to Jon Stein’s algorithmic black box.

The same day, the New York Times announced Fidelity was testing a retail robo-advisor platform called Fidelity Go. See: With RIAs deliberately not in mind, Fidelity Investments launches Fidelity Go, a robo-advisor with the human touch of Vince Gubito

Overseeing Fidelity Investment’s RIA empire is Bob Oros, 50. Oros says Fidelity Go won’t be the model for Fidelity’s advisor-oriented robo, but that some form of digital advice will be a key part to the new platform. He says every advisor should consider integrating it into their business.

“Thinking about robo as this 'stand alone thing’ is not where we’re at. When we talk to advisors about it, it’s really about having a strategy around where 'digital’ fits into their business, and the mix of 'digital’ and 'human’ that will play a role.”

He continues: “And I think it’s dangerous to age-bracket it. Robo or digital is not just for the next generation, there are plenty of folks my age who would accept that experience or even prefer it so it becomes part of a strategy; it’s not 'either/or … it’s 'and.’ And if you’re an advisor who’s not thinking 'and,’ that’s being short-sighted. That’s why we view it as core to the platform and we view it as core to everyone’s business”

Oros rising

Bill Winterberg says Fidelity needs to
help clients with onboarding.

A Schwab alumnus ('98-'07), it was Oros who helped develop its East Coast RIA business. He spent the years following the financial crisis working on LPL Financial’s clearing business before getting back into the RIA business as national sales manager at Trust Company of America in 2010. See: How Bob Oros landed at Trust Company of America

In January 2012, Mike Durbin tapped Oros to replace Scott Dell’Orfano as Fidelity Institutional Wealth Services head of sales. See: Fidelity hires Bob Oros as its new RIA sales chief Charles Goldman left in 2010.

In March 2015, Fidelity announced a shake-up of Institutional Wealth Services as Mike Durbin moved to become president of Fidelity Wealth Technologies, (primarily overseeing the eMoney acquisition) and Oros was elevated to head of the RIA business.

Oros says he doesn’t really call his new position a promotion, and that essentially the only change has been the increased visibility he now receives. See: Bob Oros jumps to the top 'RIA’ spot at Fidelity

Rational rationale?

Concurrent with Durbin’s departure was the finalization of the merger between Fidelity’s RIA custodian and broker-dealer clearing unit into one division under Sanjiv Mirchandani, the company’s head of clearing since 2009. Oros reports to Mirchandani, who reports to Gerry McGraw. McGraw reports to Abby Johnson.

Fidelity reasoning behind the merger was that it mirrored the marketplace convergence between RIA and broker-dealer models. And while placing the head of clearing atop the newly combined division may have looked to some like RIAs had lost favor within the company, Oros brushes off the suggestion.

“I don’t think RIAs have ever had a stronger voice within our firm,” he says, claiming the company is putting its money where its heart is. “The reinvestment alone demonstrates our commitment to this space. You know you don’t just get reinvestment in the business because you ask for it, you get investment in your business because you prove that you’re delivering a return for it. And I feel like we’re doing that.”

Tim Welsh, president of Nexus Strategy LLC doesn’t completely buy this line.

“If [the RIA division] ever did get the attention of senior management, and they really wanted to go for it and dominate the custody business, they could,” he says, adding that he thinks Fidelity still has a “great runway for growth.”

Rock of Boston

Of course, the Johnson family’s control over the company’s purse strings cuts both ways, providing a strong safety net during times of turmoil in the public markets.

“Think of their ability to fund a whole cadre of new consultants,” says Jim Lowell, editor-in-chief of the Fidelity Investor newsletter, “The last thing you want in a financial crisis is for the custodian itself to be in crisis. I’d rather bet on strength and safety in numbers.”

The only privately held custodian, Fidelity was able to weather 2008 without significant cuts to its workforce. And the firm is famously committed to technology spending, dedicating over $2 billion annually to maintaining and improving what it classifies as “technology.”

Last February, Fidelity plunked down a quarter-billion dollars for eMoney Advisor, and has been investing heavily to integrate it into a new platform ever since. See: What to make of Fidelity Investments paying $250 million out of the blue for eMoney

Right fit

The new platform is expected to bring the firm’s custodian offerings into the robo age. In a sign of just how fast technological innovation is happening in the industry, Fidelity’s new platform’s launch comes just over seven years since the launch of WealthCentral in December 2008. At the time, Fidelity boasted about WealthCentral being the industry’s first web-based platform. See: Technology review: Fidelity’s WealthCentral is solid and smart but still has seams.

But even if the technology behind the business is evolving rapidly, a large part of the company’s strategy will stay the same. Oros thinks a major part of the Mike Durbin playbook from 2009-2015 will stay the same on his watch: Fidelity’s focus on serving the largest RIAs.

The custodian’s emphasis on solving the complicated needs of larger RIAs has paid dividends as the independence movement strengthens. See: Mike Durbin is putting his stamp on Fidelity as an RIA custodian for asset-flush breakaways

“We’re starting to see advisors who in the past, either we didn’t know existed, or they wouldn’t take our calls, or they never expressed any interest in independence. These are some of the largest corner office wirehouse teams, now making the move,” says Oros. “Now they’re coming out and they’re way smarter on what independence means. It used to be we’d get a question like, 'so am I an employee of Fidelity?’ These folks are coming out with a really deep understanding of the different business models, the different providers, and that there is a large number behind that in terms of size. In the past, we rarely saw breakaways over a billion dollars.”

Fidelity’s first may have been Luminous Capital in 2008. See: How the Luminous deal is rocking the recruiting world — and may set the stage for more fireworks.

By the billions

Bob Oros: All advisors need to
consider integrating digital advice into their
firm

With the help of firms like New York-based Dynasty Financial Partners and Chicago-based HighTower Advisors, Fidelity gets more than its share of mega-breakaways. Of the five $1 billion -plus breakaways in 2015 recorded by InvestmentNews, plus one (Susan Reese) not counted by the firm, Fidelity became a custodian for at least five:

Corient — Fido See: Why a $3 billion UHNW team in Newport Beach bolted Merrill Lynch and what breakaway bugs are reading into it.

Intellectus — Fido, Pershing See: How David Steele opened six restaurants in the toughest foodie market in the US and then found the nerve to leave JP Morgan.

Summit Trail — Fido, Pershing See: How exactly five ex-Barclays advisors and one analyst across three time zones combined to make a $3 billion RIA.

Jerry Lucas — merged into Summit Trail Fido, Pershing See: Lehman Bros.’ binding ties and culture spur another $1B team — that stayed at their posts as Lehman burned — to flee Stifel-owned Barclays for RIA.

Susan Reese — Fidelity, Schwab See: Why a $2 billion advisor bolted Goldman Sachs’ $26 billion, Albany-based RIA and subtracted 12,000 commuting miles.

(Pershing was second in the race for the largest teams, becoming a custodian for three. See: Lehman Bros.’ binding ties and culture spur another $1B team — that stayed at their posts as Lehman burned — to flee Stifel-owned Barclays for RIA)

Big game hunting

“We think firms that have some actionable strategy is where we best fit,” says Oros. Otherwise, we’re happy to serve you in our capacity as custodian, but you don’t really get to see the best of everything we have.”

He adds: “We talk to a wide variety of RIAs, and I’d say we’ve hit a bit of a sweet spot with larger firms, because with size comes complexity, and we love complexity.”

With its business focus on the big and complex, Fidelity levies a fee on advisors with small books of business. The firm introduced account minimums in 2012, and announced their expansion to cover about 6% of all RIAs in September 2013. Currently, any advisor with less than $15 million in AUM must pay a $2,500 quarterly fee. See: Fidelity’s annual $10,000 custody fee will attach to a wider swath of small RIAs

h2 Training camp

The custodian business has been characterized in recent years by healthy competition between Schwab, Fidelity, TD Ameritrade, and Pershing, with smaller companies tussling on the periphery. Each of the “big four” custodians has chosen a slightly different approach to winning market share. Schwab boasts a McDonald’s-like gold-plated grown-up service and reliable technology. TD Ameritrade is know for a Burger King special-orders-don’t-upset-us approach, both in service and technology. Pershing is known for six-foot thick walls to its Brinks-like asset vault as backed by BNY Mellon and a way of relating to big RIAs who serve complicated customers.

Fidelity, meanwhile, is determined to outsmart and outspend — particularly with regard to technology.

“We think where we add the most value is in our intellectual property, our consulting, and our suite of technology products,” says Oros.

While Durbin has focused on software and Mirchandani on creating a hybrid haven, Oros has worked to strengthen the consultant ranks. He realized early on that the majority of consultants never worked at an RIA and set about trying to remedy that deficit of knowledge.

It’s an area where all custodians — starting with ex-Moss Adams star Mark Tibergien at Pershing — claim to lead and where outsiders are hard-pressed to judge progress.

To break out of this pack Oros saw two options: either embed his junior employees with outside RIAs for a period and hope they’d come back, or find a way to simulate the same experiences within the company. Opting for the latter, he teamed up with Philip Palaveev, owner and CEO of Seattle-based The Ensemble Practice LLC to design a two-year simulation of the various challenges an RIA’s management might face. See: Philip Palaveev and Bob Oros create Hunger Games-style RIA high jinks for Fidelity execs, then release it for wide consumption.

Fidelity has put 120 employees through the program and Oros says it has helped the company’s associates average about 90 hours of development time per year.

Fidelity also gives David Canter, another ex-Schwab executive, a high profile perch in the firm to drive practice management initiatives and RIA partnerships. He headed the collaboration with Betterment Inc. and still works closely with Marty Bicknell’s mass-affluent venture. See: Marty Bicknell and Fidelity enter into the mother of all cross-RIA referral deals.

Vital stats

Name: Fidelity Clearing & Custody Solutions

Address: 200 Seaport Blvd. Boston, MA 02210

Phone number: 1-800-735-3756

Founded: 1991; Fidelity Institutional Wealth Services and National Financial combined to create Fidelity Clearing & Custody Solutions in 2015

Head of clearing and custody business, Fidelity Clearing & Custody Solutions: Sanjiv Mirchandani, president

Head of RIA business: Bob Oros, executive vice president, head of RIA segment

Total Assets: $1.5T clearing and custody assets under administration; No. 1 in clearing and custody with 24% market share

Number of Firms: 3,500 clearing and custody clients, 5.8 million clearing and custody accounts

RIA Practice Management:& Consulting: Led by David Canter, executive vice president (the team handled 750 RIA practice management consultations in 2015)

RIA Technology Platform: WealthCentral (but stay tuned …)

Date of last major update on tech platform: September 2011, with continuous investments in new technology, and a major new technology platform set to launch in 2016-2017

Minimum assets for advisors: None but…

Custody fees for advisors below $15 million: $2,500 quarterly

Custody fees for advisors above $15 million: Varies per relationship.

Size of biggest advisory client: Fidelity declined to disclose