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Fidelity Reduces Profit Margin Goals for Advisor Services

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Fidelity Investments Chief Executive Officer Edward “Ned” Johnson has told the firm’s adviser services division to reduce its profit margin targets so that the company can use the money to improve its custody platform to boost its market share among advisers, Investment News reports.

Johnson made the decision since the company is not public and does not have to answer to shareholders about sacrificing profits to reinvest back in the business, said Jack W. Callahan, president of Fidelity Registered Investment Advisor Group.

“Where the privately held [nature of Fidelity’s ownership] comes in is that Ellyn [McColgan, president of distribution and operations] and Ned say, ‘OK, we’re going to allow you to reduce your margins because we’re going to invest a lot of money in your technology budget,” Callahan said.

Industry insiders said that Fidelity is looking to upgrade its custody platform to compete with Charles Schwab, which oversees $545 billion in custody assets, versus Fidelity’s $277 billion.

Callahan said he expects the platform to be strengthened within four years, although it may take longer to boost assets, he said.

“Our technology budget is four times what it was four years ago,” Callahan said. “I know what Schwab’s number is, and [ours is] significantly higher than Schwab’s, and it’s being spent in all three businesses [trust, third-party administrators and advisers].”

But Schwab isn’t taking the threat lying down. “We plan to continue to spend what it takes to deliver a great platform to advisers,” said Charles Goldman, president of Schwab Institutional. “The key for us is the leadership position we have in the industry and our ability to deliver services to advisers to help them grow their businesses. You can’t buy leadership with technology.”

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