After major investment managers announced significant layoffs earlier this year, the industry's ears perked up when published reports [first reported Sept. 4 on the MFMN Web site] announced that Fidelity Investments would be making cuts of its own. But last week when the firm announced the cuts, the total was much lower than anticipated, and as a result, is being interpreted by many as sign of optimism for the industry.

"There was a heightened anticipation for [Fidelity's layoffs]," said Jim Lowell, editor of Fidelity Investor, an unaffiliated newsletter that tracks Fidelity. "The firm is always under a great deal of scrutiny. People look at what Fidelity is doing to gauge the industry. They think of Fidelity as the industry."

Fidelity said it would cut 760 positions or about 2% of its total workforce. Combined with a reduction of 160 positions this past July, the total cutback is not insignificant. But many believe it could have been worse. When compared to the 25% that Charles Schwab & Co. cut, or to the significant layoffs at Janus, Merrill Lynch, Morgan Stanley or Putnam--or to the 3,000 to 5,000 cuts Fidelity was expected to make--the actual cutback seems modest, say industry analysts.

A Harbinger of Better Days?

"Frankly, I expected this number to be in the 5% to 7% range given the economic conditions, market conditions and what their competitors have done," said Lowell. "I think it means they expect a relative near-term rebound in the market economy. I guess the business managers are a little more bullish on the market than their portfolio managers, who are still holding cash and still hunkered down."

Eric Kobren, executive editor of Fidelity Insight, agreed that the cuts could have been much worse based on recent trading levels and asset decline. The low number re-emphasizes Fidelity's long-term commitment to its workforce, Kobren said.

One reason that Fidelity can afford to be optimistic is that it is privately held, said Kobren. "They don't have to watch every nickel on a quarterly basis," he said.

The Exception, not the Rule

However, the idea that private companies can withstand short-term losses better than public ones says more about Fidelity's advantageous position than it does about the industry as a whole, according to some industry observers. The fact that other managers have been forced to implement significant cost reductions cannot be overlooked.

Franklin Resources, for example, announced last week that it was being forced to cut the salaries of all employees. The firm cut 10% from those making above $200,000 and 5% from those making less than $200,000, according to a company spokesman. Franklin expects the cuts to save the firm $15 million a year.

Lincoln Financial Distributors, the distribution arm for the Lincoln family of financial services and insurance products, cut 66 jobs the week before last, nearly half of which will come from its wholesaling force. While the total cut of 66 may sound modest, it represents 10% of the unit's sales effort, and is hardly "good news" for the industry.

"Fidelity is just a lot more diversified than a lot of its competitors so it can weather the storm better than they can," said Scott Cooley, a senior analyst at Morningstar. "I've heard people suggest that the low cuts mean that Fidelity thinks the market is going to rebound in the next six months or so, but my personal feeling is that that's not the case. I think it just means Fidelity is in a better financial position than most of its rivals."

Fidelity learned a lesson in 1987 when it laid off significant portions of its staff, Lowell said. When the market turned around, the firm had to rehire workers at much greater cost.

"Fidelity's business managers don't want to give up their human capital in any large measure," Kobren said. "There's a key business strategy at work here. If they do like Schwab [has done], they will have a similarly difficult time getting back in the game. I think it shows they're in hot pursuit of market share and Schwab has basically written them a market share ticket."

Fidelity does not anticipate making any further cuts in the near future, according to a company spokeswoman. Lowell agreed. "It does Fidelity absolutely no good whatsoever to try to do this in two to three steps over the course of the next few months. That would put them in bad faith with the press and bad faith with their employees."

But not everyone agrees. Fidelity has not decided what will happen with the market, but rather is responding to what has happened to it, Cooley said.

"You know, if the market tumbles further six months from now, I think they'll announce more cuts," Cooley said. "Then again, if the market improves, they might be hiring. I just don't think they're making a market call with this."

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