Fidelity Investments has been knocked from its top slot as the number one distributor and mutual fund provider by a decline in the number of investors using 401(k) plans, increasing unemployment and an aging population.
This week Cogent Research released its 2010 Investor Brandscape report, a self-reported survey of 4,000 affluent and high net worth investors in the United States who revealed their perceptions about distributors and mutual funds. Based on the report, Fidelity fell to number two behind Charles Schwab in the top ten distributor rankings, and number two behind Vanguard in the top ten mutual fund rankings. The report is based on a representative survey of 4,000 affluent and high net-worth investors in the United States.
Part of the challenge for Fidelity is that for the first time ever, affluent investors are reporting having more dollars allocated to individual retirement accounts than to employer-sponsored retirement plans. Meredith Lloyd Rice, an author of the report, said in a phone interview on Thursday that 40% of Fidelity’s mutual fund customers hold those funds through employee-sponsored retirement plans. That is proving to be a disadvantage to Fidelity if participation in those plans decrease. In the meantime, 30% of rival Vanguard’s mutual fund customers invest in those funds through employee-sponsored retirement plans, while only 14% of Charles Schwab mutual fund customers invest through employee-sponsored retirement plans.

Rice explained that the proportion of investors that hold a 401(k) has gone down significantly. As of Oct. 2009, she said, only 59% of investors’ surveyed hold an employee-sponsored retirement account, down from 70% in Oct. 2008.
The population is also aging and those closer to retirement are rolling over their employee-sponsored retirement plans into IRAs, another reason for the decrease in participation in 401(k) plans. At the same time, younger investors are more likely to start their own businesses or freelance and aren’t necessarily working in traditional full-time jobs that offer employee-sponsored retirement plans. In addition, high unemployment is also cutting into contributions.
“It would appear that Fidelity is caught in a perfect storm comprised of an aging population, higher unemployment, and lower across the board plan participation,” Rice explained.
Meanwhile, the report points out that on the distributor side Fidelity has been hurt by lower awareness and favorability ratings toward its brand, which has been coupled with a significantly lower household penetration. This contrasts with Schwab, which has been able to continue to attract affluent clients and hold on to their assets, according to the report.
“Fidelity is a powerhouse and I am sure will remain a powerhouse,” said Rice. “Some of these things are out of their control and aren’t necessarily because of the way Fidelity is doing things.”
On the other hand, advertising spending has decreased across the industry, hurting overall brand awareness, which is something that Fidelity is struggling with, according to the report. Competitrack, which tracks advertising spending, revealed that in the first nine months of 2009 ad spending tumbled 23% to $483 million spent for TV, print, radio, and online, down from $631 million in the first nine months of 2008.
It’s not that Fidelity isn’t trying. In March the company launched its “Turn Here” campaign to "help Americans assess their financial situations and map out a savings plan based on their specific needs and personal life stage and goals,” Fidelity said in a press release.
One area Fidelity can work on, according to the report, is loyalty. “Whereas Vanguard has actually improved its relationship with investors over the past year as a mutual fund provider, Fidelity has seen a decline in loyalty,” the report revealed. It went on to say that Fidelity’s ratings on both mid-term and long-term performance have declined considerably over the past year—affecting its brand.

“The best evidence that clients and customers are turning to us is the fact that hundreds of thousands of individuals opened new accounts with us last year; we continue to be the nation’s No. 1 provider of 401(k) plans and continue to add significant new 401(k) clients to our business,” a Fidelity spokesperson said. “Fidelity also is the No. 1 provider of IRAs and ended the year with net new flows of more than $123 billion into our funds and others we sell through our fund supermarket.

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