Fidelity efforts to expand managed accounts business pay off

Fidelity Investments' managed account business has surged, growing faster than its peers this decade due to product and marketing changes as well as its big record-keeping presence, according to consultants and researchers.

"In recent years, Fidelity has put a lot of time, money and effort into its total global platform," said Brad Long, principal and research director for DiMeo Schneider & Associates LLC, Chicago. "They have improved their product quality, and the market has responded."

Fidelity's Portfolio Advisory Service at Work, also known as PAS-W, held a solid 12.7% market share at the end of the second quarter of 2018, more than triple its 3.9% share in 2011, according to research by Cerulli Associates, Boston. Cerulli said this translates as $36.4 billion.

Fidelity still trails the dominant managed account provider, Financial Engines, which had a 57.1% market share, or $163.5 billion, at mid-2018 as well as the second-largest player, Morningstar Inc., with 21.1%, or $60.4 billion. Both giants' market shares have trended slightly downward since 2011, according to Cerulli.

The firm analyzes results from the eight largest managed account providers, whose aggregate managed account assets reached $286.5 billion by mid-2018.

Cerulli calculates managed account assets of these eight providers represented 3.6% of total defined contribution plan assets in 2017 and estimates they will represent 3.8% this year.

Fidelity's gains appear to have come mostly at the expense of smaller managed account providers, said Jessica Sclafani, director of retirement at Cerulli.

Fidelity now has a bigger market share than the combined market share (9.2%) of the five other providers, including Guided Choice Inc. In 2011, the aggregate market share of these five was 13.9%.

"PAS-W has been a priority for (Fidelity) in recent years," Ms. Sclafani said. "They are well-positioned because they are the biggest record keeper."

The company, she added, has a big market share among sponsors with $1 billion or more in plan assets.

Fidelity's managed account program also can benefit from the company's other services such as health savings accounts and brokerage accounts, Mr. Long said. "It's a seamless experience for a Fidelity platform client," he said.

Like other consultants, Mr. Long pointed out that the key to success for managed accounts — both for providers and participants — is to have as much data as possible so the investment strategy can be personalized.

"You need more than age," said Mr. Long. Without enough personalized data, a managed account becomes an expensive target-date fund. "Fidelity has done a better job of gathering, analyzing and utilizing data," Mr. Long said.

The growth in Fidelity's managed account business is due in part to the realities of the record-keeping arena, said Michael Volo, senior partner at Cammack Retirement Group Inc., Wellesley, Mass.

As profit margins are squeezed by fee compression and as more sponsors offer more passively managed investments, managed accounts is a "product and profit opportunity," he said.

Fidelity has "used their investment and technical prowess to build a scalable solution," Mr. Volo said. "They have been fine-tuning their managed account solutions."

Abigail Johnson, Fidelity's CEO since 2014, "has made a concerted effort to improve the overall methodology and user-experience" of Fidelity's investment and retirement businesses, added Martin Schmidt, principal at MAS Advisors, Chicago.

Fidelity started its managed account service "at the small end of the market," but it has made "a bigger effort" for larger plans in recent years, Mr. Schmidt said.

Fidelity secures a lot of managed account business because PAS-W is on its record-keeping platform. Competing record keepers who lack their own managed account services place one or two third-party providers' services — such as Financial Engines or Morningstar — on their platforms. (Fidelity also carries Financial Engines on its record-keeping platform.)

Fidelity is trying to change the dynamics of the managed account business by offering PAS-W to other record keepers and directly to plan sponsors who aren't Fidelity record-keeping clients.

In May 2017, Fidelity said it would offer PAS-W to advisers and independent record keepers. Last month, Fidelity announced it had begun offering managed accounts to non-client plan sponsors.

Fidelity took these actions due to "the great demand we have seen with our own business," said Lorianne Pannozzo, senior vice president, workplace planning and advice.

Ms. Pannozzo provided few details about Fidelity's experience with the new strategies, declining to identify sponsors offering PAS-W even though they are not Fidelity record-keeping clients. She also declined to comment on the amount of managed account business that has come from these sponsors and independent record keepers.

Five small independent record keepers are offering PAS-W to their sponsor clients.

Fidelity is making a "smart" move to offer PAS-W to sponsors that aren't record-keeping clients, said Jason Chepenik, managing partner at Chepenik Financial, Winter Park, Fla.

"I think they're very good at making money," said Mr. Chepenik, whose firm provides corporate retirement and health-care services as well as individual investment planning services. "They're smart at branding."

Some consultants said pursuing these sponsors — called an off-platform strategy — will be a challenge because record keepers restrict the number of managed account providers on their platforms.

The Fidelity plan "makes sense, but big record keepers are their competitors," said Cammack's Mr. Volo. "It would be tough to get shelf space" on another record keeper's platform.

"Managed accounts is one of the most profitable businesses for record keepers," said MAS' Mr. Schmidt. "Other record keepers won't have the incentive to put PAS-W on their platform."

However, given Fidelity's size, market power and brand recognition, "they will have some penetration in the market," he said.