From Funds to Crypto

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We're coming to a really great financial future. Come and done are talking real money.

Introduction to House of Fidelity

Fidelity's Impact on American Investing

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Welcome to a very special edition of Talking Real Money. I'm Tom Cock here, as you know, five days a week to try to help you get money, investing, finances, all that done properly and done better. And today we have we have an absolutely wonderful uh preview of a brand new book that's just out uh about a company that's incredibly important in the financial services industry, that company, of course, being Fidelity. And uh, I was lucky enough to sort of read the book before you got a chance to see it. The book is called House of Fidelity. It's written by an award-winning journalist and editor for the Wall Street Journal, Justin Baer. Thank you for uh joining us here on uh on Talking Real Money. It's a pleasure. It's great to be here. Really, really, really enjoyed the book. And so for those of you who have an interest, certainly in the industry, certainly in fidelity, it's one that you should absolutely 100% read. So, okay, uh, I think one of the news releases or something, I tried to go back last night and look at everything, said something about how Fidelity changed uh American investing. So let's start with that. I mean, because the company does go back eighty years, I think, or something, or pretty close to eighty years.

SPEAKER_00 1:19

Eighty years just uh next month next in May.

SPEAKER_02 1:21

Which is which which is any business, anybody and and we can talk about the family ownership and all that. But okay, but for me as an investor, how has it changed how I invest? What's been the biggest change that they've they've led? Trevor Burrus, Jr.

Democratizing Financial Services

SPEAKER_00 1:34

Sure. Uh you know, we can go back to the early days of uh the sort of post-war period um where they really um get going. Um I would say the overall theme is that they have um been often at the forefront of bringing uh various financial services that had once been uh limited to the few, to the wealthy, to a broader audience, to the middle class. And this um this starts uh way back in the 40s with um them being one of the early-day um mutual fund firms up in in Boston. Um and um they had been around at that point for for about 20 years, but um that business really uh makes its comeback from the crash and begins to grow and generate a lot more interest, and um people, um regular people begin to discover um the stock market and the interest in investing. And often they did that starting in the 50s through mutual funds. So that's sort of the first moment in time where they sort of seize upon this theme. Uh I would say later, certainly um they were um significantly at the early days of the emergence of the 401k plan as the um it's really the primary uh uh retirement uh account for most Americans and one that they often would start giving them an opportunity to start saving um right as they enter the workforce. Of course, um the in in at one point many of those workers would have had a defined benefit pension. Um that begins to change um as we get into the 80s and 90s, but they were uh the first, one of the first to really um use that um initially as as a as a platform for selling mutual funds, but then later as a standalone business that that continued to broaden out and include other services that um folks would receive through their benefits uh packages at work. Um they were not the first uh retail uh or if you used to be called uh discount broker to merge in the 70s. Um you could look at uh Charles Schwab and others, but they were a fast follower there, and they very uh very quickly, in the in the years that followed, built out a it's their own retail presence. Um that kind of came went hand in hand, I guess, with the decision to start selling uh funds directly to consumers. You know, there was there was a period where you had essentially you had to use a broker to buy funds. And when that industry and really the market as a whole went sideways in the 70s, the f some fund firms realize that, well, brokers are not gonna are not gonna sell stock funds uh you know during this bear market. And so they begin to sell uh that directly to consumers, which makes them in many ways a marketing firm for the first time. They have to run ads, they have to um have uh customer service centers, they have to um have people to to answer answer those calls. And so that that marks another change, and again, uh one in which it it it it they're part of the movement to um democratize a lot of these things to to um ordinary um ordinary investors. And and another one I'll mention that that comes along in um in the 90s is uh the uh Ned Johnson, um who was the CEO at the time, um, had wanted to find ways to make it easier for for regular uh individual investors to donate to charity. And um and so had come up with this uh scheme that that resembled something he had seen happen in, I think, in the U.K., where um ordinary Americans could um could essentially set up their own um foundation through sort of a donor-advised account, which became it was highly controversial in the in the philanthropic world at the time when it came out, but ended up being one that's used um by by many millions of of people today, not only through Fidelity, but but many of their competitors. So those just some examples were again the consistent theme was bringing or really broadening access to a lot of these services to um to middle class Americans.

The Shift in Investment Strategy

SPEAKER_02 6:20

Aaron Ross Powell I like what you said, democratize investing. Uh big leadership there. Uh if you ask me, for example, middle baby boomer generation, et cetera, and you asked me about Phil D, and I went around the office and asked everybody. So I got some interesting perspectives because we have a lot of people who are 30 and younger, and that they don't know anything about the people I'm about to mention. But if you ask me, I would say it'd be Peter Lynch, who I think you cited his performance of like 27% a year for whatever the decade plus he was there. Uh Will Danoff, of course, a Contra, who just retired recently, who had a tremendous track record. But but in a general sense, that's who Fidelity is. They're stock pickers, active fund managers, and yet today they live in this world where they kind of have to be a little bit of everything to everybody, right? Because they have they have the Spartan funds, they have the uh Zero funds, they have all these other products. Um but going back to that that initial really where they they make it uh as I say with with uh with Peter Lynch's performance, et cetera, at Magellan, looking at all of that, how what impact does that have on the investor today? I mean, how do what what are people what should people take away from the history of Fidelity that that is impactful to how we're investing in today's world?

SPEAKER_00 7:34

Yeah, I think from a from a from a company standpoint, I I think it's it demonstrates how you know companies that are wildly successful in one area, um there are no guarantees that that business is going to continue growing over the decades. And so what they realized at at one point um was that the the idea of choosing a professional investor to pick stocks or bonds or or what have you, um that was not um generating the same interest as it had for a very long time, you know, since really the 40s, right? And so you they had to begin to change their stripes. And I think what it showed was that um the importance of of evolving to the time. So if you have a business that's that's large and successful, but one that's maturing, um you need to think about a time in which that business may not be the growth engine as it as it once was. And that's something that they you know, I think like everyone else, um they they probably resisted that that's you know, that we we did have this this you know, in the backdrop uh during um Peter Lynch's sort of glorious run through the 80s, um you had um this other guy uh in um Jack Bogle who was doing his thing and and coming up with this concept in the 70s about uh or popularizing this concept of the index fund and being a low-cost product where you didn't have to choose uh an individual stock picker, the index uh you were you were betting on the index, right, whether it be the S P 500. And those index funds become wildly popular as time marches on, to a point where you have even those who were longtime investors with all of those stock picking funds that are moving their money out of them and into the index products. And so Fidelity's story is is you know what has made it successful, and I'll get to your point about the way different generations perceive them, is that the center of gravity in the place begins to change as over time that the the the stock picking business, which is still in some ways kind of their their kind of their uh kind of cultural core of the organization, um, but it no longer becomes the um the most recognizable part of the company or the one that is the biggest, the most important part of its future. And so um in in and so you would you could talk to people who are younger, and you're right, they won't know who Peter Lynch is, or even, you know, going back even further, Jerry Sai, or the history and and culture of uh and challenge of picking stocks, but they might they probably know them as their um record keeper for their 401k account, or they have a brokerage account with them, or you know, they've read about or their interest in in cryptocurrencies and the like. And that is all uh you know this part of this evolution that that Fidelity really begins to go through, really going back to the 90s when you have um when these 401k plants become so large and become and and and Fidelity becomes the number one uh provider of that service. And um and that becomes really kind of the flagship of the place.

Entering the Cryptocurrency Realm

SPEAKER_02 11:27

Absolutely. We're talking to Justin Bear, he is the author of House of Fidelity, a brand new book, of course, looking at uh one of the most important, I think, investment management companies, financial firms in the country, still today, even though I'd argue I'd like what you said about their cultural core, because I think in the book, quoted Ned as saying he he hated index funds or something. I mean, and now as I say before to me, it's a bit of a contrast the fact that they have to have both of these things. But you mentioned something else here that suggests that maybe their future is another direction, too, because they they have uh been a fairly early adopter, especially of large firms, of uh cryptocurrency. They have their own crypto ETF FBTC. Um where did does is that an Abigail Johnson thing, or where did the initiative come to sort of get in that business? Where a lot of other major firms have been very careful about wading into uh the risks and rewards of cryptocurrencies?

Abby Johnson's Leadership Journey

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Yeah, and and um even as some of those uh leaders in financial service, mainstream financial services have more recently uh changed their tune a little bit. Um when you go back to when Fidelity started to explore this about 10 years ago, their attitudes were were far different. And they were extremely critical of this as a as a financial product, as an alternative uh system. Um basically they thought it was a waste of time and money, and it would it would end in heartbreak for everyone involved. And you know, I think you with within Fidelity you have to you have to think about where they are at that point in time, right? So Abby Johnson is is is at long less taking over as CEO in 2014 and then as chairman, I think two years later. And that ends up comes at a time where Fidelity has sort of lost its edge a little bit in terms of being um at the forefront of new products. And they um so their their reputation as a as an innovator has sort of taken a hit, and there are a lot of reasons for that. You know, we have this financial crisis, we have some internal um turmoil and uh changes in leadership that that basically lasts for I would say probably close to a decade. And and so then she kicks over and she is sort of very intentional about trying to find ways where they can recapture that. And so crypto comes along in this in this white paper by this guy or or gal named Satoshi is written, and there's a lot of interest in this sort of very small community at first, of what that will look like with Bitcoin and with um digital tokens and currencies and a and a ledger system. And she gets really drawn into this and sees it going a couple different ways. One as you know a record keeper in in so many different facets, you know, that's sort of a core of a lot of their businesses nowadays. Um this kind of technology, you know, in in in certain scenarios, could have posed some sort of existential threat to that. So even just making sure you got ahead of that was was critical. But but I I think she also saw uh lots of potential and and and maybe some use cases for it that would translate um you know not only as a as a as a sort of the ledger system, but even just the the the the currencies themselves. How could we use them? Um how could how what would investors be interested in? And so this begins sort of her deep, deep dive into um into this this whole new world. And um and she sees it through, right? And and and even as you know, Bitcoin and other cryptocurrencies are now infamous for having these sort of massive sell-offs that that come in every every few years, and they write it out and they continue to experiment and then begin to offer a way to to own and trade uh Bitcoin um on their various platforms. And yes, and then be and then and then have and then we're trying, along with a number a moment of other uh financial firms, to get approval from the SEC to launch a um a spot Bitcoin ETF, and then at long last that gets approved, and that's that goes out, and and that has sold sold pretty well. So, yeah, so that's that's I think that rep you know the their interest in in her in is is very much a a personal interest or begins rather as a personal interest of Abby's in and also a feel you know feeling that she had that she needed to um recapture what you know fidelity once was, which was a a firm willing to experiment and try lots of different things and try different ideas that may not may not work, right?

SPEAKER_02 16:45

This isn't your grandfather's fidelity. I I mean again when I you know because like cryptocurrency. I I wonder what, you know, I wonder what Ned and Ted would say about all this, but they I'd be curious to know what the reaction would be.

SPEAKER_00 16:56

Aaron Powell Yeah, I I mean honestly, like I I think they would probably be uh into it. I think both of them had um, you know, lots of off-the-wall ideas uh over the years, um particularly Ned. Um, you know, Ned was uh, you know, I mentioned um selling funds directly to um to consumers. They weren't the first to do that, but you know, they did have this um this innovative money market fund that came out in the 70s um that allowed you to write personal checks off of it. That was a you know, that was very popular, but it was a major pain to get it right, to get the systems right, to be able to do that. Um and um he had this, he had maintained this vast portfolio of different companies in all sorts of industries that that he bought into, you know, starting in in the early 70s when he takes over the place. And some of them were were reviewed as a way to sort of hedge the the the lack of demand for their core uh uh funds, their stock funds during the bear market. But a lot of them were were really just things he was really interested in doing. Like he launched a a at one point he launched a glossy magazine, you know, and so for so Fidelity, this investment firm, had a had a glossy business magazine out at newsstands every every month. And then he bought a tomato farm because he thought that there was this um there was this w hydropon hydroponic system that he could build a better tomato, right? And so so you know, crypto is a is is a a more, I think probably a a you know a couple degrees closer to their core business as a financial product. But you know, um I think both Ted and and and Ned um were willing to try a lot of stuff that that again, a lot of that you may not never hear about again, and you know, eventually they sell it. Um you know, they had a fidelity had a credit card at one point, um, many, many examples where they had um tried um tried new and interesting things.

SPEAKER_02 19:17

All right. I I I guess I missed the tomato part. I'll go back and make sure I pay attention to that the hydroponic but uh tomatoes. Uh we're talking, of course, with uh with Justin Baer of the Wall Street Journal, brand new book out, House of Fidelity. Again, I've read this, I highly recommend it, especially if you're interested in the industry. So you you brought up Abby, so because people she's kind of low-key. I don't even know if the public would even know who Abigail Johnson is, per se. You you she's been running Fidelity for about a decade. Um, but here's the part that I found interesting. Um, not unlike the TV show Succession, you had this kind of weird back and forth thing between her and her dad about whether she was qualified or, you know, and and he was kind of holding his cards close to his chest. But it all worked out. I mean, so was it was this always just a game from your read of somebody who's talked to all these people, or was he really considering at some point maybe selling the company or doing something different rather than having it stay in the family?

Family Dynamics and Leadership Challenges

Conclusion and Future Outlook

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Yes. So this is uh I think all this was um really the result of Fidelity becoming much, much bigger than anyone would have dreamed of when uh Ned's father handed the company off to him back in the early 70s. And so by the time Abby joins and then sort of comes of age and is is moving up the ranks there, this is a vast financial conglomerate that is a leader in a lot of the businesses they operate in. And there are many very successful, uh, ambitious people that are now in the building, right? And so the question about or the assumption that the next generation should run the place is um is far more challenging in that environment than it was when Fidelity was a small had a small office in a you know Gilded Age building in downtown Boston. And um and so it really kind of comes, I I think the the the drama that unfolds really begins with Ned uh wrestling with this idea of what a family off what a family business looks like and uh playing out all the scenarios and um you know not never wanting to sort of one of the you know, this uh part of this story goes back to to even before Ned is and and Abby are born, right? You know, very The Johnsons were part of another family business. There was a dry goods store in uh in downtown Boston. And there was a sense of obligation for the male children of that family that they were going to work at at this place. And so over over a couple generations, that becomes much more of a you know, not a welcome uh obligation, and it becomes a real chore to a point where um uh Edward Johnson II, um, or Ted, his father, hated his job, right, didn't didn't want to do it, realizes um, even though he's working really hard uh in a senior role, that his cousin, who was not working as hard as he was, got, was um entitled to a far bigger share of the company. And so he has this in in when his cousin, he finds this out when his cousin dies um very early on from I think pneumonia. And um so this really um painful uh uh you know revelation that he's toiled away at this place and and was not rewarded evenly. And that sense that he I think imparted on his son and his son imparted on future generations was was that you know don't chase um you know not only do should you not um you know force your children t into this business or into a life that they don't want, but if you're one of the kids, pursue what you love, right? And so um so so as a result, Ned never really pushed any of his kids to pursue this life, although I he obviously was happy that one of his one is vs, and ultimately two of them decided to join the family business. But that's sort of the backdrop. So he is spending uh, you know, as Abby is you know is first on brought on board as an analyst and then as a portfolio manager, and then it has a series of management jobs. Um you know, she is moving up, and he and and now the question of whether she is um is capable and and then the question is if she's ready is you know, he he has you know, at various points is unsure of that. And and and all the while, again, there are very competent executives around him that are running businesses that in a in a traditional sort of public company corporate environment you know might be more realistic as as sort of the next in line to run the place. And so that sort of that all that is happening and um it kind of reaches ahead a little bit when Abby, at that point in the early or maybe yeah early 2000s, she is appointed as as head of this flagship business. So as the mutual fund business, this is where this is where she once worked um as an as a portfolio manager, it's it's where Peter Lynch worked, it's where Will Danoff is now by now one of the big stars, Joel Tillinghast, all of these well-known, very successful portfolio managers. She's running this business. Well, um, you may remember the market and the environment in the early days of the new uh millennium were not great for for the market, for the for the industry. And so she steps into this um this business uh in running this business, you know, the market's selling off. Um they have for the first time really, they have a bunch of uh uh valued portfolio managers that are leaving Fidelity for greener pastures at say hedge funds that were growing at the time. And they're dealing with this um the scandal involving um excessive gift giving by the brokers. And on top of that, she and her father have these disagreements over the direction of the business and what they want to do within the funds, funds arm. But also uh Abby and her siblings are increasingly frustrated that Ned hasn't made it clear what the succession plan is. So all these things are happening, and um there is while there is growing um disenchantment with her role and her leadership of this business. And so eventually um her father removes her from that role. And um at the same time, I think is is is this is sort of the the low point of her her sort of position there and the and the low point in the outlook for her future. He decides that, you know, there have been just to back up for one moment, for for decades at this point, there have been this procession of senior uh leaders at many of the world's biggest banks that have come to Boston and said, Ned, you know, would you consider selling your business? And the answer is always like get get out of here. Like, you know, and there's famous funny story I have where Sandy Weill, who ran at the time it was still Travelers but would become Citigroup, he goes to Boston, he meets with Ned and he says, Hey, you know, hey Ned, you know, would you consider selling your business? And Ned sort of retorted, like, well, would you consider selling yours to me? You know, so it it that was sort of tended to be his attitude. And then we get to this point in 2004, 2005, where Ned is telling um is telling Abby, well, um, I'm gonna take some of these meetings and and and I'm gonna keep, you know, I'm gonna think about this. And um Abby, you know, as I as I get into it, Abby, you know, has to say, well, Dad, you're you're the chairman, so I have to you know, I have to respect that. You know, it's gonna be your call. Um but she makes it known that she doesn't want that to happen under any circumstances that she does he does. And and that then she then becomes uh a bit of an obstacle for that. You know, she is the at the time she is Fidel's largest voting shareholder, she is on the board. Um so there are for for very clear reasons um she can make this more difficult. So it's sort of so getting her out of the picture for those who are very interested in in pursuing a a sale um becomes paramount and and so or or so she feels at the time. And so this leads to this um this showdown um between um Abby and her father and some of the uh lieutenants that he has at the time that uh, as you said, ultimately works out, right? She um she had made it known that she was going to um not uh or withhold her votes for the board, which of course would include her father. Um that it gets interpreted as uh an attempt to remove her her father from the board. There's a counterattack, and the way they do that is they issue a lot more stock that's granted to Ned, so he takes back the role as the biggest shareholder, but they come out of that with Ned promising to create a succession plan, and that's what happens, and one of those one of those uh scenarios is uh is of course Abby um taking over. But it doesn't happen. This is 2005, right? So it doesn't happen for another you know close to a decade. And there are others that that emerge as as maybe or at least believe they might themselves be the successor, and it takes that long for Abby not only to at outlast them, but also to sort of demonstrate um to her father that she has what it takes. And um and so the much of the last part of the book is is just showing what she did and how she how she took on you know uh different roles and and what she took away from those roles that she could apply to running um running the whole f company, but also, you know, where she was successful and how that built um her candidacy to a point where when the time came, she was the only really the only choice.

SPEAKER_02 31:09

Aaron Powell At the end of the day. And I speaking of successful, I hope that this book is successful. I really enjoyed reading it. As I said, for anybody who's an investor, I think it's a great read. For anybody certainly interested in the business, it's fantastic because it gives you such a uh a wonderful backdrop looking at kind of where we how we ended up where we are today. And maybe in a few years we'll talk about Fidelity and see where they are then. House of Fidelity is the book. Justin Baer is the author, of course, he's an editor at the Wall Street Journal as well. And before we let you get away, not only thank you, but uh for any of you listening, if you ever want any other help, ask us questions. We take those all the time or ask for help from an advisor, you simply go to talkingrealmoney.com to do all of that. Thank you for joining us for this special edition of Talking Real Money. I'm Tom Cock. We will talk to you again soon.

SPEAKER_01 31:56

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