A decline in the number of investors using 401(k) plans, increasing unemployment and an aging population have knocked Fidelity Investments from its slot as the No. 1 mutual fund provider and distributor.
Last 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 gave their perceptions of distributors and mutual funds. The report said Fidelity had fallen to No. 2 behind Charles Schwab Corp. in the Top 10 distributor rankings and No. 2 behind Vanguard among the Top 10 mutual fund companies.
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 Thursday that 40% of Fidelity's mutual fund customers hold their funds through employer-sponsored retirement plans. This is proving a disadvantage to Fidelity if participation in those plans decreases.
In the meantime 30% of rival Vanguard's mutual fund customers invest in its funds through employer-sponsored retirement plans, and 14% of Charles Schwab's mutual fund customers do so.
Rice explained that the proportion of investors holding 401(k) accounts has gone down significantly. As of October, she said, about 59% of investors surveyed held an employer-sponsored retirement account, down from 70% a year earlier.
The population is aging, and those nearer retirement are rolling over their employer-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 are not necessarily working in traditional full-time jobs that offer employer-sponsored plans. In addition, high unemployment is 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 said.
Meanwhile, the report pointed out that, on the distributor side, Fidelity has been hurt by lower awareness of and favorability ratings for its brand, coupled with a significantly lower household penetration. This contrasts with Schwab, which has been able to continue attracting affluent clients and holding 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 shrunk industrywide, hurting overall brand awareness, according to the report. Competitrack, which tracks advertising spending, has reported that in the first nine months of 2009 spending on TV, print, radio, and online advertising tumbled 23%, to $483 million, down from $631 million in the first nine months of 2008.
It is not that Fidelity isn't trying. In March, the company introduced 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 said. It went on to note that Fidelity's ratings on both mid-term and long-term performance had declined considerably in 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 representative 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."