Fidelity Worldwide scouts beyond the boomers for business

Fidelity's Hugh Mullan has an unwelcome message for the investment industry: our profitability is going to fall and so will yours.

Mr Mullan, UK managing director for Fidelity Worldwide Investment, is grappling with the consequences of a wrenching transformation in his home market.

The Retail Distribution Review has banned financial advisers from receiving commission from asset managers to sell their products, while the process of automatically enrolling most workers into pension funds is reshaping the retirement market. Meanwhile, the client base for Fidelity Worldwide's traditional fund business is ageing amid a dearth of new investors.

According to Mr Mullan this will have an impact on the bottom line, not just of Fidelity but also that of the industry at large.

"[The industry] used to be about wholesale markets and big fat margins, and as a big business we were doing very well. Now it has changed a lot," says Mr Mullan, a former British army officer and executive at Schroders and Barclays Wealth.

"[Our] profitability will fall. We are a private company, we will increase our investment in the UK. To a degree that will decrease our profitability for the next two to three years. This is such a sea change, we have to position ourselves for the new market."

And Mr Mullan believes the changes under way in the UK are a precursor of what will be seen elsewhere. The Netherlands, Denmark, Australia and Switzerland are among those also implementing a crackdown on inducements to fund distributors, or considering doing so.

"I think there is a degree of complacency around the world. Those [asset managers] that do not have access to market will find it difficult to maintain high margins," he says.

"I think a lot of what we do in the UK will spread across the world. Regulators are looking at asset management being a very profitable business, and the reason why that is.

"I'm pretty sure [the industry] is going to be less profitable," adds Mr Mullan, who says fees are "very high" in some European countries with captive distribution models. In the US, a much more competitive market, both revenues and costs as a proportion of assets under management are significantly lower.

Fidelity Worldwide remains a nicely profitable business. Pre-tax profits for privately held FIL Holdings, the UK holding company, jumped 69 per cent to £30.6m in the year to June 2012, the most recent period for which figures are available, despite turnover dipping 6.4 per cent to £677m.

Nevertheless, Mr Mullan says the company's unusual spread across four business areas; retail asset management, "personal investing" (direct to consumer such as individual savings accounts), defined contribution pensions and a fund platform (Fidelity FundsNetwork) present it with a wide-ranging mix of challenges and insights into the changing nature of the industry.

He says of FundsNetwork that "it's pretty hard to make substantial profits out of a standalone third-party platform".

However, Mr Mullan foresees "an increased pool of products" in the direct-to-consumer arena, as industry-wide profits from wholesaling of funds decline. This belief has prompted Fidelity to ratchet up its investment in the platform to counter the threat from a swath of newcomers.

He also says servicing money purchase defined contribution pensions, the type offered by the UK's auto-enrolment initiative, "does not make material profits and it won't for some time to come, but we think in the long run it will".

Fidelity's response is to target larger companies with a "decent salary level", rather than poorer-paying supermarkets or security companies. It claims a 16-17 per cent market share in this segment, and believes it can double its roster of 300,000 customers within five years as auto-enrolment is expanded to more employers.

"Generally the wealthy are more profitable clients for a business. The smaller retail clients probably are not profitable," he says.

Fidelity Worldwide also intends to ape its US namesake - a legally separate entity, albeit with the same single largest shareholder, the founding Johnson family - by offering other financial products, such as Isas, on its DC platform.

Like others, Fidelity has thus far found a very low opt-out rate among workers auto-enrolled into pension schemes, of around 9-10 per cent. Intriguingly, though, it has found the highest dropout rate among higher-earning workers, who are more likely to have self-invested personal pensions (Sipps) or to have fully utilised their tax-free allowance.

The DC platform is a key element of Fidelity Worldwide's broader plan "to move from being an investment business to a retirement business".

"Most [investment] vehicles are accumulation only at the moment, but people will need to withdraw money in retirement," says Mr Mullan, who points out that an investment house such as Fidelity loses all the assets in a pension vehicle if it is used to buy an annuity from an insurance company.

To combat this threat, Fidelity is developing a pre-retirement bond that will use derivatives to remove the interest rate risk from an annuity purchase and lock in greater certainty for a saver.

"Our average client is in his fifties. Unless we do something to retain these assets, any accumulation investment business will see these assets fall quickly as the baby boomers head into retirement," Mr Mullan says.

"We haven't had the young investors coming on to replace [the boomers]. We need to attract young savers otherwise we won't have a business. It's the same for all the industry.

"We have to broaden out what we offer and make ourselves a very attractive place to do business. We think we have a strong brand."

The experiences of Fidelity's FundsNetwork also offer food for thought for active fund managers in the post-RDR era. Mr Mullan reports that passive funds have increased their market share to 10 per cent, a figure he expects to rise further.

Nevertheless, he points out that, in the post-RDR "unbundled" pricing world, the annual management charge of the typical equity fund has halved to around 75 basis points, narrowing the premium to passive funds (at around 30bp) and allowing more active funds to outperform their passive comparator.

Mr Mullan sees other benefits from RDR as well, with certain (often high-cost) products no longer enjoying the sales they once did.

"The whole unit-linked insurance market is basically in run-off now. That is a positive consequence," he says.

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Curriculum vitae

Hugh Mullan

Born 1962

Education

1982 Royal Military Academy, Sandhurst

1987 Applied science degree, Cranfield University

Career

1982 Officer, Royal Signals

1993 Global cash management, Citigroup

1997 Managing director, UK retail, and chief operating officer for global distribution, Schroders

2004 Global head of operations, COO investment and product office, Barclays Wealth

2008 COO Europe, Fidelity Worldwide Investment

2012 Managing director UK, Fidelity WI

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Fidelity Worldwide Investment

Established 1969

Assets under management $243.4bn, with $62.1bn under administration, as at June 30

Number of employees More than 6,000

Offices In 24 countries

Ownership Private company. The founding Johnson family is the largest shareholder, with a minority stake

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