Welcome to a very special edition of Talking Real Money. I'm Tom Koch 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 absolutely wonderful preview of a brand new book that's just out about a company that's incredibly important in the financial services industry, that company, of course, being Fidelity. And 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 joining us here 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, 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 American investing. So let's start with that. I mean, because the company does go back 80 years, I think, or something, or pretty close to 80 years. 80 years this next month, in May. Which is any business, 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 led? Sure. We can go back to the early days of sort of post-war period where they really get going. I would say the overall theme is that they have been often at the forefront of bringing various financial services that had once been limited to the few, to the wealthy, to a broader audience, to the middle class. And this starts way back in the 40s with them being one of the early day mutual fund firms up in Boston. And they had been around at that point for about 20 years. But that business really makes its comeback from the crash and begins to grow and generate a lot more interest. And people, regular people begin to discover 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. I would say later, certainly they were significantly at the early days of the emergence of the 401k plan as the it's really the primary retirement account for most most Americans and one that they often would start giving them an opportunity to start saving right as they enter the workforce. Of course, at one point, many of those workers would have had a defined benefit pension. That begins to change as we get into the 80s and 90s. But they were one of the first to really use that initially as a platform for selling mutual funds, but then later as a standalone business that continued to broaden out and include other services. folks would receive through their benefits packages at work. They were not the first retail or if you used to be called discount broker to merge in the 70s. You could look at Charles Schwab and others, but they were a fast follower there. And they very, very quickly, in the years that followed built out their own retail presence. That kind of went hand in hand, I guess, with the decision to start selling funds directly to consumers. There was a period where 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, some fund firms realize that, well, brokers are not going to sell stock funds during this bear market. And so they begin to sell 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 have customer service centers. They have to have people to answer those calls. And so that marks another change. And again, one in which they're part of the movement to democratize a lot of these things to ordinary investors. And another one I'll mention that comes along in the 90s is Ned Johnson, who was the CEO at the time, had wanted to find ways to make it easier for regular individual investors to donate to charity. And so had come up with this scheme that resembled something he had seen happen, I think, in the UK, where ordinary Americans could essentially set up their own foundation through sort of a donor-advised account, which became highly controversial in the philanthropic world at the time when it came out, but ended up being one that's used by many millions of people today. Not only through Fidelity, but many of their competitors. So those are just some examples where, again, the consistent theme was bringing or really broadening access to a lot of these services to middle class Americans. I like what you said, democratize investing. Ah, big leadership there. If you ask me, for example, middle baby boomer generation, et cetera, and you asked me about Fidelity, 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 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. Will Danoff, of course, a Contra who just retired recently who had a tremendous track record. 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 the Spartan funds, they have the zero funds, they have all these other products. But going back to that initial, really where they make it, as I say, with Peter Lynch's performance, et cetera, at Magellan, looking at all of that, what impact does that have on the investor today? I mean, what should people take away from the history of Fidelity that is impactful to how we're investing in today's world? Yeah, I think from a company standpoint, I think it demonstrates how, you know, companies that are wildly successful in one area, there are no guarantees that that business is going to continue growing over the decades. And so what they realized at one point was that the idea of choosing a professional investor to pick stocks or bonds or what have you, that was not 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 the importance of evolving to the time So if you have a business that large and successful but one that maturing you need to think about a time in which that business may not be the growth engine as it once was. And that's something that they, you know, I think like everyone else, they probably resisted That's, you know, that we did have this, you know, in the backdrop during Peter Lynch's glorious run through the 80s, you had this other guy in Jack Bogle who was doing his thing and coming up with this concept in the 70s about or popularizing this concept of the index fund. and being a low-cost product where you didn't have to choose an individual stock picker, the index, 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 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 stock picking business, which is still in some ways kind of 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, of its future. And so, um, and, and, 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 Psy, or the history and culture of, and challenge of picking stocks. But they might, they probably know them as their record keeper for their 401k account, or they have a brokerage account with them, or, you know, they've read about their interest in cryptocurrencies, and the like. And that is all, you know, this part of this evolution that Fidelity really begins to go through, really going back to the 90s when you have, when these 401k plans become so large and become, and Fidelity becomes the number one provider of that service. And that becomes really kind of the flagship of the place. Absolutely. We're talking to Justin Baer. He is the author of House of Fidelity, a brand new book, of course, looking at one of the most important, I think, investment management companies, financial firms in the country still today, even though I like what you said about their cultural core, because I think in the book quoted Ned as saying he hated index funds. And now, as I say, 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 have been a fairly early adopter, especially of large firms, of cryptocurrency. They have their own crypto ETF, FBTC. 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 the risks and rewards of cryptocurrencies. Yeah. And even as some of those leaders in financial service, mainstream financial services, have more recently changed their tune a little bit. When you go back to when Fidelity started to explore this about 10 years ago, their attitudes were far different and they were extremely critical of this as a financial product, as an alternative system. Basically, they thought it was a waste of time and money and it would end in heartbreak for everyone involved. And, you know, I think with infidelity, you have to think about where they are at that point in time, right? So Abby Johnson is at long last taking over as CEO in 2014 and then as chairman, I think, two years later. And that comes at a time where Fidelity has sort of lost its edge a little bit in terms of being at the forefront of new products. And so their reputation as an innovator has sort of taken a hit. And there are a lot of reasons for that. We have this financial crisis. We have some internal turmoil and changes in leadership that basically lasts for, I would say, probably close to a decade. 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 white paper by this guy or gal named Satoshi is written. And there's a lot of interest in this very small community at first of what that will look like with Bitcoin and with digital tokens and currencies and a ledger system. Um, and she gets really drawn into this and sees it, um, you know, in a couple, 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, 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 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 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 and then and then have and then we're trying along with a number a number 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 that has sold sold pretty well so yeah so that's that's i think that rep you know that their interest in her is very much a a personal interest it 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 firm willing to experiment and try lots of different and try different ideas that may not work right This isn your grandfather fidelity I mean again when I you know because like cryptocurrency I wonder what you know I wonder what Ned and Ted would say about all this But I'd be curious to know what the reaction would be. Yeah, I mean, honestly, like I think they would probably be into it. I think both of them had, you know, lots of off-the-wall ideas over the years, particularly NED. You know, NED was, you know, I mentioned selling funds directly to consumers. They weren't the first to do that, but, you know, they did have this innovative money market fund that came out in the 70s 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. And he had this, he had maintained this vast portfolio of different companies in all sorts of industries that he bought into, you know, starting in the early 70s when he takes over the place. And some of them were reviewed as a way to sort of hedge the lack of demand for their core funds, their stock funds during the bear market. But a lot of them were really just things he was really interested in doing. Like he launched a, at one point he launched a glossy magazine, you know. And so Fidelity, this investment firm, had a glossy business magazine out on newsstands every month. And then he bought a tomato farm because he thought that there was this hydroponic system that he could build a better tomato, right? And so, so, you know, crypto is, is, is a more, I think probably a, you know, a couple degrees closer to their core business as a financial product. But, you know, I think both Ted and Ned 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. You know, they had a – Fidelity had a credit card at one point. Many, many, many examples where they had tried new and interesting things. All right. I guess I missed the tomato part. I'll go back and make sure I pay attention to the hydroponic tomatoes. We're talking, of course, 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 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. She's been running Fidelity for about a decade. But here's the part that I found interesting. 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 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 was he really considering at some point maybe selling the company or doing something different rather than having it stay in the family? Yes. So this is, I think all this was really the result of Fidelity becoming much, much bigger than anyone would have dreamed of when 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 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, ambitious people that are now in the building. And so the question about or the assumption that the next generation should run the place is far more challenging in that environment than it was when Fidelity had a small office in a Gilded Age building in downtown Boston. and um and so it really kind of comes i think the the drama that unfolds really begins with ned wrestling with this idea of what a family what a family business looks like and playing out all the scenarios and um you know not never wanting to sort of one of the you know this part of the story goes back to even before Ned and Abby are born, right? The Johnsons were part of another family business. There was a dry goods store in downtown Boston. And there was a sense of obligation for the male children of that family that they were going to work at this place. And And so over a couple generations, that becomes much more of a, you know, not a welcome obligation. And it becomes a real chore to a point where Edward Johnson II, 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 in the 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, very early on from, I think, pneumonia. And so this really painful, you know, revelation that he's toiled away at this place and was not rewarded evenly. And that sense that he, I think, imparted on his son and his son imparted on future generations was that, you know, don't chase, It's, you know, not only should you not, you know, force your children 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, so, so as a result, Ned never really pushed any of his kids to pursue this life. Although he obviously was happy that one of his, one of his V's agree and ultimately two of them decided to join the family business. but that's sort of the backdrop so he is spending 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 then 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 right and and at 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 sort of the next in line to run the place And so that sort of that all that is happening And it kind of reaches ahead a little bit when Abby at that point in the early or maybe early 2000s she is appointed as head of this flagship business So as the mutual fund business, this is where she once worked as a portfolio manager. 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, you may remember the market and the environment in the early days of the new millennium were not great for the market, for the industry. And so she steps into this business, in running this business, you know, the market's selling off. They have, for the first time, really, they have a bunch of valued portfolio managers that are leaving Fidelity for greener pastures, say hedge funds that were growing at the time. And they're dealing with this scandal involving 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 arm. But also 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 there is while there is growing disenchantment with her role and her leadership of this business. And so eventually her father removes her from that role. And 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 the funny story i have were Sandy Weil, who ran, at the time it was still Travelers, but would become Citigroup. He goes to Boston, he meets with Ned and he says, you know, hey Ned, you know, would you consider selling your business? And then sort of retorted like, well, would you consider selling yours to me? That was sort of tended to be his attitude. And then we get to this point in 2004, 2005, where Ned is telling Abby, well, I'm going to take some of these meetings and I'm going to keep you know i'm gonna think about this and um abby you know as i get into 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 going to be your call um but she makes it known that she doesn't want that to happen under any circumstances that she does. And then she then becomes a bit of an obstacle for that. You know, she is at the time she's Fidelity's largest voting shareholder. She is on the board. So there are for very clear reasons, 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 sale, um, becomes paramount and, 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, with 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 not withhold her votes for the board, which of course would include her father. That gets interpreted as an attempt to remove 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 scenarios is, of course, Abby taking over. But it doesn't happen. That's 2005, right? So it doesn't happen for another, you know, close to a decade. And there are others that emerge as maybe, or at least believe they might themselves be the successor. And it takes that long for Abby not only to outlast them, but also to sort of demonstrate to her father that she has what it takes. And so much of the last part of the book is just showing what she did and how she took on, you know, different roles and what she took away from those roles that she could apply to running the whole company, but also where she was successful and how that built her candidacy to a point where when the time came, she was really the only choice. At the end of the day. Yeah. And 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 wonderful backdrop looking at kind of 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 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 Koch. We will talk to you again soon. Thank you. the program is provided as a public service by Appella Wealth, a fee-only registered investment advisor. Please see Appella Wealth ADV Part 2A on our website for information regarding Appella's fees and services. Appella Capital LLC DBA Appella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in the states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Appella does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice. Thanks for listening and please visit talkingrealmoney.com for more information and important disclosure related to performance of any specific index or fund quoted in this podcast. When the lawyers get richer.
