Fidelity: Making Your Money Work Harder for You
Written: Apr 24 '07 (Updated May 08 '07)
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Pros: Best Index Funds, Easy Interface, Large and Stable Company, Variety of Services, Low Fees
Cons: Minimize their strengths by steering you into some pricier and inferior investment vehicles.
The Bottom Line: You can do great with Fidelity; they have some of the best stock index mutual funds around but tend to encourage investors into their overpriced actively managed brethren instead.
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| bettega's Full Review: Fidelity Investments |
Fidelity is an investment company that runs a plethora of money management services from brokerage accounts, insurance, mutual funds and other devices that by their own admission will "make your money work harder for you". As a matter of fact, so ample is their scope that they are the largest investment company in the world with over one trillion dollars under their umbrella.
They have very successfully been helping people from little Joe Schmoes with IRA's all the way to large institutional corporations make money with their money since 1946 when the Johnson family of Boston Massachussets founded it. There are numerous headquarters sprinkled through the northeast though Fidelity has enjoyed success in reaching small businesses or individuals for their retirement accounts because more than any other investment company they open small offices in places such as shopping malls where you can speak 1 on 1 with a live person about your investments.
Fidelity currently employs over 30,000 people in its various arms of the investment corporation alone in addition to having ownership stake in other companies across the world as a means to diversify and expand as much as possible. This is good because they are not going anywhere with your money. If the company went bankrupt, so would much of America and this kind of size helps them buy not only stability, but also economy of scale.
Fidelity: Investment Philosophy
Fidelity has prided itself on trying to outperform the market with some of the best money managers around. The Fidelity philosophy involved active management of funds by some of the best and brightest financial minds such as Peter Lynch of Magellan fame and more recently the Contrafund's Will Danoff. Certainly these and many other financial geniuses that Fidelity employs have produced market scorching returns in the past. The corporate culture certainly encouraged them as managers try to grab the hottest stocks. This philosophy worked well in the bull markets of the 1980's and 1990's that were recovering from the depressed valuations of the 1970's. A rising tide will float all boats and the brightest star in the brilliant markets of decades past was certainly Fidelity.
However, that rate of appreciation and rate of returns is completely unsustainable for the long term as evidenced by some recent inflation and the bleak bear market of 2000-2002. When the market does well, Fidelity funds do amazing. When the market tanks, Fidelity funds scrape the bottom of the barrel so it's quite a roller coaster ride with their actively managed funds. What further compounds this volatility is a culture that encourages active trading which drives up costs with lots of brokerage fees. Did you know that the little guy paying 7-10 dollars a trade on average gets a much better deal than the big players who trade millions of shares, and yet this cost gets passed to the little guy who invests in the fund! Being a rarity for a Fidelity fund to hold a stock more than a few years, many of their funds' seemingly excellent returns get whittled down by excessive capital gains taxes. The end result is that their actively managed funds aren't neccessarily outlandishly expensive compared to some, but as good as they appear they end up trailing their index benchmarks given enough time.
Another piece of corporate culture that has been disappointing is that effective managers who do manage to beat the market tend to be rotated from fund to fund so that it's difficult to interpret a fund's record with the frequent changes in leadership that they are prone to undergo. Each manager also is paid according to how much money he or she is managing in their alloted funds, which encourages them to keep funds open longer than they should be. This asset bloat was a big concern in their former darling Magellan and has reared its ugly head in their more recent star the Contrafund. What this means is that as the asset loads increase, it becomes more difficult to beat the market because it's just too much money to maneuver. Instead of the manager being able to invest in whatever stock he or she wants, they are forced to invest in an ever increasing number of stocks which tends to make the fund perform more like its index benchmark. With every share being bought or sold affecting the price, some of these huge funds trying to maneuver make the impact of a splashing hippopotamus on stock prices, and with the frequent trading they perform this makes it difficult to actively manage the fund as they initially wanted to.
Still, with the recent bear market showcasing the impossibility of beating the market and the importance of low fees in helping boost returns, Fidelity has successfully slashed their expenses across the board. Not only have they slashed yearly expenses for their index offerings to the lowest in the market, but their trading fees as wel as expense ratios of actively managed funds have fallen as well. Every year you have your money in a fund, you have to pay them back a certain percent of your money whether it goes up or down. The bigger this cut tends to be, the less you the investor get to keep which negatively affects your returns over time. Fidelity has made strides to decrease costs across the board which means you the investor get to keep more of your money. They have even outdone the very inventors of index funds, the not for profit Vanguard group which for years touted themselves as being the cheapest to own but in some cases is no longer. Overall Vanguard may still be cheaper as a whole, but what's important is that Fidelity has appropriately reacted to the reality of the competition and beat the most streamlined group at their own game in more than a few comparable products.
What Fidelity Has to Offer
Fidelity, according to its slogan, helps you to make your money work harder for you than just gathering dust in some sissy bank account. They are very diversified and if you can think of some legitimate way to do something with your money, Fidelity likely will have a solution for you.
Retirement Accounts Tax deferred 401k's, 403b's, IRA's, all Roth or not are all to be had here. These devices allow you to put money into the respective account up to a maximum limit. The difference between these accounts is whether or not your company sponsors them or whether it's an individual one. All the money you deposit into these accounts is tax deductible off your gross earnings for that year although there are limits based on age. From there you can invest it in a variety of vehicles that is determined by your employer and the funds available. The IRA behaves like an open brokerage account which will be described in the next section except that it is tax free.
Brokerage Accounts : You can open a taxable brokerage account from where you can buy a large variety of equities. Your money starts off in the Fidelity cash reserves which is a money market fund whose interest rate is a little less than the competitors, but you don't have to pay any charges, money market expense ratio or other fees. From here you can purchase just about any financial vehicle of your fancy from CD's to individual bonds to stocks, options, futures, ETF's and a wide variety of mutual funds. Fidelity not only offers an excellent number of funds covering most needs but also offers an "NTF" (no transaction fee) service where you don't have to pay money to buy someone else's mutual funds. Fidelity's own investment products will be discussed in a later section. Stock trades (this includes ETF's) are 7.95 each which is a reasonable brokerage fee.
Annuities and Profit Sharing If you have money to invest over and above your tax free retirement accounts, you can open additional investments where you defer taxes until you start to withdraw from it as income after you retire. You can also use this feature to set up annuities with Fidelity where you can arrange it to your heart's content where you will give them a lump sum of money and they can give you a guaranteed fixed stream of income every year you live. If you expect to live a very long time, a variable annuity might be the best thing to sock your money into. Otherwise, continuing the profit sharing and expanding your 401K to roll over into a brokerage account that you can keep managing might be better.
Insurance Fidelity offers life insurance policies that are competitive with market rates, just be prepared to sign off even your first great-grandchild's medical record.
College Plans/529 : The 529 is a nifty plan indeed. You can give money to just about anyone through this plan and as long as it gets spent for educational purposes, it can grow, be withdrawn and equities can be sold without any taxes. It's also a good way for individuals of high wealth to pass off money without paying inheritance taxes because the account itself is freely transferrable to anyone of blood relation in the family. Therefore, if you open an account for the eldest child and money is still left over, you can transfer it to a sibling etc. You can even open an account in your name and use it to finance your retirement many years from now by taking a 1 year tour of Tuscany as long as you have receipts to proove that you attended wine-making school, art classes and other educational activities.
Financial Advice : You can get varying degrees of financial advice. Reading about investing on the website leaves you desiring for more as the educational materials though very easy to understand are very skimpy. For a fee which is waived if your account exceeds a certain total, you can actually get someone to go over your investments with you and recommend an appropriate course of action depending on what you have in mind for the future. In order to get a proper consultation, you have to fill out a survey that asks about your goals, retirement plans, possible future expenses. The website itself is very good at showing you "best case", "worst case" and "average" scenarios to aid the investor in establishing proper retirment goals. This is a very educational thing for people, especially young people because you will be challenged into seeing how not getting that cup of Starbucks' Latte every day for four dollars will add up to about 1000 dollars a year which compounded over a lifetime of investing can grow into an obscenely large sum.
A Critique of Fidelity Funds
Some investors prefer to purchase their own stocks, bonds or other vehicles and in that case most brokerage fees will be similar and most investment companies won't be that different. I will go into detail to describe the highlights of the funds Fidelity has to offer in their respective categories as fidelity not only has more than a few ripoffs you should steer clear of but also the best funds out there:
Index Funds, The Spartan Family: Fidelity does have the cheapest index funds around. They are known as the Fidelity Spartan funds and all have expense ratios of only 0.1% for the investor shares or if you have over 100,000 dollars to invest, cost a paltry 0.07% per year for the Advantage shares in the stock department while their Spartan bond funds cost 0.2% per year for the investor shares and 0.1% for the advantage share that can be entered into with that same threshold of $100,000. No funds are cheaper than this, not the miserly ETF's nor even the value oriented Vanguard.
Because of this I highly recommended their index funds. Actually, they are the only Fidelity funds that I would recommend from them as their actively managed funds, though costing less than the industry average, still can't compete for long term returns because of the drag imposed by higher pricetags. This holds true for all investment companies actually, but as long as the index is properly tracked, the best predictor of long term returns is cost and Fidelity wins out against all the competition. I will provide a list of these funds with a brief description and their symbols, the second designation being the cheaper advantage shares for higher volume investors:
FSTMX/FSTVX: This is the best stock mutual fund in the world bar none. It is a total US stock market fund that follows a composite index that is made up of every single stock in the USA. Giving you access to all companies of all market capitalizations, when it comes to stock investing you can't get more diversified than this. You can never guess which sector is going to turn hot, but with this fund holding the majority of your dollars you can be sure that you will be able to reap in the returns of every market sector. Again, being a volatile equity fund, it can go up and down quite a bit with certain years posting gains of 20-30% or losses in the 10-20% range or more. Patient investors with long time horizons have always been rewarded when investing in stocks, and if held for the long term, say 10-20 years or more you can expect an annualized gain of about 10-11% on average. Most highly very recommended as the core of your portfolio for just about anyone, though how much you allocate should depend on your age and investment horizon. Like all the other stock funds, it won't make much income for you, but even so if you're already retired a lot of people are living longer so even then a foothold in this fund can give you a fighting chance against inflation over the long term.
FSMKX/FSMAX: This index fund mirrors the S&P 500 index which until recently was thought of as a good indicator of the US stock market. Some people might like this index more because it focuses only on the largest, most stable companies and over the long haul, as with any large capitalization stocks, you can expect some volatility with an annual return of about 10-10.5% on your principal. The only problem is that you miss out on some of the higher growth of smaller companies, to which you can add their extended market index. That said, the S&P 500 is a powerful force indeed. Although this mighty index took a big hit in the recent bear market, the average investor in the last 20 years made only 6000 dollars on every 10,000 invested while this ever talked about benchmark more than quadrupled in the same time span.
FSEMX/FSEVX: This is the Spartan extended market index meaning that it covers the stocks of smaller companies, mirroring the returns of the Wilshire 4500 which is a more broad index that covers small cap stocks like the S&P 600 or the Russell 2000. Risk and reward are always related. Smaller companies that are not yet established are riskier by nature but also allow for better opportunities for growth. If you hold small capitalization stocks long enough, you can expect a yearly appreciation of about 12% although the ride will be far more bumpy with plenty of stomach churning ups and downs. Lately small cap stocks have done better than their larger brethren and this run is getting a bit long in the tooth. Those who stay the course over many decades can still be hansomely rewarded by the higher growth potential, especially if this fund is used to help support and juice the returns over a long time span of other funds like the above two. One big caveat is that this fund is poorly tax efficient. Small companies are either going belly up or expanding to be larger ones all the time. When a company no longer meets the criteria for the mirrorred index, this fund has to sell it and given how topsy turvy this market sector can be, it creates for a lot of buying and selling even for an index fund. There are small cap funds that are created to be tax efficient like Vanguard's Tax Managed Small Cap (VTMSX), but this isn't one of them, so I can only recommend it for a tax sheltered account like an IRA or a 401k. It's not a bad idea to keep small cap funds in that type of account because their greater volatility will also mean more frequent rebalancing. There will come a time when you want to take advantage of that huge growth, sell off the shares and put it into income producing investments, and a tax sheltered account like an IRA helps you do that without paying excessive taxes.
FSIIX/FSIVX: This is the Spartan International index fund. It covers a good swath of stocks of developed countries in Europe and Asia (mostly UK, Japan, Germany, France and Switzerland), allowing investors to hedge their bets should the USA and/or the dollar not perform as well as expected. There are additional risks to investing in foreign indexes; currency exchange rates and political events make it a more volatile proposition but because of the diversification such equities provide, it is recommended that most investors have at least some international holdings in their portfolio. This fund is an excellent means to that end. The only problem with this fund is that it lacks exposure to emerging markets. That's not neccessarily a bad thing; risk and rewards are related. Though emerging markets can give some of the most amazing returns imaginable, they also tend to lose money almost as many years as they make it. Overall the picture is one of strong long term gains, but you really have to ride out the rough spots and not let your focus be lost. If you really want emerging markets exposure and have that kind of risk tolerance as well as a long investment horizon, I suggest perhaps putting 3-5% of your investable assets in VWO, which is an ETF of Vanguard for Diversified Emerging Markets. It has a very low expense ratio and unlike many actively managed emerging markets funds which are horrendously tax inefficient, generates few distributions so you can even keep it in a taxable account. This combination will give you a diversified, low cost broad exposure to the international scene.
Bond Funds Should you wish to park your money in a less volatile security that can generate income, Fidelity has some excellent bond index funds as well. The biggest problem with bonds is that unless interest rates fall and the value of the bond of that said interest rate becomes more desirable, the only way it can increase in value is through the interest. Essentially you lend a certain amount of money to an entity in exchange for the interest plus your principal at an agreed rate or repayment. Currently, you can expect interest in the 5-6% range depending on what bonds you're buying. Keep in mind that at the end of every year, you have to pay taxes on that as if it were income, so it is difficult for bonds to keep up with the 4% per year that currencty loses its value called inflation. Fidelity has municipal bond funds as well where they invest in state and local bonds whereby the interest isn't taxable, but most of those interest rates don't even approach 4% so you really do get whacked with inflation. You should probably consult with a financial advisor if you're not sure whether bonds are for you or not, but a good rule of thumb is that they are not very practcical unless you have less than ten years to your financial goal.
Still, all things considered Fidelity has some attractive options regarding bond investment. Because bonds have lower returns over time than stocks, the expense ratio of the bond funds is even more critical in predicting your returns.
Fidelity offers both actively managed as well as index bond funds all of which have low costs. You can index short, medium or long term bonds or just go with the total US bond market index the latter of which is the recommended approach. Otherwise, you can go with their actively managed municipal funds, sector bonds such as low credit quality (otherwise known as junk) bonds or emerging markets debt etc. Most of these funds are valid options, however Vanguard has recently undercut Fidelity with their new bond ETF's out just this month. With expense ratios of 0.08% per year, if you are about to retire and looking to move stock holdings into bonds from where they can generate more income, you are probably better off converting your 401 or 403 account into an IRA brokerage account and putting the lump sum into a Vanguard bond ETF such as the total bond market ETF known as BND.
Actively Managed Stock Funds: It's not that I don't like Fidelity's actively managed mutual funds. Actually, they have lower operating expenses than the industry average but despite this they still will leave you underperforming the market over the long term when all costs are put into play. I don't like any actively managed funds because they nickel and dime the investor away from returns that could serve them better over the long term, so I am not singling out Fidelity. Don't believe that you can indefinitely beat the market by entrusting your money to these active managers.... just stay away and index your money because Fidelity has the best index funds around.
Advisor Funds: These are special, low volume mutual funds run by the best and brightest of Fidelity. Not only are the fees some of the highest in Fidelity which is inexcusable given the large minimums that some of these funds propose, but they also charge you a load. Yes, that's right, you have to pay them for the privilege of giving them your money. This is while over the next few decades you will watch those costs erode your earnings and the cheaper, seemingly plain index funds will beat you out every time. My stay away message here is very strong, so I want to make sure that even if you are privileged enough to access some of these funds that you use the Spartan Advantage share classes for their index funds discussed above instead.
Freedom/Retirement Life Cycle Funds: This was a great idea that was originally invented by T. Rowe Price a few years ago. Essentially, these funds were designed to be held in tax free accounts like 401k's and you just park your money there while the company automatically takes care of everything. All the funds have a name such as Fidelity Freedom 2045 with the last number corresponding to the year in which you plan on retiring. Depending on how far you are from retirement, the fund will invest in more stock. The closer you get to retirement it will grow more conservative and put the money in bonds or cash instruments instead. After retirement they go into the default "income" mode where they use an income generating asset allocation to maximize interest and minimize volatility.
Though this type of fund seems easy, freeing you from the concerns of asset allocation, it is another ripoff, especially considering what Fidelity has to offer. First off, these funds are actually funds of funds; they invest the money in other Fidelity funds, sometimes very many of them. All the funds are actively managed; let's erroneously assume for a moment that you have a chance of beating the market. When invested in so many different funds comprising of thousands of stocks, the fund gets so spread out over the whole market that it will behave exactly like an index fund. That's good, because you want to ride the market for what it can deliver, otherwise known as diversification, except that you will never be able to beat the market like that. What's more is that to hold a basket of thousands of stocks easily accessible through their Spartan index funds for 1/10th the cost, you are paying almost 1% of your money per year. If you have 100,000 in your 401k (what you would have after about 10 years of generous contributions, the max at which is 15,000 per year if you're under 50), it would cost you 10,000 dollars over just those ten years (1,000 dollars per year), not counting how much that extra money could have appreciated in value had it stayed invested instead of going to pay for those fees. It's wrong, plain wrong. If you are totally panicked about asset allocation and don't know the difference between cash, stock or bond, Fidelity is taking advantage of that uncertainty. Certainly it's better to have your money here than losing value to inflation in some bank account for fear of not knowing what to do, but far, far better options are available. Not all life cycle funds are like this. Vanguard offers the samy type of package that invests in their own indexes and charge far more reasonable fees but Fidelity's setup is a total ripoff.
There is also another teensy problem with the Freedom fund design in that that most of their stock allocation is in the growth sector of the market which creates for more volatility instead of a more balanced approach covering all the bases. They also have very little small cap exposure, which kind of negates the "aggressive" approach the ones for younger people are supposed to take.
Customer Service
One last area for which I would like to comment is Fidelity's customer service. They have been OK. Sometimes the people are very helpful, sometimes they are less helpful, but they give it a nice go most of the time. Their attitude is good, though sometimes it takes a very long time for them to answer the phone with exceedingly long waiting times which can take up to a whole hour.
Conclusions
Fidelity is a solid money managing company. It offers lots of great services of all shapes and sizes for all sorts of people ranging from young folks just getting started for retirement planning all the way to retirees. Whether you have a few thousand or a few hundred million dollars, provided that you use your head and formulate a good asset allocation, it's hard to go wrong with Fidelity. They have taken many steps to remain competitive and in numerous cases come out on top, but overall the whole concept of proper asset allocation, long term gains through indexing and a balanced portfolio are more encouraged by their competitor Vanguard.
Fidelity is one of the best investment companies around but as a whole despite being superior where it counts in terms of costs (by only a few basis points, but still), I feel Vanguard has more options and makes more sense from a philosophical point of view. A knowledgeable, savvy investor could do very well with both, but unlike Vanguard Fidelity simply doesn't know how to exploit its biggest advantages to the benefit of its investor. I would certainly subtract a star because Fidelity still tries to aggressively market funds that cost too much and minimizes its stellar index funds. They have something so good, why make it such a closely guarded secret?
With these caveats in mind, I would heartily recommend Fidelity to anyone. Just be careful which funds you buy into and if you will be doing a 401k, make sure you are assertive about asking to include their Spartan index funds into it.
If you would like to know more about the concept of index funds and how to make the most money possible from the stock market over the long term, read A Random Walk Down Wall Street.
Happy Investing!!!!
Recommended:
Yes
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bettega
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Reviews written: 89
Trusted by: 139 members
About Me:
On prolonged, possibly permanent hiatus. Ciao to all my Eps friends!
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