Two Giants Square Off
Fidelity and Vanguard are bigger than ever since the fund scandals
The company that is synonymous with buy-and-hold investing also recently expanded on a new type of investment vehicle. These shares, known as VIPERs (Vanguard Index Participation Equity Receipts), allow investors to buy and sell shares of 16 Vanguard index funds that track a variety of markets (large-cap stocks, small-cap stocks, the basic-materials sector, technology, healthcare, and so on) and trade on the American Stock Exchange.
VIPERs should allow Vanguard to appeal to a broader audience. For instance, active investors, who have largely been shut out of Vanguard in the past, may be drawn to these products because they can buy and sell the exchange-traded shares throughout the day, instead of just once a day, which is the case with most traditional funds.
Moreover, because these shares are purchased through a brokerage account and do not require a Vanguard account, a greater number of institutional investors and financial advisers can do business with Vanguard.
On the opposite end of the spectrum, Vanguard is offering a one-stop approach to retirement investing, with a new set of so-called Target Retirement funds. These investments are balanced portfolios that invest in a mix of stock and bond funds. As the investor ages, the fund automatically rebalances and rejiggers the investments to become gradually more conservative. Fidelity runs a similar set of portfolios. "What Vanguard seems to be heading for is becoming a financial supermarket that can meet not everybody's needs, but the vast majority of investors' and savers' needs," says Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter.
Fidelity is already there. In addition to mutual funds, Fidelity has a highly regarded brokerage that competes with the likes of Merrill Lynch and E*Trade and has been successful at attracting IRA rollover accounts.
Perhaps Fidelity's biggest weapon in asset gathering is its lead role in the 401(k) business. At the end of last year, Fidelity oversaw $277 billion in 401(k) and similar retirement plans, spread out among more than 10,000 companies and more than 8 million plan participants. That makes Fidelity by far the biggest player in this market.
In addition to also offering traditional pension management services, Fidelity has become a big player in employee benefits services for corporate America. Earlier this month, Bank of America became the latest company to hire Fidelity to handle its human resources administration, payroll, and employee benefits for 250,000 employees and retirees. Overall, Fidelity oversees human resources programs, payroll functions, employee benefits programs, and stock plan services for 17 million U.S. workers.
The strategy is simple: Fidelity is not only in position to become the first fund firm young workers build relationships with through 401(k)'s but can build on those relationships as employees get their paychecks, earn raises, select their health insurance plans, and utilize other benefits programs.
"As baby boomers are approaching retirement, we're devoting a lot of resources to getting ready for that," says Fidelity Vice Chairman Bob Reynolds. Later this year, Fidelity is expected to announce new financial advisory programs that will appeal to boomers nearing retirement.
This strategy should ensure that Fidelity retains its dominance in the industry, analysts say, at least in the next generation. The same goes for Vanguard, thanks to the near-religious fervor with which Vanguard die-hards worship that company and its low fees. "These giants have huge momentum going forward," says Merriman.
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