Record gains in the stock market and solid performance overall helped Fidelity top $5 billion in operating income for the first time last year. It reported nearly $5.3 billion in operating income, an increase of 53.6 percent from $3.4 billion in 2016.
In a letter to shareholders included in the update, Fidelity Chairman and CEO Abigail Johnson said capital markets were “a significant contributing factor” but that expense management and the firm’s focus on scale and efficiency also helped it achieve that level of profitability.
Fidelity Institutional, the business division that serves as an intermediary for financial firms, also reported strong performance in 2017. Within that division is Fidelity Clearing & Custody Solutions, through which new clients and expanding relationships with existing ones attracted $120 billion in net client asset flows across the registered investment advisor, bank, broker/dealer and family office segments. The Personal Investing division, which reduced discount brokerage commissions for U.S. stock and exchange traded fund trades from $7.95 to $4.95 per trade, and option pricing from $0.75 to $0.65 per contract, finished 2017 up 19.5 percent with a $2.05 trillion assets under administration.
While celebrating the overall performance, Johnson’s letter also acknowledged that money continued to trickle out of Fidelity’s actively managed funds. In 2017, investors pulled $47 billion from Fidelity’s actively managed equity products. On the flip side, $32.1 billion flowed into Fidelity’s index products.
However, other actively managed investment vehicles such as collective investment trusts, separately managed accounts and ETFs performed well last year and offset the stock fund outflow. Non-mutual funds, actively managed assets have increased from $18 billion at the end of 2009 to $124 billion at the end of 2017, according to the shareholder report.
Managed accounts in particular got a shout out in Johnson’s letter for continuing to grow at a good clip, with flows of $37.7 billion last year.
Company wide, operating expenses were up 2.8 percent from 2016 to $12.9 billion, but one-time expenses and higher employee compensation from its Share Plan Expense program lifted it above last year. Excluding those costs, operating expenses would have been lower than in 2016.
Markets aside, Fidelity’s organic growth, which it defines as growth in assets and revenue from new and existing clients, was the highest it has been “in several years.” The company was servicing 29.1 million workplace plan participants (up 5.7 percent), 19.4 million retail client accounts (up 8.7 percent) and 6.7 million institutional clearing and custody accounts (up 4.4 percent) at the end of 2017.
Assets under management finished the year at $2.45 trillion, 15 percent more than 2016’s $2.13 trillion.
In recent months, Fidelity Investments has dismissed two portfolio managers over inappropriate sexual behavior and is taking steps to address the issue. Among the changes, the company created a sexual harassment response committee of Fidelity executives as well as a representative from an outside law firm, and Johnson moved her office to a floor in the headquarters where fund managers and key employees work.