Fidelity Investments is an enormous financial services company that might fetch a market value over $150 billion if it were a public company. That would make it bigger than rival firm
Fidelity’s strengths were apparent in its company’s annual earnings report released late Wednesday showing the firm had pretax operating profit of $8 billion in 2022, $10.3 trillion of assets under administration, and $3.9 trillion of discretionary assets including mutual funds.
(ticker SCHW), whose shares are down 0.3% to $80.25 Thursday, has a market value of $150 billion.
Fidelity had more revenue than Schwab last year –$25.2 billion versus $20.8 billion—but lower operating profit compared with Schwab’s $9.4 billion.
As a private company controlled by the Johnson family, Fidelity is willing to make substantial investments to maintain some of its industry-leading positions and has less incentive than public peers to report outsize profit—and pay more in taxes. The founding Johnson family owns 49% of the company and employees own the rest.
Fidelity’s operating profit was down 1% from the prior year. In her annual letter, Fidelity Chairman and CEO Abigail Johnson said that “was an expected and planned development as we made significant increases in hiring and substantial investments in the company’s technology platforms.”
Johnson noted that Fidelity spent $4.2 billion on the company’s technology systems in 2022.
Fidelity reports financial results annually and provides little detail about its earnings including a balance sheet and returns. It doesn’t disclose the price at which it repurchases stock from employees.
“The company had outstanding operating performance in each of its major lines of business—retail brokerage, wealth management, workplace benefits, asset management, and clearing and custody. This unique combination of businesses gives Fidelity the financial and operating stability to deliver resilient business results during both bull and bear markets,” Johnson wrote.
Fidelity’s online brokerage platform had 37.1 million retail accounts at year-end, more than Schwab’s 34 million. Fidelity said its account base grew 11% in 2022 and that 43% of new retail accounts were opened by investors between 18 and 35 years old.
One of Fidelity’s best businesses is its custodial operations in which it oversees 401(k) and other workplace accounts. It had 40.9 million workplace plan participants at the end of 2022, up 8% from 2021.
In the 401(k) business, Fidelity is the No. 1 custodian with about three times the assets of No. 2 Empower Retirement.
Fidelity also is a top asset manager with $3.9 trillion of assets under management including mutual funds at year-end. That total was down 13% in 2022 and likely reflected the bear market in both stocks and bonds. Net asset flows were substantial at $466 billion last year, although that was down 21% from 2021.
Fidelity is believed to be the No. 2 custodian for assets of independent financial advisors behind Schwab. Its total clearing and custody accounts were up 7% last year to 8.2 million.
Fidelity arguably has a better business mix than Schwab, its closest rival, with its huge custodial and asset-management operations. Schwab is reliant on more volatile interest-rate spread revenue which accounted for about half its total revenue last year.
Fidelity doesn’t disclose revenue and profit by division but is far less reliant on spread income than Schwab, which had over $500 billion of interest-earning assets, mostly bonds at year-end. Schwab’s earnings growth of about 20% last year was powered by spread income as it benefited from higher interest rates. Fidelity, unlike rivals, doesn’t operate a bank.
Fidelity likes to highlight such customer-friendly policies as sweeping cash into higher-yielding money-market funds now yielding over 4% against lower-yielding cash-sweep bank accounts at some rivals.
Fidelity’s total employee count rose 18% last year to 68,000.
In her letter, Johnson outlined Fidelity’s strategy, writing that “despite the stock and bond market declines last year, we increased hiring and spending on customer service, technology, and new products. We have followed this contracyclical path multiple times during our long history.”
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