From fund specialist to cryptocurrency empire — dreaming of a digital financial platform
In 2008, I studied abroad in New York, the financial hub of the United States. The Manhattan that I visited was a totally different world to the Korea that I was used to. By the time I learned my route to school, a green signboard caught my eye. That sign could be seen everywhere in Manhattan. It was the sign for "Fidelity Investments," where Peter Lynch, considered a legend on Wall Street, used to work as a fund manager. Lynch's book "Beating the Street" had a huge effect on my life. The book gave me inspiration on what kind of career I hoped to pursue. I have been working for Korea's largest asset management company for 10 years. Fidelity was not more or less than the company that raised Peter Lynch. It was just one foreign management firm that hopped on the trend of operating funds in 2007. But that is until "Fidelity Digital Assets" was established in October, 2018. Thinking outside the funds Abigail Johnson, chief executive of Fidelity Investments, asked for help from the blockchain community so that it can adopt digital currencies and blockchain technologies during a keynote speech at the world's largest blockchain conference Consensus in 2017. She said there are still obstacles in adopting the technology on its own and urged for cooperation. "You are the community who will drive the future of this technology. I challenge you to start collaborating together — and I don't just mean with people that think like you — we need to be having hard conversations," she said. The total amount of assets Fidelity manages rounds up to some 8,000 trillion won. It is a massive financial group that fits the description: financial empire. That giant announced it will jump into a digital currency market that had only just started. I thought; that company is big but at the same time smart and agile. Anxiety came over me as I watched the speech. It was like a sign showing that the digital asset management market is soon to be opened. Abigail Johnson is the granddaughter of Fidelity's founder Edward C. Johnson II. Fidelity is an unlisted company and management rights pass down the Johnson family. Johnson is the largest shareholder of Fidelity Investment’s mother company and holding unit Fidelity Management & Research. She owns a 25 percent stake. Her personal assets are estimated to be around 20 trillion won. Johnson graduated Harvard with an MBA and started working at Fidelity as a stock market analyst. She then built her career by going around several different departments within the investment company before being inaugurated as chairperson in 2012. From 2014, she also became chief executive officer. Chief editor Jim Lowell of Fidelity's in-house magazine Fidelity Investor compared the Johnson family with China. He said the family always has five year and 10 year plans. Economic paper Forbes selected Abigail Johnson as the fifth most influential female figure in the world in 2018. Giant, but smart and agile Fidelity made roughly 24 trillion won in revenue last year. The company has some 45,000 employees. The assets under management amount to roughly 3,000 trillion won, but considering the assets managed by all Fidelity affiliates, including stock agreements and retirement pensions, the assets managed total roughly 8,000 trillion won. Considering Japan's total fund market is worth some 2,500 trillion won, the company could be called an empire all on its own. It is not only big in size. From 2017, it has been injecting over 3 trillion won into research and development. This means the company is pouring in 3 trillion won every year to developing new technologies though research doesn't directly result in moneymaking. This R&D is led by Fidelity Lab. Fidelity Digital Assets, which was established in October 2018, was actually one of the incubated projects of the Fidelity Lab. Innovation is not created all of a sudden. IBM System/360, which became the basis for all personal computers, was launched in 1964. Fidelity bought the computer just a year after it was released. In 1995, the company created an online homepage only a year after Netscape launched its browser Navigator. It was the first among asset management companies to make an online homepage. It's natural that Fidelity's next challenge is focused on bitcoin and blockchain technology. In February 2014, the company started researching bitcoin and blockchain technology. In 2015, it founded a start-up specializing in digital currency mining. In May that year, it newly established a blockchain incubating program and from November, the company started accepting donations in bitcoin. In June 2016, it built partnerships with academia and industry players. In August 2017, the company interconnected accounts from cryptocurrency exchange Coinbase with the online homepage of Fidelity Investments. In September it accepted donations in Ethereum on top of bitcoin and in October, it founded Fidelity Digital Assets. From zero to negative fees So why is Fidelity trying to lead the digital asset management market? First of all, the traditional asset management market is overly competitive. Millennials, born between 1980 and 2000, and the so-called Z generation, born between the mid-1990s and early 2010, will become major contributors to the economy in several years but as they begin their careers after graduating college they are pressured by massive debts from student loans. Under the government's loose fiscal policy crafted under the cause of boosting the economy, asset prices soared. On top of this, fintech companies that didn't exist before are offering customized financial products for clients. What traditional asset management companies can do against the fierce competition is lower commissions. U.S. asset management companies are already in a fee war. To take the lead in the competition, Fidelity launched zero-fee funds covering the U.S. and international stock market in August 2018. They were two index mutual funds, dubbed the Fidelity Zero series. The strategy is to give up management fees and only earn profits by securities lending. The series of index funds were a huge success from the launch. In just a month, Fidelity attracted roughly $1 billion into the two portfolios. There are no minimum investment requirements as well. Following Fidelity's move, index fund giant Vanguard shot back by lowering management fees and minimum investment requirements on 38 of its index funds. However, the fee war does not end at zero. U.S. Salt Financial applied to offer negative-fee funds to the U.S. Securities and Exchange Commission. Its fund was offered on a -0.05 percent fee. This essentially means the company would have to give extra money to consumers if they decide to hand over their assets for management. Under such competition, laying back and enjoying the glory days of the past and simply meddling with fees could make a company disappear in the near future. Finding a brand new market The basic business model of the asset management business is to gain management fees. If companies can't profit from management fees anymore, they have to venture into a new market where they can. Fidelity is sure that new market will be the digital asset management market. Fidelity Digital Assets announced it will directly offer cryptocurrency brokerage services rather than simply managing cryptocurrency consigned to them by institutional investors. It's because the company can earn high fees while broking cryptocurrencies including bitcoin. The company also showed off its interest in the security token market. Its ultimate goal is to create a security token market and introduce new investment mediums that could replace funds in the long term. Then various types of assets including stocks, bonds and real estate will be tokenized and new tokens that enable people to invest in the tokenized assets will be introduced. I've always explained this type of investment using the term Investment Token. The early model of this type of investment is Facebook's Libra Investment Token. Those owning the token receive part of the profits earned from the Libra Reserve. From another point of view, the token can simply be understood as a fund owning Libra Reserve. But you don't always have to make indirect investments through funds. In the process of tokenizing traditional assets and by investing, broking, consulting and taking consignments of tokens and cryptocurrencies, Fidelity is expecting to find new ways of earning fees. Becoming a digital asset management platform A simple business model of offering one-off financial products is no longer effective. Financial companies must create a platform. How many customers they can lock into their platforms will decide whether it can succeed in the future. Changes in todays' financial world can easily be spotted from JP Morgan's recent moves. The company created JPM Coin to found its own financial platform. Currently, the coin is only used as a payment scheme for financial institutions using JP Morgan's services. But, what is the essence of a platform business? It is to increase the number of users of the platform. To attract more users to the platform, the company will definitely expand the use of the digital coin. Fidelity has a variety of business areas, from asset management, retail brokerage service, consignment service to operating health savings account. It is capable of establishing a financial platform covering various products related to people's lives. To maximize the profit generated from such platforms, the most effective way is to create its own payment medium. That is why giant financial companies dropped out of Facebook's Libra project. From that perspective, there is a possibility that Fidelity too will introduce its own cryptocurrency. What will be the outcome of the bold moves by Abigail Johnson toward the digital asset management market? One clear thing is that time is ticking. Lee Yong-jae, author of the book "Next Money"