high-net-worth customers soon began to demand access to the best funds regardless of source, while regulators came down hard on practices—particularly compensation practices— favoring affiliated funds. At the same time, the availability of information and services on the internet decreased brand loyalty and the dependence of customers on any particular firm.
Fidelity learned this lesson when it started a credit card business that was marketed to its mutual fund customers. But Fidelity’s mutual fund clients always paid their balances on time, so they did not generate any interest income for Fidelity. They also refused to accept credit cards with annual fees. With shortfalls in both interest and fee income, Fidelity eventually sold the business to a commercial bank with a huge volume of credit cards.
All three firms are privately held, which means they are not subject to the short-term pressures from public shareholders to increase quarterly earnings. They each have a different legal structure. Fidelity’s stock is effectively controlled by members of its founding family, whereas Vanguard has a unique legal form: The management firm is owned by the shareholders of the Vanguard mutual funds. Capital Group is a private partnership similar to other professional services firms.
Without an independently determined share price, transferring ownership from one generation of owners to the next, as part of a management succession, is a challenge. In essence, the firm must buy back the shares from the retiring generation and sell them to the incoming generation, often providing financing to the incoming generation to facilitate the transaction. Furthermore, none of these firms have a share currency that could be used to acquire smaller managers, which in part explains why these three firms have grown organically with minimal acquisitions