Fidelity, Once Stodgy and Adrift, Bets on the Reddit Crowd

Today, Ms. Johnson’s 75-year-old company has placed more bets than nearly any other big Wall Street firm on the future of cryptocurrencies and doubled down on other areas powered by individual investors—and the plan appears to be working.

Seven years into her tenure as CEO, Fidelity is more profitable than ever. It oversees $11 trillion in assets. That figure, which includes assets in Fidelity accounts as well as Fidelity funds held by other brokers’ clients, has more than doubled since Ms. Johnson took over. Fidelity’s individual accounts number more than 70 million, up nearly two-thirds since the end of 2014.

Ms. Johnson, 60, has remade Fidelity with a focus on giving a new generation of individual investors what they’re looking for. She spent heavily on expanding its customer-service workforce and building up tech platforms. She lowered fees on products most popular with small investors, in some cases undercutting Fidelity’s rivals.

Her efforts helped Fidelity ride the country’s biggest wave of new investors since the dot-com bubble. In the months after the 2020 pandemic lockdowns, many cooped up and bored Americans discovered stock-market trading. Since March 2020, customers have opened 12.7 million new retail Fidelity accounts.

Their enthusiasm has revived the brokerage industry and, at Fidelity, accelerated a shift away from the actively managed funds that had been the firm’s core business. Fidelity has arrived at a point where its most important assets no longer are star fund managers.

“Most of it was going to happen anyway,” Ms. Johnson said in an interview at Fidelity’s downtown Boston headquarters. “But what changed was people’s sense of how important it was.”

It can’t be known how durable the trading interest spurred by pandemic restrictions will prove, nor how the new generation of investors might respond to a prolonged market slump. Their faith in the markets could be tested this year, with volatile trading and the S&P 500 down more than 9% from its record close Jan. 3.

Many of the new investors are so far paying Fidelity little or no fees on the services they use. Ms. Johnson and her team are betting that some of them will stick with Fidelity for decades, and as they age and their financial needs grow more complicated, will turn to the firm for more-lucrative services such as advice.

Ms. Johnson’s path to chief executive was a winding one, delayed while her father, Edward (Ned) Johnson III, waited until he was 84 to cede his CEO role. The wait encouraged whispers by some Fidelity executives that she wasn’t ready. It wore on her, too.

After rising from analyst to running the asset-management business, Ms. Johnson in 2004 tried to force her father from his top position. The plan fizzled after he learned of it and issued enough stock to dilute his children’s ownership in the family business, people familiar with the matter said.

On Tuesday, Mr. Johnson said, “I’m proud of what we built, and equally proud of what Fidelity has become. The focus has been on our customers from day one, and that holds true today.”

Mr. Johnson removed his daughter as head of the flagship investment-management division in 2005, during a tough stretch for its mutual funds that eroded confidence in her ability to take over the company someday. When he suggested her next role be running Fidelity’s foundation, she balked and raised the possibility of leaving, people familiar with the events said.

Mr. Johnson formed a succession committee, the people said, which would eventually anoint Ms. Johnson as Fidelity’s leader. In the meantime, she took over the business of managing retirement and benefits plans for companies, now known as Fidelity Workplace.

It was there, in exile at Workplace’s offices in Marlborough, Mass., that Ms. Johnson’s—and Fidelity’s—resurgence began.

The division was among the 401(k) industry’s biggest. It was also a mess. “It had gotten to a size where the lack of discipline and appropriate attention to detail was starting to become evident,” Ms. Johnson said.

Executives said Ms. Johnson finished her stint at Fidelity Workplace a few years later with an appreciation of the benefits of scale, of selling rivals’ funds as well as its own, of tech systems with the capacity to handle surges in client activity, and of connecting directly with individual customers.

She rose to president of Fidelity in 2012 and chief executive in 2014. Succeeding her famed father as CEO, Ms. Johnson needed to find her own leadership voice. Several Fidelity executives said they remember leaving meetings with Ms. Johnson not knowing where they stood. She also earned a reputation among other executives for surrounding herself with deputies who wouldn’t challenge her or the status quo.

One such executive was Jack Haley, a Fidelity lifer whom Ms. Johnson valued for his unwavering loyalty and work ethic, but whom others at the firm saw as a gatekeeper. “Our job is not to tell the Johnsons what’s important,” one former manager recalls Mr. Haley, who served as Ms. Johnson’s de facto chief of staff, frequently saying. Mr. Haley, now retired, declined to comment.

Ms. Johnson began to work closely with the head of the sprawling personal-investments business, Kathleen Murphy. Former Fidelity executives say Ms. Murphy’s candor and skills at navigating the bureaucracy helped Ms. Johnson become a more decisive and confident leader.

Former executives also said Ms. Johnson appeared distrustful of some of the flashier executives who held influence with her father. Job candidates heading to interviews with her were cautioned not to wear cuff links, on the theory these might remind her of a certain type of overly confident male executive prevalent on Wall Street.

By the time she took the CEO reins, the actively managed mutual funds for which Fidelity was best known were leaking client money. The firm still had star managers such as Will Danoff and Joel Tillinghast, but too many of its funds were struggling to keep pace with the stock market’s long rally.

Finding her stride, Ms. Johnson pushed out underperforming fund managers and revamped the pay schemes of those who remained. Portfolio managers, long lavished with perks, began to be held accountable for investment performance to a degree they weren’t before.

The stock-picking unit’s problems ran deeper than its investing performance. A spate of allegations of sexual harassment and bullying came to a head in 2017, when the firm pushed out several executives and hired a law firm to review employee behavior. That year, Ms. Johnson moved her office to the 11th floor of Fidelity’s downtown Boston headquarters, where the stock-fund managers reside.

Some analysts at Fidelity had long complained of unfairness in the way the firm evaluated them, with portfolio managers having a big say. In a 2017 meeting with female portfolio managers, Ms. Johnson asked about the way analysts were evaluated, which included a survey. Fund manager Ramona Persaud responded: “This is the same survey we used when you were running the division,” according to a person who witnessed the exchange. Ms. Johnson changed the analyst-performance surveys and ordered executives to undergo management training.

Ms. Johnson revamped the firm’s index funds by slashing fees and in 2016 dumping the “Spartan” name, calling them Fidelity funds instead to eliminate confusion. Fidelity leaves management of most of its index funds to Geode Capital Management Inc., a firm also owned by the Johnsons as well as current and former Fidelity executives. In a pioneering 2018 move, Fidelity unveiled several index funds with zero fees.

To reposition the asset-management business, Ms. Johnson leaned on an old friend, Bart Grenier. During her 2004 bid for power, Mr. Grenier was among her close allies, viewed by other executives as supportive of her campaign. He left the firm after the bid failed.

Months after Ms. Johnson added the title of chairman in 2016, she brought Mr. Grenier back. He ran its international investing business from London and in 2020 returned to Boston to head asset management.

The firm’s actively managed mutual funds still have profit margins far exceeding anything else Fidelity sells, but some of their prominent managers are well into their 60s. Mr. Grenier has sought to build new offerings such as quantitative tools and environmental, social and governance screens for portfolio managers.

Fidelity is launching a fund to invest in private credit, including loans to midsize companies. It raised money for this from other Fidelity funds and is expected eventually to let individuals invest directly. Mr. Grenier said the active-management business produced organic revenue growth in 2020 and 2021.

The pandemic’s awakening of new interest in stock trading in 2020 flooded brokerage firms with orders and strained Fidelity’s systems. Waiting times on calls jumped, and customers complained.

Fearful of missing a chance to nab a new generation of investors, Ms. Johnson assembled business heads to figure out why they couldn’t hire enough associates. Lieutenants offered reasons such as license requirements in certain customer-facing roles and a tight labor market.

“That’s ridiculous,” Ms. Johnson said, according to one person in attendance. “Hire as many people as you can.”

Fidelity embarked on its biggest-ever hiring spree. It ended 2021 with more than 60,000 employees, up about 22% in a year. Of 16,000 people hired last year, nearly 80% will deal with customers, such as at call centers and branch offices.

The hiring, coupled with buyouts of about 3,000 workers in 2017 and 2,000 last year, radically changed the makeup of Fidelity’s workforce. On average, employees now are younger, less-experienced and more diverse in race and gender. While most of the financial-services world has undergone a similar transition, the changes have been jarring inside Fidelity, where 30-year careers weren’t uncommon.

Dozens of longtime employees, on job-posting and company-gossip message boards and in conversations with human resources, have lamented Fidelity’s transformation and complained of what some called its embrace of “wokeness.”

A Fidelity spokeswoman declined to comment. “Fidelity is committed to continually strengthening diversity and inclusivity, in our workplace and our communities,” Ms. Johnson and Wendy John, Fidelity’s head of global diversity and inclusion, wrote in a 2021 letter.

Many on the management team, too, now are younger and more tech-savvy, and fewer came up through Fidelity’s mutual-fund operation. When Ms. Murphy retired as head of personal investments, her successor came from outside— Joanna Rotenberg of BMO Financial Group.

“We needed a senior management team where everybody had a healthy level of experience managing technology,” Ms. Johnson said at the time.

Ms. Johnson was early among mainstream Wall Street executives to take an interest in cryptocurrencies, and began in 2013 to hold Wednesday-evening meetings to discuss crypto and blockchain technology. Two years later, Fidelity started mining bitcoin, mostly as a research project. It later added a link on retail customers’ accounts to Coinbase, the crypto exchange, to track digital-asset holdings.

Fidelity created a business in 2018 to store and trade bitcoin for sophisticated investors such as hedge funds, and in 2020 launched a crypto fund for deep-pocketed customers. It has also filed with regulators to start an ETF that tracks the value of bitcoin. The cryptocurrency, which hit a record $68,991 in November, has since fallen by half.

Ms. Johnson took aim at a collection of unrelated businesses her father, now 91, had acquired. It was weighing down profits, according to Moody’s Investors Service. Former employees said the portfolio was also cutting into the dividends paid to Fidelity’s shareholders: the Johnson family and a group of Fidelity executives and portfolio managers.

Fidelity sold some of these businesses, including a Maine tomato farm. The rest shifted to other Johnson-family entities. The moves made the company’s profits less volatile, Moody’s said.

Fidelity says its operating profit margin was 34% in 2020, up from 20.5% in 2014. A spokeswoman said margins also grew as it added new customers and lowered costs.

Ms. Johnson said she couldn’t predict whether Fidelity would ever be run by someone outside the family. Her brother, a little younger, is CEO of the family’s Pembroke real-estate investing firm. A daughter, who worked at Fidelity as a client-relationship manager, left the company in December.

Would Fidelity ever merge with another financial colossus? No one has raised the idea with her, Ms. Johnson said.

“I want to create a business for the future,” she said. “I want to create a business that will endure, and you can’t know all the answers to that now.”

Write to Justin Baer at justin.baer@wsj.com