| 01 October 2009

Fidelity Labs is an interesting approach to an old problem: how to innovate without alienating your core audience. Google, of course, offers a similar approach with their own labs product. But innovation is something that's expected of them. Fidelity, on the other hand, is a large ship that is slow to turn in the sea of change.

The lab experiments, located in a (clearly stated) segregated site at fidelitylabs.com, attempts to offer a safe-haven for forward-thinking technicians to toy with new, Web-based ideas. Among their stated objectives? "Provide early findings of research to influence strategic planning," and to "showcase technology that supports strategic business objectives." These carefully worded objectives show just how delicate the team must be with their experiements.

Fidelity Investments is a 60-year-old private Boston firm that touts itself as the largest provider of retirement and workplace investing plans and one of the largest providers of low-cost mutual funds in the industry. For decades Peter Lynch, who taught us the simplicity of "invest in what you know," ran the firm's Magellan Fund and served as the indisputable face of the firm forhis unwavering approach to investing.

But for all its stodgy appeal the firm has taken on new life in the last several years as an online broker. The firm recently rolled out an amalgamation of content providers under the "Fidelity Interactive Content Services" umbrella. Just under a year ago the firm was ranked as the #1 online broker by Kiplingers, besting Charles Schwab (SCHW) and Muriel Siebert (SIEB).

So just what is Fidelity Labs? You won't find desktop applications or direct access trading platforms here. No, the genre of the Lab is more about using the Web to experiment with communication, rather than to reinvent the way we think about investing or how we trade. On this page you will find widgets and gadgets that allow you to see the latest market updates on iGoogle, Vista or your iPhone. These are products that should have been released from the bondage of beta long ago. (Text alerts, it appears, have finally graduated from beta and now live in the real world.)

You'll also find podcasts and a media player that offers some high-production interviews with several un-coached Fidelity managers that are, quite frankly, painful to watch. (I'll take Liz Ann Sonder's overly enthusiastic tone any day of the week over these guys.)

Finally, there are these weird, experimental animated movies that are meant, I guess, to explain investing in ways that could not otherwise be done. These things are a mystery to us but we're sure some animator had fun making them. How they "support strategic business objectives" also remains a mystery.

The fact is, none of these things are really new products. In fact, most of them, have been around for a while on the Web and Fidelity seems to be just catching up.

Much of the real development we see lately focuses almost exclusively on the active trader market. Larger firms have long sought active traders. They know that one active trader can yield as much activity as ten lazy big accounts. Or even more. But unlike Fidelity the approach has always been buy rather than build, and segregate on the front end as much as possible.

Schwab hitched their wagon to the AT market early, buying Cybertrader in March 2000. The hyper-active direct-access brokerage funnels a lot of activity, but mostly through a separate platform. TD Ameritrade (AMTD) purchased thinkorswim in June of this year, adding both a desktop and an online application for active traders to the mix and bringing with it about $3.7 billion in new assets and an additional 14,000 trades per day.

Fidelity, on the other hand, preferred to give it a go on their own. They first developed an active trader platform in-house and launched it in 2002. After just two years the firm later caved and bought Wealth Labs in 2004 to supplement their desktop tool sets.

In 2005 Celent predicted that the active trader market would top 350,000 accounts by 2008. Forrester Research, meanwhile, was convinced that the fight for the active trader would lead to zero profits. What neither firm predicted was the growth in online brokerage offerings and rapid development of back-end technology to support it.

Now, smaller brokerage are popping up with ease, building their business on the backs of entirely fungible Web 2.0 architecture. Options House and tradeMONSTER are two such examples who've built their businesses on readily available Adobe (ADBE) Air technology. This allows them to not only get up and running quickly with a desktop application but also to develop an release new tools on a regular basis to keep their clients happy. optionsXpress (OXPS) was quick to udnerstand this phenomenon and rolled out their own Air application in July.

Even as most investors stick with cash and remain somewhat frozen the Wall Street Journal just reported a dramatic rise in trading activity among the most active investors.

It is in the milieu of all this technological innovation and active trader activity that our recent report on the proliferation of mobile trading apps was met with some skepticism. (Which just shows you never can stand in the way of progress.) But our point was a finer one than whether we should have trading apps. They question was not whether these applications should exists, but more about who should have them and why certain companies would release them.

We think Fidelity has to make a choice: either develop applications that really push the envelope and either compete for the active trader market or, whizzy new applications that actually appeal to their core audience of mtuual fund buy-and-holders. Or they need to just give up and keep that focus on those "strategic business objectives."

We're fine with either choice but would love to see the Boston giant throw its weight around a little and show us what can really be done with the right support and a real Labs effort.