There have been a few major changes at Fidelity Investments in the past month. I mentioned one of them in a previous post -- the changing of the guard at Fidelity Magellan -- but there has been another behind-the-scenes shift involving the Johnson family, which founded and controls the privately held company. These changes have implications for everyone whose money is managed by Fidelity.

Here's the background. Edward C. Johnson III is the chairman and CEO of Fidelity. He owns a 12% stake in the company. From 1995 until recently, his daughter Abigail Johnson controlled nearly 25% of the voting stock, with other family members controlling an additional 12% or so (for a total of 49% of voting stock). Even though she is only in her early 40s, she has been promoted quickly through the ranks, and was until recently President of Fidelity's main money management unit FMRCo.

A 25% stake in the company? President of a key business unit within Fidelity? Naturally, these arrangements led many to believe that Abigail was heir apparent in the Johnson family. But that possibility may no longer be in the offing.

Earlier this year she left the post of President of FMRCo, and "was transferred" (according to the Wall Street Journal) to Fidelity Employer Services Co., which helps big companies administer retirement plans. Instead of working in downtown Boston, Johnson was now working at a distant suburban office park. Johnson was not happy with the move, which led to some friction with her father, according to sources cited by John Hechinger of the Wall Street Journal. She has since sold some of her voting stock to trusts to benefit younger family members.

But behind the almost gossipy tone of the Wall Street Journal articles on this subject, is a nugget of news that I think is far more important to the millions of ordinary customers who own Fidelity mutual funds: Fidelity is changing its domestic stock research unit and oversight of fund managers. That's why Johnson was transferred to a satellite office in the burbs, with no direct control over how fund managers are picked.

Here's my take: Johnson got to her previous position partially through hard work, but mostly through her name. Nothing suprising there -- that's how lots of family businesses are run. But the performance of the money-management unit was lacking, and that forced Fidelity to shift her out to a less-critical job (despite the claims of the company and herself to the contrary). I don't think the intention was to have her remove herself from the heir-apparent position, but like a lot of other family empires in which top son or daughter is taken down a notch (think Lachlan Murdoch) that's what happened at Fidelity.

And I am glad she's been taken down a notch. Nepotism is fact of business life, but in Fidelity's case, when millions of people's money and futures are at stake, merit -- not last names or relationships -- should be the number one determinant of who rises to key positions.

We're already seeing some of the repurcussions of this move. Stephen Jonas, who took over Johnson's old position at FMRCo, has shaken up the poorly performing Magellan and Growth and Income funds, as well as Fidelity Capital Appreciation Fund, Fidelity Export and Multinational Fund, Fidelity Advisor Growth & Income Portfolio, VIP Growth & Income Portfoli, Fidelity Growth & Income II Portfolio, Fidelity Advisor Large Cap Fund, Fidelity Advisor Small Cap Fund, Fidelity Small Cap Independence Fund, and Fidelity Small Cap Retirement Fund (NB: if you owned these before Nov. 1, I would check the updated prospectii and try to research the new managers and their track records as managers of other funds or as analysts).

Jonas has also supposedly changed the old Fidelity system of doing investment research and choosing managers, whereby young analysts are put on a career track to become fund managers down the road. Outside analysts with good track records will be brought into the company, and kept on as analysts, rather than being promoted to fund managers. I say "supposedly" because at least one recent appointment -- Andy Sassine to the management of the newly created Fidelity International Small Cap Opportunities fund -- was made according to the old pattern (Sassine was an analyst before his promotion). It's not clear how future fund appointments will be made, and whether or not Fidelity analysts are forbidden from becoming fund managers.mortgage calculator