That's a really good question, dt! At last: someone challenging this seemingly unchallengeable conventional wisdom:
Like you, I see no real evidence of Fredo having a "good heart," at least not in the film. Families often take pity on the dumb, or addled, or failed, members of the family by rationalizing their (largely self-inflicted) mistakes and misdeeds--"well, he has a good heart, though..." About the only thing we saw in the novel in Puzo's first description of Fredo: "He was the kind of son parents dream of...still living at home..." Probably he was still living at home, being obedient, etc., because he lacked the brains or initiative to be on his own and make decisions for himself. That's an example of the kind of rationalization I meant.