Two years ago, Steven M.H. Wallman launched a frontal assault on the $7 trillion mutual-fund industry. His weapon: "folios," customized baskets of up to 50 stocks that investors could buy in one transaction from his online brokerage, Foliofn Inc. Wallman figured his brainchild would give the diversification of a fund, but with lower costs and more freedom to manage taxes.
But in the face of the bear market, few individuals took to the idea. Now, the pioneer of the anti-fund hopes to make his comeback--in partnership with the fund industry. It has been a wrenching adjustment for Wallman. But if he succeeds in slashing the cost of customized money management--which some fund companies bet he can--the move could be a winner for Wallman and his fund foes alike.
These days, new money comes into the market mainly via funds or financial advisers. So Wallman is repositioning Foliofn to catch that cash. He has landed one deal: Brinker Capital Holdings Inc., a King of Prussia (Pa.) investment consultant overseeing $3 billion, will create folios managed by its 60 independent managers, which it expects will reap $300 million over the next year. Brinker will charge between 1.5% and 2.25% of assets. Three big fund houses--American Century Investments, Navellier & Associates, and one that Foliofn won't name--are also exploring offering folios for clients.
Such deals could put Foliofn, based in Vienna, Va., in what Wallman calls "the sweet spot of financial services"--separately managed accounts. These accounts let investors split their portfolios among managers with different investing styles--growth, small-cap, and so forth--for one fee of up to 3% of assets. Unlike mutual funds, separate accounts let investors manage holdings to minimize taxes. But that flexibility poses huge back-office challenges--which will only get worse if separate accounts keep up their 20% annual growth.
Wallman and his potential partners think folios can be the answer. The firm's technology lets a manager design a model folio and simultaneously trade stocks in a huge number of accounts, while letting investors block unwanted stocks or trades that raise their taxes. Says Navellier managing director Peter Knapp: "Folios are going to become the dominant technology for financial advisers--whether it's Foliofn or something very much like them."
That's a key qualification. Foliofn has had rocky times. Last October, Wallman cut the firm's staff from 200 to about 80. After September 11, "we had to reduce costs," Wallman says, especially in such areas as his ambitious investor-education Web site. The firm still isn't profitable, but the founder says venture firms keep offering him capital, which the shrunken company doesn't need now.
Folios may never revolutionize investing as much as Wallman hoped. And fund executives may gloat to see this vociferous critic joining their ranks. Either way, Wallman figures investors will pay less for a more diverse portfolio--and that's a plus.
By Mike McNamee in Vienna, Va.