Mutual Funds Hear the Rumble of the Net

SAN FRANCISCO (03/03/2000) - On Thursday, the mutual fund industry heard the mighty Internet rumble a little closer.

With the launch of Folio;investing, the peculiarly named product from Vienna, Virginia-based startup Folio, individuals will be able to create and manage their own mutual funds online. This is the first of several new financial-services products to be unveiled during the coming year by Foliofn, which was founded in 1998 by Steven Wallman, formerly a commissioner for the Securities and Exchange Commission.

The Net had already begun to influence the mutual fund industry, but it had left the role of the fund manager largely untouched until now. Some funds allow investors to apply online, while others have gone so far as to allow investors to see their holdings on a daily basis. Most funds, though, continue to keep their cards close to their vests, disclosing such information monthly or quarterly.

Folio;investing; lets an investor take on the responsibilities of a portfolio manager. It will enable customers to create their own customized portfolios of up to 50 stocks, which they can buy and sell like funds.

"In order to diversify their portfolios, investors still need professionals to pick their stocks for them," says CEO Wallman. "And many times actively managed funds underperform index funds. With Folio, you can pick the set of stocks that you want at the right level of risk for you. We are marrying the benefits of diversification with the benefits of stock ownership."

What is perhaps most revolutionary about this service is its pricing model.

While mutual funds charge fees based on assets, and brokerages charge commission fees per transaction, Folio is taking an entirely new approach: It's charging a yearly subscription fee of as low as $250 for an unlimited number of trades.

In an effort to deter day traders from taking advantage of the low price, Foliofn will execute trades only twice each day. When it does trade, it will match as many orders as it can, creating a more efficient marketplace. By preventing investors from selling at certain price levels during the trading day, Wallman hopes to convince them to think of their portfolios as funds, rather than as individual stock holdings. If investors really want to execute individual trades, they can do so for $20 per transaction.

Folio;investing; is creating a new class of financial products. From a regulatory and tax standpoint, the product is not a mutual fund. Just as in the equity markets, individuals are taxed when they sell; investors assume their own risks. But it's more than a brokerage service that lets investors make batches of trades for a single fee. Individuals can invest dollar amounts in their portfolios. As in direct stock investing, an investor can opt to start a portfolio with $200, distributing it evenly across 20 stocks. Folio will put a portion of a share into your portfolio, and either hold onto the remainder of that share or distribute among others' portfolios.

"Stock brokerages are no longer a way to invest," says Wallman. "They are a way to have fun."

Folio has received some funding from Internet service provider PSINet, and some from venture capital funds the Mayfield Fund and Jefferson Partners. Wallman won't disclose how much he's raised to get his 130-person operation off the ground. He admits it's under $100 million, but says it's "not far under." He's currently in the process of completing another round of funding.

Fund managers will likely take notice of this young company, but it's unlikely that they'll need to spruce up their resumes anytime soon. Many of those who pour their life savings into mutual funds or retirement account funds will still want professional money managers to do the grunt work.

"Most people who are professionally successful don't have time for that," says David Kugler, CEO of the Monument Funds Group in Bethesda, Md. While Kugler says he has "zero interest" in getting into this manage-your-own-fund space and he feels no threat by it, he pauses to consider the possibilities.

"Maybe it will be a hit, and we'll cheer them on," he says. "After all, nobody took eBay seriously when they started."

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