SAN FRANCISCO (03/08/2000) - Steven Wallman wants to do to mutual fund managers what online trading did to stockbrokers: Push them to the sidelines. Wallman, a former commissioner for the Securities and Exchange Commission, has taken the wraps off FolioFn, the secret - and oddly named - financial-services startup he founded in 1998.
The venture has lined up a product that aims to tip over the mutual fund industry's apple cart: FolioInvesting, ready in spring, will let people create and manage their mutual funds online for the first time. Like other areas of the financial industry, mutual funds are changing under the Net's sway. But the role of the fund manager largely has been untouched until now.
Some funds let investors apply online, and others allow investors to follow their holdings in real time or to suggest stock picks to a fund's portfolio managers. So far, fund managers aren't racing to spruce up their resumes upon learning about FolioInvesting. Most people who pour their life savings into mutual funds or retirement account funds will still want professional money managers to oversee them - if for no other reason than the inconvenience and headache that goes with the job. Investors "will probably teach themselves pretty well that they're not professionals," says Steven Witt, managing director for Firsthand Funds in San Jose, Calif. "That's just great with us."
FolioInvesting will let customers create their own customized portfolios of up to 50 stocks, which they buy and sell like funds. It puts the responsibilities of the portfolio manager into hands of the investors. To diversify their portfolios, "investors still need professionals to pick their stocks for them," Wallman says. "And many times, actively managed funds underperform index funds.
With FolioInvesting, you can pick the set of stocks that you want at the right level of risk for you."
The most revolutionary part of the service is the pricing model. While mutual funds charge fees based on assets, and brokerages charge commissions and fees per transaction, FolioFn is taking an entirely new approach by charging a yearly subscription fee as low as $250 for an unlimited number of trades.
Mutual fund managers find those low fees more laughable than threatening.
"They're crazy," says David Kugler, CEO of the Montgomery Funds Group.
"I don't understand how they'll make money." FolioFn hopes to deter daytraders from taking advantage of the low price by executing trades only twice a day.
Most mutual funds price once a day, when the market closes. The firm also plans to match as many orders during those execution times as it can. Investors who want to execute individual trades can do so for $20 a pop. FolioInvesting is also creating a new class of financial products. From a regulatory and tax standpoint, the product isn't a mutual fund. It's also more than a brokerage service that allows investors to buy and sell batches of trades for one fee.
Individuals can invest dollar amounts in their portfolios. Like direct stock investing, investors can opt to start a portfolio with $200 and distribute it evenly across 20 stocks.
FolioFn will put a portion of a share into your portfolio and either hold onto the remainder or distribute it among others' portfolios. Wallman insists that not having to pay costly portfolio managers will help his bottom line, and that the electronic platform saves costs. "Their business model requires high fees," he says. "Ours doesn't." While mutual fund managers aren't preparing for the kind of shakeup that brokerages saw with online trading, chances are they'll keep an eye on FolioFn and its progress. "Maybe it will be a hit, and we'll cheer them on," says Kugler. "After all, nobody took eBay seriously when it started."