February 1, 2001

Basket Boom

The competitive juices are flowing among folio pro

The race is on to provide retail investors and advisors with personal portfolios or folios--equity baskets that can trade at the click of a mouse. Who's competing? You've got the most recognizable name, Foliofn. Then there's TCAdvisor Pro, a collaboration of Trust Company of America, UNX.com, and MAXfunds. Netfolio has joined the pack. And here comes PersonaFunds. Sure, there's that company called eInvesting, which is now part of e*Trade. And don't forget SmartLeaf.com.

Folios are being hailed as a breakthrough product because they allow advisors to satisfy clients' increasing appetites for equities. Folios also give more sophisticated advisors a chance to manage equity portfolios themselves. "There are a lot of investment advisors who are managing $50 million to $200 million in assets who have predominantly managed money only using mutual funds. This gives us the opportunity to take the next step to equities," says Tom Lydon, president of Global Trends Investments in Newport Beach, California, who's now beta-testing TCAdvisor Pro's platform.

Who'll win the most advisor clients? Success hinges on execution, service, and costs. Companies are also competing on the number of stocks per portfolio and the stock universe, operational focus and reporting/administration, and of course advice and research. Foliofn (which recently launched a separate service aimed at advisors called Folio Advisor) and TCAdvisor Pro are broker/dealers. Netfolio is an RIA, but will be directing trades made via its Web site to Bear Stearns. eInvesting is leveraging off e*Trade's brokerage know-how. SmartLeaf.com is an RIA, and says it will help clients manage portfolios and specifically aid them in reducing taxes, expenses, and risk. And New York-based PersonaFunds will start licensing its enabling technology in the next two months to brokerage firms and, eventually, to financial planners. PersonaFunds will offer a complete financial planning and reporting package, says Dennis McDonald, president and CEO.

TCAdvisor combines the trading methodologies of electronic brokerage firm UNX with Trust Company of America's custodial and back-office capabilities. MAXfunds lends its online fund analysis and research to the offering, and provides UNX customers with data and performance metrics on 45 stock baskets. John Hurley, executive VP at Trust Company of America, says advisors' desire for another investing option besides mutual funds prompted the creation of TCAdvisor. "Advisors who have invested in mutual funds have become sophisticated, and said they would like to create their own baskets of stocks."

How do these folio baskets work? To help advisors get the hang of it, TCAdvisor offers a variety of sample sector and asset class equity baskets that are designed, researched, and tracked by the analysts at MAXfunds. Advisors can clone or customize these pre-assembled equity baskets to create their own private label baskets or portfolios.

Jerry Michael, president and co-founder of SmartLeaf.com, says "it used to be that only the really wealthy could own stock. But now with low transaction fees, the less wealthy can own the baskets."

TCAdvisor says it beats Foliofn Advisor's services hands down. TCAdvisor's basket trading platform allows advisors an unlimited number of trades; Foliofn Advisor allows only five for each client. TC allows for an unlimited number of stocks in a portfolio, while Foliofn has a maximum of 50. The TC stock universe is virtually unlimited as well (about 8,500), whereas Foliofn is limited to 2,500. As for trading frequency, TC's is constant and immediate; Foliofn's has only two windows per day. And the trading cost for TC is a standard 3.5 cents per share plus a $25 posting fee. Foliofn Advisor charges an annual per client fee plus an asset-based fee.

Christopher Loveless, vice president and director of Institutional Netfolio, says advisors can leverage Netfolio's research offering from Standard & Poor's Compustat database. And advisors can test and save their own investment strategies on the site, he says, which makes Netfolio the perfect "desktop separate account portfolio manager." The novice Netfolio, which launched in August 1999, merged with O'Shaughnessy Capital Management in January 2000. Once merged, Netfolio decided to do away with mutual funds and delve into the folio business. Its Web site appropriately reads: "Goodbye Mutual Funds. Hello Netfolio."--Melanie Waddell

Picking the Proper Fund

While equity markets are staggering, money is still flowing into hedge funds. But are those dollars going to the right funds?

Investments in hedge funds aren't slowing down. The shaky markets of late have kept investors clamoring for alternative investments with healthy returns. Tass Research, the research arm of Tremont Advisers, Inc., says that $3.5 billion, or 83%, of all new hedge fund assets in the third-quarter of 2000 went into long/short equity funds. Total new assets in the third quarter committed by investors to hedge funds, Tass says, was $4.2 billion, almost replacing the $4.9 billion outflow during the second quarter.

Placing second in the quarter was the event driven category, pulling in $1.6 billion, or 38%, of new assets, Tass found. The risk arbitrage sub-sector received the bulk of the new assets. "We've had a good environment for risk arbitrage because there are lots of deals," says Bruce Ruehl, chief investment strategist at Tremont Advisers in Rye, New York.

Deal flow has also surged because barriers to cross-border takeovers in Europe have fallen, he says. And very high valuations of company stocks generated by the bull market gave companies inexpensive currency to go out and do deals, he says.

Ruehl says flows into risk arbitrage will remain healthy in 2001. "We think risk arbitrage should continue to generate solid returns--in the mid-teens--this year."

But it's the convertible arbitrage sector that he's worried about. "I think that with convertibles it's a riskier bet," going forward. Convertible arbitrage was the hottest performing category of 2000, according to Tass, attracting $563 million in assets during the third quarter of 2000. Convertible arbitrage makes use of an interest-paying hybrid security, like a bond, that converts into equity down the road. "Convertibles are very cyclical, and every few years there is a total washout in the markets," Ruehl says. "We believe we are in the second half of the U.S. convertible arbitrage cycle. Funds may do well and then snap back next year. But we are concerned it may come this year." Ruehl says investors "always get convertibles wrong. You have to be counter trend," he says. It's better to put money into them when they are cheap and "everybody hates them. If you get in when it's popular, you're late."--Melanie Waddell

Not exactly raymond and Goliath, but . . .
Facing competition on your own turf? Feel like you're just an asset-gatherer for the behemoth known as Schwab? Raymond James says you don't have to feel that way any more.

With its new fee-only Investment Advisor Division, Raymond James Financial Services will compete for the independent advisor business by offering advisory clearing and custodial services. RJFS maintains that unlike other major firms, it "does not market to clients directly, nor does the organization have client relationships that would compete with their investment advisors. There is no conflict of interest."

According to Matt Matrisian, manager of the new division, Raymond James will do things differently because it's a full-service firm moving into the investment advisory business, rather than moving from back-office and investment advisory services into being a full-service firm.

Michael J. Di Girolamo, senior VP of compliance advisory services at Raymond James, expects the new division to flourish, citing targets of two dozen offices and $500 million under management. The new division will have its own Web site, www.rjfsiad.com.

The division won some followers even before it was off the runway. Although its launch was set for January 22, by mid-January, five firms had already climbed on board to beta test Raymond James' new wares.--Marlene Y. Satter

Chipping Away at the Rock

Prudential jettisons its investment banking unit, saying the beneficiaries will be its thousands of advisors and their clients

It seems like the entire financial services industry is busily eyeing the wealthy client, of which there is, as yet, no apparent shortage. We've noted in these pages the teaming-up of AXA Financial and Grant Thornton Advisors; The Evensky Group, launched in May to establish nationwide Private Family Offices, switching from Schwab to Fidelity; and Ernst & Young signing joint venture agreements with e*Trade and Fidelity.

Among the latest in corporate shifts designed to better follow the money is the phasing out of the investment banking unit of Prudential Secur-ities, a subsidiary of Prudential Insurance Company of America, as part of the parent company's demutualization. It's not that the reorganization has given birth to a field force of financial advisors per se--the company claims its approximately 7,000 brokers have always dispensed advice, and will continue to do so. Rather, Prudential's strategic shift in focus from investment banking to research, says a corporate spokesperson, will arm these broker/advisors with reams of "unfettered, objective research" to better serve their increasingly knowledgeable clients. This research, the spokesperson adds, "is basically advice."

"That's the basis of a full-service brokerage firm, to provide advice," affirms the spokesperson, adding that the company already has in place financial planning and asset management platforms.

But who are these Prudential financial advisors? First, they're licensed brokers. An unknown number holds the CFP designation, while others may or may not hold a related financial planning designation. "All of them are supposed to at least have the ability to be able to provide financial advice in addition to just trying to sell product," the spokesperson says.

Here's what's happened thus far. On December 18 Prudential announced plans, long in the works, to demutualize and go public. As the spokesperson explained, however, it's also an attempt to bring Prudential Securities "in line with where we think the parent company's been going, which is advice as one of our strongest products."

Basically, the reorganization will enable Prudential Insurance Company to issue stock to raise money for acquisitions and expansion, which in turn can be said to result in making Prudential Securities more attractive to wealthy clients to whom the company can dispense financial advice and sell insurance policies and retirement investment vehicles--in that order. The spokesperson says Prudential brokers are "looking at the need of the client and then providing product based on an analysis of that need, as opposed to other organizations that might be more product driven."

To get the ball rolling, Prudential in October exited its institutional fixed-income and underwriting business, letting go some 425 investment bankers and administrative staffers. In December, 160 Prudential Securities investment bankers were also sent packing, leaving 130 in investment bank staff on board.

Pru's grand reorganization plan must be approved by the New Jersey Department of Banking and Insurance (the okay is expected at the end of February) and be voted upon favorably by two-thirds of a minimum of one million Prudential policy and contract holders. As of December 31, 1999, Prudential, the nation's second largest life insurer, had more than $363 billion in assets under management.--Cort Smith

Gather and disagree
In a time of accelerating change, the 2001 FPA Broker/Dealer Conference reflected the challenges imposed by fluctuating markets, a shifting investor base, and an industry busily reinventing itself, while an old debate seemed to gain new life. Issues facing the 600-odd professionals attending the January 11-13 conference in Orlando included the move of many customers from full-service brokers to do-it-yourself investing; a rise in regulatory issues, including proposed regulations on deceptive advertising and sales practices, mandatory documentation, and disclosure rules on margin accounts; and the need for regulation to keep pace with technology.

In her keynote speech, Mary Schapiro, president of NASDR, pointed out the difficulty of writing rules that would apply to the widely diverse broker/dealer community. Regulations governing branch offices, correspondence, and field exams are just some of the areas NASDR is addressing. There is also concern over huge up-front bonuses being paid to reps, and the possibility that it might lead to churning.

One detour became obvious first in the session by John Keeble on the past, present, and future of the business, followed by a sequel at the FPA Town Meeting. Keeble, an eminence grise in the industry, did not mince words on the subject of fees versus commissions. Commissions are not going away, he says, nor do they need to--because it is perfectly possible to keep one's clients' interests ahead of one's own even when drawing commissions. Keeble had some harsh things to say, too, about NAPFA and its crusade to depict the commission structure as less than honorable.

At the FPA Town Meeting, a number of attendees rose to speak of their concerns about the fee-vs.-commission debate and the FPA's commitment to CFP certification. The majority seemed to share Keeble's views on commissions, and told FPA President Guy Cumbie and Executive Director Janet McCallen that the FPA should not pursue the goal of CFP certification for all members, nor should it denigrate those who collect commissions on the work they do. The controversy over these subjects, it's clear, is far from over.--Marlene Y. Satter

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