From the September 2002 issue of Investment Advisor • Subscribe!

September 1, 2002

Foliofn Ups the Ante

The folio company's new allocation product may be

Foliofn is hitching its wagon to the booming separately managed account market with the recent launch of Folio Allocator. The online brokerage firm's founder and CEO, Steve Wallman, is convinced that his company's new separate accounts platform will "revolutionize the separately managed account business and allow the multi-manager account business to take off."

Wallman figures other separate account providers can't match Folio Allocator's cost benefits, its ease of customizing accounts for clients, or the tech platform's ability to deliver multiple portfolios in a single account. "The Allocator allows the sponsor or the advisor to, with one click, synchronize an unlimited number of accounts to an asset allocation model that has within it a variety of different individual models--folios, if you will--that are potentially managed by different managers or different firms," Wallman says.

Unlike traditional separate account platforms, which generally are managed by an account manager alone, folios allow levels of management--the customer, an advisor, or the manager of the portfolio can control the account, Wallman says. And with Folio Allocator, "you can even split that up so a manager has control over a portfolio within an account and then a sponsor or an advisor can have control over the asset allocation between the different managers within an account," he says. "The sponsor or advisor can say, 'I want the domestic growth fund to be 30% and the domestic value to be 70%.' Later on [they can] change that to be 40%/60%. You can do all of those things with the folio technology. Some of them [are] hard or impossible to do with the more traditional technology for separate accounts."

Since starting Vienna, Virginia-based Foliofn two years ago, Wall- man has had to do some fancy footwork to keep his business afloat. Wallman's original plan was to use folios--baskets of up to 50 stocks that can trade online--to compete head-on with the mutual fund industry. Folios offer the diversification of a fund, lower transaction costs for small-volume trades, and allow more room to manage taxes. But folios proved too complex for retail investors to grasp. Wallman is now bent on marketing his platform to financial advisors, mutual fund companies, and money managers, as well as institutions. Advisors have also had a hard time embracing the folios concept, but that may be changing as Wallman says Foliofn now gets more calls from the advisor channel than the company can handle.

Foliofn's technology is also generating so much interest from mutual fund companies and those in the separate accounts business that Wallman's adding new bodies to the firm's sales and marketing team. "We are so far ahead of the rest of the world in terms of technology that we need to sell [the technology platform] instead of continuing to build it." But adding new employees in the sales and marketing area will mean job cuts in other divisions, he says. Foliofn has yet to turn a profit, but Wallman says the brokerage firm "continues to grow in customers, revenues, and assets week over week," despite "the headwinds of the market."

Swimming Upstream

Rob Hegarty, director of investment management at the research firm TowerGroup, says Wallman will indeed have a tough time launching a new product in such a turbulent market atmosphere. "I honestly think [Foliofn] is swimming upstream given the current market conditions and the market environment for asset allocation," he says. "They are coming out with a product at a time where the lack of interest and lack of confidence in the market is really doing a number on the entire marketplace." But Hegarty does believe Foliofn is filling a much-needed product gap with Allocator. "There is a need in the marketplace for a tool for advisors that makes it much easier to allocate their clients' funds across multiple managers."

Despite hitting upon what appears to be an untapped product niche for advisors with Allocator, and managing to keep his business alive when other folio companies have died off, Hegarty still isn't convinced the long-term prognosis for Wallman's company is a good one: "They're probably a long way" from turning a profit. Launching a new product like Allocator "requires a pretty heavy up-front investment; and this is their second go at a product market entry. They took a run at the retail market, and that failed."

But it looks like Foliofn is taking another stab at the retail market. The company had plans to launch a radio advertising campaign in the Washington, D.C., area in mid-August and an online ad campaign was scheduled to start at the same time.

A Better Tool

Advisors can access Folio Allocator by logging on to Foliofn's advisor-only Web site, www.folioadvisor.com. "We have a number of advisors who have been able to take [Folio Allocator] and create a dozen account templates and then, with that in place, do the asset allocations quickly among the different accounts and also manage the underlying portfolios within each account separately and easily," Wallman claims.

Wallman says Folio Allocator is a "Godsend" for advisors with a few hundred clients. If an advisor wants "to change the asset allocation within [clients'] accounts, instead of going in account by account, all they need to do is simply change the template," he says. "[The advisor] can potentially change three or four hundred accounts in a matter of minutes as opposed to what otherwise would have taken potentially days. Or they would have to hire people in the back office, so it saves time and money."

Folio Allocator technology is used within Foliofn's Model Folios, which allow advisors to invest client assets in various styles and asset classes managed by various managers. John Hancock Advisers and Sovereign Asset Management signed on to manage five Model Folios in July. The two firms join existing manager Brinker Capital Holdings, Inc., in King of Prussia, Pennsylvania, which is an independent provider of managed account services for independent advisors.

Brinker has a new Foliofn-based managed account program that uses Model Folios managed by State Street Research & Management, Nuveen Asset Management, Fred Alger Management, AIM Private Asset Management, and 1838 Investment Advisers. Gil Baker, national sales director at John Hancock, says Foliofn is taking advantage of the industry trend of providing technology platforms that allow advisors to perform all sorts of services from their desktop.

Sameer Shah, a planner with Shah & Associates in Tampa, Florida, isn't convinced that advisors are gaga over Foliofn's platform. Shah, who conducts a monthly virtual discussion group on new investments with other advisors, says there was a "flurry of interest" when folios first arrived in the marketplace, but that interest seems to have waned. Among the members of his group, "there doesn't seem to be an interest in looking at them again."

Shah does think that Foliofn's technology platform is an interesting match for separate accounts. But Shah and the other advisors in his group often debate whether all the hype surrounding separate accounts is justified. The advantage of having a separate account, says Shah, "would be some sort of tax management overlay, and the Allocator, as far as I understand it, sort of allows you to efficiently bring portfolios back to models. But if you're not then looking individually at what's going on with the tax issues, the supposed benefit of the separate account management isn't really being offered; why not be in a mutual fund that has the same portfolio [because] you don't need to worry about rebalancing?"

Shah's group wonders if separate accounts are being used to the detriment of the client. "It's unclear that after [levying] the fees that some of these separate account managers are charging, [that it's] really worth it for the client."

Shah says he'd like to see Foliofn hook up with a firm like Seattle-based Tamarac, which provides portfolio optimization tools. Tamarac offers software that can lower an advisor's expenses by allowing him to do tax management optimization, tax trading, and swapping in-house, instead of outsourcing it. But Shah says he can't figure out how to implement this type of service. So he'd like to see Foliofn combine its technology with Tamarac's tax management optimization. "I think that's what Foliofn is missing right now in terms of advisors. Right now if you use [Folio Allocator] the separate account managers [are charging] a fee, which a lot of us don't think is justified."

By using Tamarac's optimization offering, Shah says, the advisor could "simultaneously do both the model rebalancing and tax optimization, because for different clients, it's going to be a different answer in terms of how much you want to trade off trying to get close to the model versus the tax issues."

Folios are designed to allow for more tax efficiency, Shah says, but it really depends on how they are used. "The folio is a tool, so it depends on what you do with it; if you trade it everyday and don't look at what you're selling, it's going to be very tax inefficient," he says. "Without some sort of optimization mechanism, either you're not going to do the tax management effectively, or it's going to be a very inefficient process, which is what Allocator was supposed to resolve. If you crank Tamarac into [Allocator], and depending on what parameters you set in terms of how much you want it to be tax managed versus optimized to the model, it will do that algorithm for you." Shah says, "maybe [Foliofn] needs an Allocator now for tax-managed optimization along with the product they currently have."

Watching Foliofn's progress going forward should be interesting, as Wallman is determined to keep his brainchild above water.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@ia-mag.com.

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