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December 01, 2001 at 07:00 PM
All signs indicate that folios are on their way out, right? Advisors and retail investors are still harboring a wait-and-see attitude about these baskets of stocks that can trade online. Folio providers are cutting staff and at least one has shut its doors to individual investors. But don’t count out these new-fangled products just yet.
After all, it took 15 years for the idea of discount brokerages to catch on, and nearly a decade for index mutual funds to hit the mainstream. “It used to be that it would take decades to build up new companies and new concepts,” says Steve Wallman, CEO and founder of Foliofn. “We’ve now gotten used to the notion that we can condense what otherwise would take 20 years into at most 10 or 20 months, and if something doesn’t occur in that time frame then we get a little bit concerned about it.”
Turmoil in the economy and markets, along with investors’ reluctance to allocate any more cash to equities, have all played a hand in Foliofn’s recent spate of layoffs. The Vienna, Virginia-based financial services firm recently issued pink slips to 50 of its 140 workers, 36% of its staff, and cut executives’ salaries. Netfolio recently closed its doors to retail investors. “The markets have not been as cooperative as one might like in regards to growing a new kind of financial services product,” Wallman says.
Wallman admits that Foliofn’s growth is coming from a “small base” of customers, but he says the firm’s “week-over-week” growth is evidence that consumers “understand the benefits of this new kind of investing, and they will embrace it.” It will just take time for consumers to trust this new investing concept, he says.
Sameer Shah, a CFA with Shah & Associates in Tampa, Florida, who conducts a monthly virtual discussion group on new investments, says folios dramatically lower transaction costs for small- volume trades. And, he says, Foliofn’s technology platform allows investors to effectively and efficiently manage a large number of security positions, especially in terms of tracking cost basis.
But it’s hard for most retail investors to grasp folios because some have the investor owning units instead of shares, others have ownership of partial shares, and some only allow trading a couple of times per day. Shah says investors and advisors also question whether the companies offering folios have staying power. “If one implements a strategy based on the advantages of folios, and then has to move the funds to another custodian (because the company fails), they would first probably earn the ire of their clients, but they also would have a hard time transacting and monitoring the accounts going forward on a strategy based on the availability and costs of the folio platform,” Shah says. Advisors would be much more receptive to folios, he says, “if Schwab or Waterhouse would offer them, though the companies may fear cannibalization of their current commission revenues.”
Since retail investors remain skittish about folios, companies like Foliofn are relying more on investment professionals to keep their businesses afloat. Wallman says the nascent Foliofn is relying on its original growth strategy of “providing underlining services to other [companies in financial services] who can leverage off of their trusted brand name.” Foliofn is marketing its platform to the nation’s credit unions through an alliance with CUNA Mutual Group, a credit union trade group; Brinker Capital, an independent provider of managed account services for independent advisors, is now using Foliofn as a back-office trading, custody, and accounting platform; and Quick & Reilly inked a deal with Foliofn in September, and a product launch is expected soon. And Foliofn is now in talks with RunMoney Corp., a turnkey asset management provider.
Wallman says Foliofn intends to be cash-flow positive next year, and has lots of new products on the drawing board, maybe even one involving hedge funds.–Melanie Waddell
Rolling Out The Carpet
All are welcome to contributeto the economic stimulus bills percolating in Congress
Christmas has come early this year, and no one’s happier than President Bush. His present tax stimulus initiatives are holdovers from his early days in office, which he entered espousing four major priorities via the Economic Growth and Tax Relief Reconciliation Act of 2001. To wit: 1) marginal tax rate reductions; 2) relief in the form of tax credits and/or rebates for low- and moderate-income taxpayers; 3) enhanced expensing of capital expenditures by businesses; and 4) repeal of the corporate AMT (Alternative Minimum Tax). The House acted on these wishes in late October, passing H.R. 3090, a $100 billion economic stimulus package. The tax breaks were first married to a time frame extending to 2006. After the events on September 11, however, some of these initiatives, in some yet undetermined form, will be law for tax year 2002. At press time, the Senate was still deliberating.
“New lower tax rates for consumers and entrepreneurs will show up in paychecks on the first day of the next year–of the new year, if we can get that passed out of the Senate,” said President Bush on October 24. “The tax rebates for low- and moderate- income folks would begin to arrive soon, if we can get it out of the Senate.”
There are some 72 different possible amendments to stimulate the economy, as put forth in early November by Senate Republicans. The Bush administration is trying to hold the line against proposals calling for increased government expenditure, with the President sticking to his original priorities. He’s not expected to comment until Senate action is taken, becoming involved when the House and Senate hash out their differences–which was expected by Thanksgiving.
Differences lay in the details of the proposal released by Finance Committee Republicans on October 25, which would seek to implement the Bush tax cuts plan, and the proposal offered by Democrats. In general, writes Ken Silverberg, a tax specialist and partner at the Washington law firm Nixon Peabody, in his October 30 Washington Tax Update newsletter, the Democratic plan “is far less generous to business taxpayers, but includes tax rebates for low-income individuals and $35 billion of additional government spending.”
Regarding the treatment of businesses, the GOP plan, as noted by The Bureau of National Affairs, a Washington-based publisher covering legal and regulatory developments in business and government, would provide for a depreciation “bonus” permitting businesses to expense 30% of their qualified capital expenditures for three years. The Democratic plan would allow businesses to expense immediately 10% of investments in capital and software put in service within the next 12 months, with the remaining 90% depreciated under current rules.
We Brake for HNWs
Of interest to financial advisors and their high-net-worth clients is the proposed acceleration of reductions in the top marginal tax rates. HNWs will be significantly affected, since they will realize lower tax rates as early as next year–not 2006.
Under Bush’s economic stimulus plan, persons in the 27% income tax bracket will see a reduction to 25% in 2002. Key items in H.R. 3090 would lower long-term capital gains rates from 20% to 18% for the majority of taxpayers. It also would bestow upon corporations a retroactive elimination of alternative minimum taxes they paid as far back as 15 years, while permitting companies to deduct current operating losses from taxes they paid up to five years ago.
Benefits to low-income individuals, according to The Bureau of National Affairs, would be the provision of tax checks to those who did not receive the full benefits of rebates authorized under Bush’s original $1.35 trillion tax cut.
Also significant to advisors with HNW clients is the increase in the amount of capital losses that can be deducted against ordinary income, up from $3,000 to $5,000, effective next year.
And Bush in late October signed into law an anti-terrorism bill (H.R. 3162, called the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.) In general, the bill gives the Treasury Department more power to monitor bank secrecy and demand reporting of large cash transactions. Section 356 requires the Secretary of the Treasury to publish before January 1, 2002, proposed regulations requiring broker-dealers to submit suspicious activity reports (such as terrorist money laundering schemes). –Cort Smith
Your Kind of Trust Firm
National Advisors Trust Co. is of, by, and for advisors
On October 1, the doors opened at the newly formed National Advisors Trust Company (NATC). The Overland Park, Kansas, firm is a venture on the part of 82 independent advisory practices across the country.
