An Interview with Steven Wallman, Founder of FOLIOfn.com
Forbes magazine recently celebrated its 85th anniversary with a special issue (12/23/02) that focused on "big ideas" in the business world. For example, among the big financial ideas of our times were mutual funds (1924), value investing (1934), discount brokerage (1973), index funds (1976), and cash management accounts (1977). Forbes also offered a crystal-ball glimpse into what may be the next big financial idea on the horizon. Among "15 people who will reinvent your future," the magazine profiled Steven Wallman, founder of the company FOLIOfn.
"Folios" are a concept that should be on every financial advisor's radar, because they have the potential to change the way you and your clients do business. This article will help you understand the potential of folios, including insights that Steven Wallman shared with FreeERISA.com in a recent interview.
Surviving a Difficult Start-Up
A folio is a group of individual securities that can be bought, sold, evaluated, and adjusted via an online platform through "one-click" implementation. For example, you could position clients into a model portfolio of many stocks by entering one trade for that folio. You then can monitor, adjust and rebalance the folio with lower transactions charges than those imposed by any brokerage account, including discount and on-line trading.
For example, FOLIOfn charges clients of investment advisors an asset-based fee that ranges from 20-40 basis points per year, with a minimum of $300 per client. This covers the advisors' use of the company's portfolio management system, up to 10 folios of 100 securities per client, all transactions (executed twice daily), custody, clearing, automatic rebalancing, dollar cost averaging, statements, confirms, and client billing.
Before starting FOLIOfn, Steven Wallman served as an SEC Commissioner (1994-97) who advocated ideas favorable to the individual investor. For example, he was a champion of decimalization, which reduced bid-ask spreads while making trading more convenient. He also promoted greater disclosure of mutual fund management fees and costs, arguing that many investors are unaware how much they pay year after year.
Wallman then leaped from public policy guru to entrepreneur, launching FOLIOfn's first service offering in the summer of 2000. In the two and a half years since, his company of about 70 employees has battled to survive a period of adversity and change. Initially, the company focused on direct investors-the online traders whose ranks had just exploded. Of course, the tech bust and bear market deflated the online trading boom.
During 2001 and 2002, although its direct investing business continued to grow, FOLIOfn shifted its focus to developing advisor relationships through a companion site designed specifically for advisors, FolioAdvisor.com. This site contains portfolio management applications and tools not available to the direct retail client. Also, the company began licensing its technology to other institutions, including some that support financial advisors.
Summarizing progress to date, Wallman says: "We created a whole new concept in a difficult time frame and market. Against that headwind, we've built great technology and been successful with it. Although our concept hasn't yet taken over the advisor space, we are starting to make inroads among advisors who are innovative."
A Spectrum of Managed Account Models
FOLIOfn has positioned its technology in the fastest growing part of the money management business- fee-based managed accounts. But since Wallman is wary of betting his company on any one trend, the company is developing applications broadly across many managed account models. "Part of what we stand for is allowing innovative financial companies and advisors to bring better services to the marketplace. For example, our platform permits a whole series of managed account models ranging from non-discretionary to fully-managed and discretionary. In between, you could offer shared discretion between a rep and customer in accounts that are not fully managed in a traditional separate account sense, but are not totally do-it-yourself, either."
For example, FOLIOfn offers a number of folios that contain pre-selected securities meeting specific investment objectives or containing securities within a specific industry segment. With one click, customers or advisors can choose among about 100 of these pre-built folios. Then, they can work together to customize the folio's holdings to the client's preferences, risk tolerance, income requirements or tax needs. Says Wallman: "Our technology offers choice along a whole gradation of investment models and client customization features. We think this flexibility will become quite valuable for advisor s offering financial advice in the future."
Diffusing Competition With Mutual Funds
Along with market turmoil, FOLIOfn also has survived regulatory challenge. Specifically, the mutual fund industry's most powerful trade group, the Investment Company Institute, smelled potential competition and petitioned the SEC to have folios regulated as investment companies. The SEC denied that petition in August of 2001, which removed a cloud hovering over the concept. Now, Wallman plays down competition with funds, instead emphasizing cooperation.
"We don't view ourselves as anti-mutual fund," he says. "Some of the more innovative fund companies recognize that the real product they offer is investment management expertise. In some applications, they see opportunity to deliver that expertise just as well and perhaps more profitably and efficiently through folios." Wallman concedes that folios' cost and tax advantages aren't competitive across all applications, compared to mutual funds. He specifically cites some illiquid international securities as an area in which the institutional trading clout of funds creates benefits.
But for many types of domestic securities, Wallman believes folios have proven their ability to accommodate a variety of investment strategies, active or passive, on par with mutual funds. "To the same extent that an advisor can help clients pick funds, they can help clients choose pre-selected folios. Each folio is totally transparent in real time, and for those we have created we show historic returns right on our site. In many cases, performance has been very good. It's also easy for advisors to create their own folios, or access the folios managed by institutional managers through sponsors." Recently, the platform added access to selected mutual funds and exchange-traded funds (ETFs), in addition to individual securities.
In the future, some money managers may create their own model folios online and sell password access to them for a fee. This approach, which could reduce the cost of active money management, is already being explored between FOLIOfn and creative money managers.
Stay Open-Minded to Innovation
Wallman says that reaching out to financial advisors has become a more important priority for FOLIOfn, in part because creative advisors are defining new applications for the concept. For example, one advisor has developed a family of 401(k) plan funding choices implemented through folios. In another case, "we worked with advisors who were trying to figure out how to manage several hundred accounts from a back-office perspective, and they were thinking about creating their own mutual fund. It seemed to be their only choice, until they saw that it makes more sense to run those accounts on a folio platform, with individual securities, tax-efficiency and lower costs."
In short, individual advisors can play a role in helping innovations happen, by opening their minds to new concepts and applying them creatively. The big ideas are out there in financial services, and some will gain traction sooner than you may think. Keep your eye on folios, and keep your mind open to the next great wave of innovation.
freeERISA.com FOCUS:
NAICS Codes Can Be Key to Generating Cross-Referrals
In last month's column, we discussed how you can identify business prospects in your area using FreeERISA.com's EIN Finder data base. That was a timely idea, because this data base will now be tripling in size, to 4.4 million listings! This month, we'll offer an idea that will help you combine data from EIN Finder and FreeERISA.com's 5500 data base to develop a better understanding of prospects' businesses, while promoting cross-referrals with them.
Every company in your market is not qualified to do business with you. But even among those that aren't, you can obtain referrals to their customers, suppliers and friends-provided they know you exist. To make qualified referrals, they need to know your name, address and phone number. But it also helps to know the nature of your business-i.e., that you are a financial advisor, investment broker or insurance agent.
The same is true in reverse. In EIN Finder, you can quickly identify many businesses in your market by name and address, with phone numbers in some cases. But EIN Finder doesn't tell you anything about the companies' industry, products or services. To "get the cross-referral ball rolling," you need to know the nature of their businesses, too.
In many cases, the answer is buried in the company's 5500 filing, on Line 2D, where all filers are required to supply a "business code." This code can be a valuable part of each prospect's profile data, for reasons we'll cover in this article.
A Valuable 6-Digit Identifier
Until a few years ago, companies were required to supply a four-digit SIC code that identified their general industry. (SIC is an abbreviation for Standard Industrial Classification.) Now, the 5500 requires a six-digit NAICS code. (NAICS stands for the North American Industry Classification System.) A listing of NAICS codes is contained on pages 59-61 of the 2002 Instructions for Form 5500, which may be downloaded here:
http://www.irs.gov/pub/irs-pdf/i5500.pdf
For example, suppose you identify through EIN Finder a company in your market called "Enterprise Solutions." The name alone doesn't tell you much about the company's services. But a quick search of the 5500 data base shows that the company has listed NAICS Code 541519. This identifies a company that is in the "Computer Systems Design and Related Services" category. The U.S. Census offers a more detailed description of each NAICS code on its site at www.census.gov. If you enter "NAICS 541519" into the search utility on this site, here's the description you will find:
"This U.S. industry comprises establishments primarily engaged in providing computer related services (except custom programming, systems integration design, and facilities management services). Establishments providing computer disaster recovery services or software installation services are included in this industry."
Could this be a company to whom you could refer clients if their hard disk crashes and they need to recover valuable financial data, or if they need to network several PCs together to share software? It's at least a candidate, based on the NAICS Code identifier and census definition.
So, here's a feasible approach for your first prospecting call:
"Hello, I noticed that your company is listed as a supplier of computer systems design and related services. I am a financial advisor working in your market, and I have clients who at times have need of those services. Could I take a minute to find out when it would be appropriate to refer you to them?"
Whatever the response is, it can lead naturally to this: "Of course, I'd also appreciate any referrals that you may wish to make to my practice. I want to send you some information about our firm that you could pass along, if you ever felt it was appropriate. Would that be okay?" An affirmative answer allows you to verify that the business address is current, while indicating that it's worth your time to continue communicating with this prospect.
(Note: Even if EIN Finder does not contain a phone number to call, the 5500 usually does. It's listed on line 2C, directly above the NAICS code.)
More Prospecting Applications
Once you know a company's NAICS number, you can use it to prospect in several ways. For example:- If you want to focus on prospecting specific industry segments, you can search private databases (e.g., Dun & Bradstreet or InfoUSA) for other companies in your market with the same NAICS code.
- If you want to learn the lingo and customs of a given industry, including its major trade associations and professional designations, just enter "NAICS XXXXXX" into an Internet search engine (where the Xs stand for the 6-digit number). You'll usually turn up websites of many companies in the same industry, some of which describe their expertise and services in detail.
- Would you like to know the number of people who are employed in your state in this same industry? Go to this site- http://www.bls.gov/data/home.htm -sponsored by the Bureau of Labor Statistics. Scroll down to "State and County Employment and Wages from Covered Employment and Wages, 2001 (NAICS basis)" and click a "create custom tables" column. Select your state, type in the NAICS number, and then click "Get Data."
Promoting cross-referrals with other businesses in your market can be a natural, comfortable way to introduce yourself to them. To show you are sincere, it helps to know a little about the nature of businesses and their services before you make your first call. In fact, it's a good idea to add space for recording NAICS codes on your data-gathering forms for business prospects.
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