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BizReport : Internet : July 05, 2001

Exclusive Interview with Steve Wallman, founder and CEO of FOLIOfn

Once upon a time in the late nineties, people trusted their brokers to keep them swimming in the black. After all, the stock market moved in one direction (up), and analysts' optimistic predictions kept finding validation in ever higher stock prices. But since the stock market began to decline in the Spring of 2000, people aren't quite as trusting of the so-called soothsayers and brokers whose calls now appear more the result of momentum than any broad insight of the markets. As investors sit on the sidelines contemplating the future, Steve Wallman, founder and CEO of FOLIOfn (, says he has a solution that emphasizes personal empowerment and minimizes the role of high-fee mutual funds and commission-thirsty brokers.

by Michael Grebb, Special Correspondent

Termed "folio investing," Wallman says the concept allows investors to control their holdings in real-time, constantly rebalancing and redirecting their portfolios while holding down costs considerably. Wallman's concept has already caught on: Several other online brokerages have said they'll offer similar options to their customers (Wallman has already partnered with some online brokerages). "We've put close to $100 million into this company so far to get everything to work the way it's supposed to work," he says. So how does folio investing work and why is the system so unique and complicated? Wallman took a few minutes to explain it to BizReport.

MG: How did you come up with this concept?

SW: We take the benefits of the low-cost diversification in a mutual fund and marry that with the benefits of direct stock ownership - customization, lower fees, lower costs overall, the ability to manage your portfolio, better tax advantages, and the ability to [invest] as you wish as opposed to whatever happens to be forced on you from a fund. If you want to do all of those things but still have the benefits of either active management or indexing, then there wasn't any way to do it--at least for the smaller investor.

MG: But folios aren't direct stock purchase plans, and yet people can buy partial shares and exert other controls. How is that possible?

SW: That's our whole invention. That's part of the whole system we've created. It's the ability to buy in dollar denominations and fractional shares... It required some really elaborate development. The folio investing system adds some additional and unique elements, including the ability of the broker to sell a fractional share from inventory that the broker already has.

MG: Do you have specific stocks from which people must choose or can investors buy partial shares of any stock?

SW: It's almost any stock that people would care to invest in. We have about 3,500 stocks where we currently do this. That represents about 98 percent of the average daily trading volume on the exchanges. The ones that are left out are the most illiquid, smaller-cap stocks that people trade very infrequently.

MG: So how does FOLIOfn make money? What's the business model?

SW: We have a variety of different pricing systems. On our advisor site, we have an asset-based fee. For credit unions and other partners, we have a transactional-based fee. We have on our regular retail site a flat subscription-based fee. And we'll probably be experimenting with additional types of pricing plans as we go. The flexibility built into our system is pretty amazing and it gives us the opportunity to continue to offer investors a whole range of ways to buy our services that best accommodate their needs.

MG: Is this kind of investing the future or will it simply be one of many investment niches going forward?

SW: We clearly see people moving dramatically into this kind of investment strategy. When you look at the kind of vehicles that investors have had available to them for the last three-quarters of a century, it has really been limited to two: Mutual funds and brokerage accounts. Each has their advantages and disadvantages. What folio investing does is that it combines the advantages and eliminates the disadvantages. That's just got to be a better way for people to invest in the future.

MG: What are the growth prospects?

SW: We think the growth prospects are great, absolutely terrific. And our prospects not only include the retail but also the institutional offerings... allowing this sort of platform to be used by financial planners and advisors, and professional money managers that want to offer our services to institutional and other large investors - or to much lower levels in terms of assets invested. So somebody who normally could only get a managed or separate account if they had a quarter of a million, a half million, or a million dollars minimum, can be offered that kind of account even with a minimum of twenty-five or fifty thousand or even ten thousand dollars. So the opportunities for people to have this kind of account available to them are just explosive. That's where the future will go.

MG: Why have you steered more toward the institutions? Is it because the shaky economy has softened the retail market?

SW: The retail area is where we're headed, but the question is whether we do it with partners or on our own. The opportunities in this space are so huge and the companies that are currently in the space are spending so heavily in terms of advertising... it makes more sense for us to continue to offer innovations and inventions, which is where our value-add is, instead of us trying to build our own market or brand name, where we do not have a specific advantage. Our great skill is not necessarily marketing. There are others who have built tremendously powerful marketing organizations. We have built a powerful innovations and inventions organization.

MG: You have talked about the tax benefits of folio investing. Could you elaborate on that?

SW: The benefits of folio investing are overwhelming compared to the other vehicles that provide for diversification. If you take a mutual fund, there are a whole variety of adverse tax aspects. One is that the forced capital-gains distributions that occur when a mutual fund sells stocks. The shareholder has to take that on his or her own tax return even if the shareholder is not selling any shares. So last year, for example, a lot of fund shareholders awoke to the very rude occurrence of having lost money in their mutual-fund shares but still having to pay capital-gains taxes. That's a pretty horrendous effect. Not only do you lose money on the fund itself, but you have to pay taxes on top of it. With a folio, you never pay a capital gains tax unless you sell the stock yourself or face the rare circumstance of a corporate reorganization with a forced liquidation or something of that nature. Generally speaking, it's under your control as to whether or not you want to incur a capital gain and when you want to incur it.

There's also the inability of a mutual fund to sell stocks for a loss to offset the gains. You can harvest tax losses with folios by selling the losers and keeping the winners and therefore having a tax loss you can use to offset normal income and any capital gains you may have had.... That's a pretty tremendous benefit. For the first time, someone can actually get an after-tax return that's actually higher than a pre-tax return. That's unheard of with a mutual fund.

Tags: FOLIOfn

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