Media Contact

Kathy King

Folio News


A Peek Inside the Rising RIA Custodians Fighting to Overtake the Big Four
(by Lisa Shidler, RIAbiz)

November 29, 2011 — RBC, LPL, TCoA, Scottrade and National Advisors Trust are all pushing to gain the critical mass to get past also-ran status. more

Folio offers ‘boutique’ technology

Folio Institutional, a privately held firm based in McLean, Va., is a small custodian that is attracting advisors with its specialized technology. See: Folio Institutional finds its winning formula for RIA custody in specialized trading technology.

The company has about 350 advisory firms, up from 275 a year ago. The firm declines to disclose assets in custody but says the total now is several billions of dollars.

“We view ourselves as a boutique as opposed to the big-box stores,” says Greg Vigrass, president of Folio. “We view ourselves as offering more of a customized experience. You just don’t walk in here and we have 14 of everything and you choose a size you like.”

The company markets itself as a niche custodian providing window-trading capability. While trades can be executed in real time as with other custodians, the firm says its RIAs take advantage of having trades transacted during two daily trading windows, 11 a.m. and 2 p.m. He acknowledges that day-traders may not like the twice-daily aspect but says the process is appealing to RIAs.

At other custodians, trades can be made throughout the day, but Folio says its sweet spot is model portfolios. For instance, an advisor who uses model portfolios can update or re-balance an allocation and have those changes executed immediately and simultaneously across the portfolios of all of the clients who are subscribed to that model.

The process allows the buying and selling of fractional shares. Any dollar amount can be fully invested across all of the securities in a portfolio. The fractional share-capability allows advisors to make strategic use of even the most expensive stocks.

Target-date funds’ design outdated, research concludes
(by Lee Barney, Employee Benefits Network)

July 27, 2011 — Most target-date funds are not as diversified as they could be, and particularly as they increase in popularity in 401(k) plans, their design needs to be revisited, according to Folio Investing. more

Recent moves by several fund companies to include alternative and other nontraditional assets in their allocations is a step in the right direction, but does not solve their shortcomings, according to Folio Investing founder Steven Wallman.

“Most target-date funds apply an approach to asset allocation that can be enhanced,” Wallman says. “Our analysis shows that these funds are not as well diversified as they could be beyond stocks and bonds, thereby leading to a high exposure to risk from a decline in stocks.”

He continues: “Achieving true diversification requires much more than simply combining stocks and bonds in a portfolio. Financial research over the past two decades, and subsequent changes in strategic asset allocation by institutional investors, suggests that better results can be achieved by analyzing the relationships between sectors over time, and diversifying to a far greater extent than is traditionally done.”

Folio Investing’s own suite of target-date funds, launched in 2007, takes an institutional approach by looking at the “relational diversification,” or relationship between asset classes, in order to reduce risk, improve performance and deliver more consistent returns. In addition to stocks and bonds, the funds also invest in commodities, inflation-trading bonds (TIPS), real estate, infrastructure stocks such as utilities and other asset classes.

Folio Investing said its research found that other target-date funds lose 1% or more a year in performance due to inadequate diversification, and said that since their inception four years ago, the return of its 2010, 2020, 2030 and 2040 funds averaged 1.13% higher a year than the average return of corresponding target-date funds from three leading fund companies. Among all target-date funds, Folio Investing said, its funds’ performance has been 2.87% higher a year.

“The long-term impact of a performance improvement of 1% a year is significant,” Wallman says. “The Department of Labor and others have estimated that a 1% increase in return over an investor’s working lifetime results in almost 30% higher wealth at retirement. Target-date funds are the default core investment in 401(k) and other defined contribution plans. A more perfect design will improve the chance of a financially secure retirement for hundreds of thousands of Americans — and we can do better.”

To Improve Target-Date Fund Performance, Folio Uses Relational Diversification
(by Danielle Andrus, AdvisorOne)

July 20, 2011 — Folio Investing, an online brokerage, announced Monday that since launching its suite of target-date funds in 2007, the average return for the 2010, 2020, 2030 and 2040 Moderate target-date folios was 1.13% higher per year than the average return for comparable target-date funds offered by three other mutual fund companies and is up 1.87% per year compared with the universe of target-date funds. more

The reason for the funds’ success, according to the company, is relational diversification, a strategy that manages a portfolio’s risk level and the evolving relationships between asset classes.

“The concept is straightforward,” Steve Wallman (left), founder and CEO of Folio Inc., which operates Folio Investing, says of relational diversification. While Folio’s funds are diversified in the traditional sense, the company is “also looking at the relationship between sectors to take advantage of any changes,” he told AdvisorOne.

Among the standard stock and bond allocations, the Target Date Folios also invest in commodities, inflation-tracking bonds (TIPS), real estate assets, and include explicit allocations to infrastructure stocks such as utilities.

Other large target-date funds follow an outdated design approach that may leave them vulnerable to risk, according to Folio. Most target-date funds can enhance their approach to asset allocation, Wallman said in a statement.

“Our analysis shows that these funds are not as well diversified as they could be beyond stocks and bonds — which are correlated with those stocks — thereby leading to a high exposure to risk from a decline in stocks,” he added.

“During the 2007 to 2008 period, target-date funds experienced a lot of volatility. There was an increase in correlation between stocks and bonds, and the benefits of diversification began evaporating,” Wallman said in a phone interview.

Some “sizeable firms” have adopted Folio’s strategy, Wallman told AdvisorOne, though he declined to name the firms at the time, citing disclosure agreements.

“What’s interesting is that even over the last three years, which were not good years, target-date funds are an example of how a well-diversified portfolio can do even during difficult years,” Geoff Considine, strategic consultant to Folio Inc., told AdvisorOne.

“It seems as though the starting assumption about target-date funds is that they’re well-diversified. That’s the question we started addressing when we launched the Folios in 2007,” Considine said.

“Three years is a pretty short time period,” Considine acknowledged, “but results have been consistent.”

Wallman noted that there are important policy matters regarding target-date funds that affect huge numbers of investors. In a comment letter sent in January to the Securities and Exchange Commission regarding target-date fund names and marketing, Folio argued that more important than a fund’s glide path is its “risk glide path.”

“We have learned that it is that expected portfolio risk that is the critical design feature of target date vehicles, with the asset allocation simply being a means to achieve that expected risk level as it changes over time,” according to Folio.

‘Madoff Audits’ Will Crimp Broker-Dealers
(by Mark Schoeff Jr., Investment News)

June 19, 2011 — An SEC rule proposal intended to thwart the likes of Bernard Madoff likely would result in significantly higher compliance costs for smaller broker-dealers. more

Last week, the Securities and Exchange Commission unanimously agreed to move forward with a rule change that, if enacted, would expand on regulations approved by the commission two years ago. Under the proposal, broker-dealers would have to file quarterly reports outlining whether they maintained custody of clients’ assets and, if so, offer details about how they did it.

Broker-dealers holding assets in custody also would be subject to regular examinations by a public accounting firm to ensure they were complying with SEC rules pertaining to net-capital requirements, the segregation of customer and firm accounts, and routine reporting on the securities they held for themselves and their customers.

In addition, the B-Ds’ internal controls also be would reviewed, much in the same way that auditing firms examine corporate financial controls as directed by Section 404 of the Sarbanes-Oxley Act of 2002.

“This brings a much more rigorous approach to making sure that custody management is honest, transparent and much safer for investors,” said Kurt Schacht, managing director of the CFA Institute. “This makes it much more difficult for the scoundrels in this business to do the damage we saw with Madoff.”

Broker-dealers that do not act as custodians would be required to submit to periodic reviews by an independent public accountant to verify their status.

Preventing Fraud

The proposed rule change is in response to the massive Ponzi scheme carried out by Mr. Madoff, as well as the fraud allegations against R. Allen Stanford.

The new rules mainly would affect about 300 B-Ds that maintain custody of clients’ assets. The vast majority of the 5,000 B-Ds registered with the SEC use outside custodians.

If enacted, the rule would require all B-Ds to allocate more time and money toward custody reporting. That could prove particularly burdensome for smaller firms that don’t enjoy the same economies of scale as their bigger rivals.

Although his firm is in favor of the proposal, the cost of compliance is “certainly is going to go up 10% and as much as 25% for a small, self-clearing broker-dealer,” said Michael Hogan, chief executive of Foliofn Investments Inc. “It’s not going to go up that much for Merrill Lynch.”

Foliofn hopes to keep the increase in its compliance costs below 10%, Mr. Hogan said. But it remains to be seen whether Foliofn, and other custodial firms, will pass those costs along to investment advisers who use them to hold clients’ assets.

“It might have to happen,” said Mr. Hogan, whose firm is privately held. “I don’t know. It’s too early to tell.”

The reporting amendments will be open for public comment for 60 days. The quarterly reporting requirement would go into effect in December; the examination requirement would go into effect in September 2012.

Cost Concerns

The Securities Industry and Financial Markets Association, which represents B-Ds, will file a comment letter asking the SEC to consider the issue of costs carefully, said Kevin Carroll, SIFMA managing director and associate general counsel.

“We are sensitive to the incremental cost burden of the proposed rule on our members, particularly our smaller broker-dealers,” Mr. Carroll said. “There are probably reasonable ways to narrow and focus the rules to alleviate some of that burden.”

The new rules are not directly mandated by the Dodd-Frank financial reform law, but they are intended to help the Public Company Accounting Oversight Board fulfill its Dodd-Frank requirement of overseeing accounting firms that audit broker-dealers.

Under the proposed rule, the SEC and a designated examining authority would be allowed to review the audits.

“The goal would be to enhance the commission’s or the [designated examining authority's] examination of the broker-dealer by building on the work performed by the accounting firm, particularly in the area of verifying the custody of customer assets,” SEC Chairman Mary Schapiro said at a commission meeting June 15.

The rule would impose on B-Ds similar custodial guidelines as the ones imposed on investment advisers two years ago. Under those guidelines, investment advisers now are subject to surprise exams of client assets by independent public accountants.

Broker-dealers that maintain custody of the assets of an investment adviser’s clients could satisfy the adviser custody requirements by fulfilling those contained in the broker-dealer reporting rule.

Commissioner Elise Walter said the move would ensure that SEC custody oversight extended to both players in the advice market — investment advisers and broker-dealers.

“I’m pleased to see we're rounding the loop,” Ms. Walter said.

In the wake of the Madoff and Stanford scandals, investors are more cognizant of the role of custodians.

“Advisers have certainly taken on more responsibility to communicate with their clients about the advantages of third-party custody,” said Greg Vigrass, president of custody at Folio Institutional.

The Socially Responsible Investment Firm You've Never Heard Of
(by Steve Garmhausen, Financial Planning)

June 13, 2011 — The stars in the world of socially responsible investing are companies like Pax World, Parnassus and Ariel, which have leveraged the model to gain billions of dollars of assets under management. more

American Values Investments, Inc., in Gray, Tenn., is tiny by comparison, managing a mere $25 million. Yet the advisory firm has succeeded, albeit on a smaller scale, by adding a twist to socially responsible investing: Rather than screening companies out, it focuses on screening them in.

There’s almost nobody in America today that targets the good guys and invests there,” says Carter LeCraw, who founded the business 15 years ago and is its chief executive.

To LeCraw, the good guys are “American Hero Companies” such as The J.M. Smucker Co., Lowes Cos., Inc., and J.B. Hunt Transport, Inc. The firm uses a 500-point scoring system to identify companies that reflect the values of integrity, humility, diligence and caring. Just 125 of the thousands of companies it has studied qualify for potential investment.

American Values Investments invests “primarily to help the companies who are in turn helping America,” according to LeCraw. Returns are its secondary aim. The order of those priorities might scare off some investors, but the company’s recent returns have been strong.

Its American Hero Index portfolio, which equally weights the 76 top-scoring American Hero Companies, returned 22.55% in 2010, beating its benchmark, the Wilshire 5000 Equal Weight Index, by nearly 10 points. Its American Hero Equity strategy, which uses 20 to 30 stocks, did about 13 points better than that same benchmark, returning 25.78% last year. The S&P 500 returned 15.1% last year.

LeCraw has enough faith in his firm’s research and asset management abilities that he allowed its retail advisory business to spin off in late 2009. “We were competing with other retail financial professionals,” he says. “We wanted to eliminate that competition so we could sell them our portfolios.”

It’s easy to see the appeal of managing money for other advisory firms: It can be much more lucrative. “Instead of linear growth — trying to pick up individual clients here are there, you’re looking at exponential growth,” says Zachary Gronich, CEO of RIA in a Box, a consultant to advisors. “RIAs that use me as a subadvisor give me a whole basket of clients.”

If it were easy, everyone would be doing it, of course. Industry experts say connections and credibility are key, and that a hefty marketing budget doesn’t hurt.

LeCraw’s firm, which has five employees, has grown modestly so far. Shortly after the spinoff, its assets stood at around $19 million, and they have since risen to $25 million, in part on the strength of the market recovery until the past month.

Most of the outside assets have come through the spun-off firm, Values First Advisors. But LeCraw hopes the end the year with $40 million of assets under management, in part by bringing additional advisor firms on as clients.

“(Values First Advisors’) business is growing a lot, so we’ve been feeding off that,” he says. “Now we’re trying to open other subadvisory relationships with other investment advisors.”

LeCraw acknowledges that not having a big marketing budget is a challenge, but says the firm is being creative to compensate. One project, for instance, invites people to nominate “current-day heroes with the same character, commitment and courage.” The plan is to choose 56 — the same number as the signers of the Declaration of Independence — by the end of the year.

American Values subadvises outside money mainly through Folio Institutional, a division of online brokerage FOLIOfn Investments, Inc. The platform allows outside advisors to access the portfolios run by American Values and others. It also markets its American Heroes portfolio through Covestor Investment Management, which lets individuals mirror the trades made by successful investors.

LeCraw incorporated the business in 1996 and adopted the name American Values Investments in 2002. After struggling at first, LeCraw’s venture got a significant boost in its early days from Tennessee resident John Gregory, the former CEO of King Pharmaceuticals, Inc.

Gregory “found out about us and asked if I would meet with him,” remembers LeCraw. After a short meeting, he took a 17% stake in the company, gave LeCraw $10 million to invest and promised to introduce him to friends. “He dumped a boatload of money on us, and we were able to ramp up and expand,” says LeCraw.

Folio’s Non-Traditional Diversification in Focus
(by Stan Luxenberg, The Street)

June 3, 2011 — Folio Investing, an online broker, has been crowing about its target-date retirement portfolios. Folio says that most of its portfolios have outperformed competitors by wide margins. more

According to Morningstar, the average 2020 target-date mutual fund returned 1.3% annually during the past three years. In comparison, Folio says that its conservative 2020 portfolio returned 3.4%. Folio attributes the success to a bold strategy that ignores traditional rules for diversification and asset allocation.

The Folio Investments, Inc. are not mutual funds. Instead, they are baskets of ETFs. To invest in one of the Folio target-date portfolios, you must open a brokerage account at the company. Retail investors can maintain an account for a flat annual fee of $290.

Can Folio continue delivering competitive returns in the future? That is difficult to know because the track record is still short. For the time being, most investors may feel more comfortable with one of the conventional target-date mutual funds. But the Folio offerings are worth watching to see if they can demonstrate a new way to manage retirement savings.

Target-date funds are designed to serve people who plan to retire around specific dates, such as 2020 or 2040. The funds are broadly diversified, including mixes of stocks and bonds. As the retirement date approaches, the portfolios become more conservative, aiming to avoid losses.

The target-date category is dominated by large fund companies, including Fidelity Investments, Vanguard Group, and T. Rowe Price (TROW). Though each company has a slightly different strategy, all the major competitors agree on basic approaches. The funds emphasize core holdings that include large-cap stocks and investment-grade bonds. As the retirement date approaches, the bond allocation increases and equity holdings are reduced.

While the major companies provide broad market coverage, Folio’s target-date portfolios invest in niche ETFs. To appreciate how the major companies differ from Folio, compare Vanguard Target Retirement 2040 (VFORX), which returned 1.3% annually during the past three years, and Folio’s moderate 2040 portfolio, which returned 1.5%. The Vanguard fund has about 62% of assets in Vanguard Total Stock Market Index (VTSMX), a broad index that fits in the large blend box, 26% in Vanguard Total International Stock Index (VGTSX) and 10% in Vanguard Total Bond Market II Index (VTBIX).

In contrast, the Folio target-date portfolio has an unusual collection of 10 holdings, including 5% of assets in iShares MSCI Malaysia (EWM), 5% in Vanguard Utilities (VPU) and 10% in Vanguard Index REIT (VNQ). Folio executives argue that their approach provides greater diversification because the niche ETFs do not move in unison.

Folio managers say that they have avoided general large-cap stock funds. The managers argue that they can get better diversification with a mix of assets that includes ETFs specializing in utilities and other infrastructure stocks.

Even during downturns, consumers spend on electricity and transportation, so infrastructure stocks sometimes prove resilient. Folio portfolios also hold commodities and emerging market stocks. Those can be volatile, but they tend to have low correlations with other assets.

Defending their approach, the Folio managers point to the experience of the financial crisis when stocks of all kinds fell. Some target-date funds lost almost as much as the S&P 500 because bond holdings failed to cushion the losses suffered by stocks.

“Many designers of target-date funds assume that if you own a domestic stock fund and a foreign stock fund, then you are diversified,” says Greg Vigrass, president of Folio Institutional. “But you need to hold a wide range of assets.”

The Folio approach showed promise during the downturn of 2008. For the year, Folio 2040 lost 30.8%, while the Vanguard 2040 lost 34.5%. Vigrass argues that his portfolio outperformed because it was more broadly diversified, not because the Folio Investments, Inc. held more bonds or other staid investments.

Target-date mutual funds have glide paths, long-term plans for lowering stock allocation. A typical glide path for a 2040 fund would show that the portfolio begins with 90% of assets in stocks and reduces the allocation to 50% during the next 30 years. With Folio Investments, Inc., the glide path is less certain. Each year, Folio reviews market conditions and adjusts portfolios. The idea is that correlations can change. Assets that appeared safe in the past may become riskier.

In 2010, Folio lowered its allocation to Treasury Inflation-Protected Securities. The problem was that the securities were becoming more correlated with stocks and providing less diversification.

To determine portfolio holdings, Folio runs thousands of Monte Carlo simulations. These test how different assets might perform in various market conditions. The aim is to find the combination of assets that seems most likely to produce the best returns, while taking an acceptable level of risk.

Tougher 401(k) Rules Seen as "Full Employment Act" for RIAs
(by Dan Jamieson, Investment News)

May 1, 2011 — As the Labor Department prepares to issue stricter rules for the retirement fund industry, financial advisers at RIA firms are licking their chops over the prospect of poaching business from broker-dealers and insurance agents. read more at Investment News »

Giving Up Control
(by Temma Ehrenfeld, Financial Planning)

April 1, 2011 — John Gay increased his revenue by 30% when he let investors control their money. more

Bernie Madoff didn’t do much for advisors except sow seeds of mistrust. But for Frisco, Texas-based sole proprietor John Gay, giving up discretion over clients’ accounts grew his practice.

Gay supervises 25 million in assets in portfolios he designed and which are available on the retail platform provided by Folio Investing, a low-cost online brokerage in McLean, Va. The result? A comfortable six-figure income with a 30- to 40-hour workweek. Here, an enlightening discussion about why his collaborative system attracts and keeps more clients.

“It used to be that investors’ biggest fear was running out of money. Post-Bernie Madoff, people became afraid of being ripped off. So I began bringing clients in without asking for trading authority or automatic deductions from their accounts. Clients really like it because they don’t have to sign their life away to me. They push the buttons.

“I don’t have the compliance burden of trading authority, discretion or custody. I charge a flat fee, typically between $2,000 and $8,000 for the year, depending on the complexity of their needs. I’ll design a portfolio of ETFs accessible only to the client based on risk tolerance. I use FinaMetrica’s risk profiling system, with spouses answering separately.

“We can implement the portfolio together in the office or with a split screen over the telephone. I usually view it several times during the year and alert them if I see a need for changes. I send them reminders and we rebalance every year. I can make allocation changes via Folio’s platform and then clients easily adapt the changes (with my help). It only takes a few minutes on the Folio platform; it’s much easier than the client executing it on an ordinary brokerage platform site like Vanguard or Fidelity.

“Clients can call me during the year without additional charge. I now have 75 clients who return to me each year, along with a fair number who operate on their own but call me when their situation warrants. They might be getting divorced or changing jobs. Those people pay me when they need me to do a new plan.

“Between 2009 and 2010, my revenue increased 30%. In the past, when I had clients who didn’t want to hand over discretion, only half would come back for help. Now 80% of my new clients come back to me annually.”

Folio Institutional Names Three Sales VPs
(source: Investment News)

January 21, 2011 — Actifi Inc. of Plymouth, Minn., has hired Brian Stimpfl, 42, as senior vice president of relationship management. read more at Investment News »

Folio Institutional Finds Its Winning Formula for RIA Custody in Specialized Trading Technology
(by Brooke Southall, RIAbiz)

January 21, 2011 — Ability to allow advisors purchases of partial shares has applications in 401(k), model portfolios and investments in Berkshire Hathaway. more

Frank Monte, president of Harbor Financial Group, had a problem: He wanted to buy Berkshire Hathaway shares for smaller accounts, but none of the usual RIA custodians could accommodate his need for access to Warren Buffet’s company.

The difficulty for the Fairport, N.Y.,-based advisor was that Berkshire Hathaway A shares (BRK.A) sell for about $120,000 a piece. This is a non-starter for the accounts of many clients whose average assets number around $300,000.

Then, a year ago, Monte discovered Folio Institutional, an emerging custodian in McLean, Va.. He was able to put 90% of his clients in Berkshire Hathaway shares because its technology allows the purchase of fractional shares.

Berkshire Hathaway B shares, no thanks

(He could have invested in Berkshire Hathaway B shares that trade for about $79 through other custodians; the problem was that he knows that they have underperformed the A shares significantly since 1996: a 232% rise for B shares versus a 256% rise for A shares, according to his calculations.)

Folio is yet another small custodian like Scottrade Advisor Services, Trust Company of America, Ceros Financial Services, Inc., Shareholders Service Group Inc. that is finding a niche through use of specialized technology. It serves 400 RIAs and an additional 12 broker-dealers. About half of those consider Folio their primary custodian. Folio Institutional declines to disclose assets in custody but says they are now at several billions of dollars.

Its trading technology is such that it can rebalance multiple advisor accounts with a click of a mouse.

“We knocked on the doors of TD, Schwab and Fidelity but they weren’t as user friendly for trading; it’s old technology. You have to go through a number of steps,” Monte says.

These large custodians have all made major advancements over the years in developing trading technology but they don’t specialize in technology for running model portfolios. The weakness of Folio Institutional’s trading for model portfolios is that the trades occur at 11 a.m. and 2 p.m. each day. This is not a problem for most long-term investors but it is largely unworkable for day traders.

Mark Bagley, a spokesman for Folio Institutional, says his company works to afford flexibility to advisors of all kinds.

Trading windows

“We do offer two daily trading windows (11 a.m. and 2 p.m. ET). Many of our advisors execute their trades during these windows because the patented system facilitates model-based trading: hundreds, or even thousands, of client portfolios which follow an advisor’s models can be updated with a single click. There is also a cost-savings, because the trades we match internally are executed at the mid-point of the bid-ask spread to the benefit of all customers participating in that order.”

Folio Institutional also offers the full array of standard trading orders — including market, limit, stop and stop-limit orders — that can be executed in real time, he adds.

Like Trust Company of America, this diminutive custodian doesn’t necessarily cater to the smallest of RIAs and it has a niche serving turnkey asset management providers. See: How a small RIA custodian is making big waves For instance, it serves VSR Financial Services of Overland Park, Kan., a TAMP that manages $2.9 billion and has 250 advisors on staff.

“[Folio Institutional] has been a good fit because it allows our advisors to trade on a (portfolio) model basis and actually manage the model and it’s ticket charge-less,” says Scott Stanfield, vice president of wealth management. “It allows us to be a true wrapped vehicle. Ticket charges make (clients) feel like they’re getting nickel-and-dimed.”

The Folio Institutional platform was developed in 2002 as an offshoot of FolioFN, a retail discount broker, two years after the founding of FolioFN by CEO Steven M.H. Wallman, a former member of the Securities and Exchange Commission. The RIA custody arm of FolioFN was largely developed by Greg Vigrass, president of Folio Institutional, who had worked at Schwab in sales and service roles from 1989 through 1999.

Survivor among “folio” companies

The fact that Folio Institutional has achieved critical mass is a testament to the skills of Vigrass. During the year-2000 time frame, there were so-called “folio” companies springing up everywhere — and few have survived, according to Charles “Chip” Roame, managing principal of Tiburon (Calif.) Strategic Advisors.

“Folio” is the jargon used by the industry to describe the ability to set up an investment portfolio and have the ability to allocate dollars across it with minimal trading costs. At one time, it looked like they might be in a position to usurp mutual funds because of their low cost and high tax efficiency (an investor gets their own tax basis) but they have never made that big a dent.

“A number of companies jumped in. It was just too complicated. Consumers didn’t get it. Somehow FolioFN persevered and Greg Vigrass figured out this technology can be used in the institutional world. He figured out it’s an easier sale to businesses,” Roame says.

FolioFN has about 125 employees and about 75% of its assets come from advisors. It has 35–50 service employees shared between the retail and institutional side of the business.

Besides supporting a number of TAMPs with big assets, the custodian has a strategy of increasingly serving the 401(k) market and has two employees focused exclusively on it. The platform allows plan participants to buy ETFs in dollar amounts — rather than by number of shares — making it possible for them to be fully invested. This extra layer of seamlessness can be used as a differentiating factor by advisors.

401(k) application

“It allows a lot of advisors to get out there and introduce ETFs to 401(k) plans. We’re seeing that become a significant part of our growth,” Vigrass says.

Another area of specialty is helping advisors that prefer socially responsible investing. See: Eavesdropping on SRI in the Rockies: SRI’s surprising growth, changes in the sector, and the question: How do you handle BP in a portfolio? technology makes it easy to strip out companies that are considered socially irresponsible.

Because of the custodian’s unique capabilities, Folio RIAs tend to be big proselytizers, according to Vigrass.

“It’s almost cult-like in many cases; we have some pretty rabid fans,” he says.

Indeed, Monte says that he is now putting 75% of new assets with his new custodian.

He says TD Ameritrade continues to get assets because of one deficiency he’s found at Folio.

“Folio doesn’t have the breadth and depth in the mutual fund space. We go to TD.”

Big hiring

With the success it has realized in the past few years in winning more and larger advisors, Folio Institutional is now making some aggressive hiring moves aimed at much faster growth.

It recently Robert Steger, vice president of sales, Pacific Northwest region. Steger, based in San Francisco, formerly was west coast sales manager for the Broadcort Clearing division of Merrill Lynch. Previously in his 20-year career, he worked at Fidelity Investments and Charles Schwab Corp.

Another hire is David Turner, vice president of sales and retirement consultant, Western regions. His more than 20 years of experience includes eight years as regional sales director for SEI Investments. He also held positions at American Airlines and KPMG International.

Folio Institutional also hired Rick Hope as vice president of sales, Midwest region. Based in Chicago, he has more than 21 years of experience in financial services. He previously was a regional vice president with DWS Investments Distributors Inc., a unit of the Deutsche Bank Group. He also worked with the retail and institutional divisions of Charles Schwab Corp.

Let Clients Make Their Own Trades
(by Peter McDougall, Dow Jones Newswire)

January 10, 2011 — Trust in financial advisers has been on the wane since the 2008 crisis crushed many portfolios and Bernie Madoff gave the industry a black eye. more

John Gay, president of Frisco Financial Planning, a fee-only firm based in Frisco, Texas, believes investors’ concerns can be put to rest simply by letting clients do their own trading. In fact, as of the past six months, all of Gay’s clients are in charge of their own trades. In a recent interview, Gay reports the new model has made his clients happier and his job easier.

Q: So how do your clients manage their investments?

A:I have been operating on the Folio Investing platform for several years now. My clients can pull up a list of my model portfolios whenever they log in to the system. They can ask the system to match any of my models, or they can make their own investments. They generally give me “view only” access to their accounts, and have it set up so I receive the same alerts they do. We still have our regular meetings to discuss what portfolio best fits their needs and what investments would be appropriate for them. And then I can walk them through the trading process or they can do it themselves.

Q: What is the advantage to this approach?

A:By making it so I don’t have direct access to their funds, clients don’t have to worry about Ponzi schemes, embezzlement or any of those types of fears. And from the adviser standpoint, it’s made my job a lot easier. Like most advisers, I’m rewriting my Form ADV [registration with the SEC and state securities authorities] as a result of the financial regulatory reforms. My task is a lot easier because I don’t have trading discretion and I can’t pull fees out of my clients’ accounts. I’m not even managing assets. And my fees are much lower than average since much of the compliance, trading, and administrative burdens don’t exist under this model. (Typical annual fees range from $2,000 to $6,000.)

Q: Do you see this as potentially changing the relationship between advisers and clients?

A:Are some advisors are going to feel threatened by this? Sure. Some clients might say, “So what do I need you for?” But if trading is the only value that you're adding, then your number is up soon, anyway. You have to add value through financial education, and this model makes that educational component even more important. I haven’t lost a client because of this, and most are happier with the new arrangement.

Q: Are there some clients that just aren’t right for this model?

A:There will always been clients that need to be saved from themselves. For them, this type of model won’t work. Those are the types of clients that, if they are going to sell everything in their account when the market has hit rock bottom, they're going to do it no matter what the restrictions or the environment. But from a regulatory and liability standpoint, I’m not so sure that’s a bad thing. After all, it’s possible that a client could turn around and say, “I wanted to sell out, but he talked me out of it,” and place the blame for significant losses on the adviser.

Fortunately my clients don’t fall into that category — they are free to take all, some or none of my advice. But for advisers that have a real challenge with educating their clients and saving them from themselves, they'd probably need to think twice before adopting this model.

↑ Back to top