Self-Serve
Aug 06 2001
NEW YORK - The market is down and your mutual fund is down more. You feel anger rising as you review the dubious investments the fund manager made in the past quarter and tell yourself, "I could have done better."
Finally, it's easier to put your money where your mouth is. The mutual fund industry may want you to think running a portfolio is rocket science, but with a deep library of stock research available on the Web, a seasoned investor can manage a portfolio of dozens of stocks with as little as $5,000.
Major retail brokerages E-Trade and Fidelity Investments are set to launch so-called stock basket or folio products that, like similar services already on the market, give individual investors a platform for managing and trading individual stocks in a package resembling managed mutual funds.
The products will have securities regulators and the mutual fund industry monitoring them for even the slightest hiccup or impropriety. Investors should also consider whether these services are best for them.
Baskets are merely the next in a wave of new investing vehicles that gained momentum when Foliofn set up shop in March 2000. Former SEC Commissioner Steve Wallman's company - much to the chagrin of the mutual fund industry - lets investors create folios of up to 50 stocks or pick from pre-selected folios matched to an index or investment style.
E-Trade's product launch will no doubt bring mutual fund and individual investing interests to a head once again. Investing platforms like E-Trade's and Foliofn's are meant to empower investors looking to diversify their holdings, control their tax accountability and keep brokerage costs to a minimum. Sounds like the goals of a well-heeled portfolio manager.
"These products appeal to a very narrow group of people," says Al Fredman, who studies mutual funds and related investments at California State University Fullerton. His advice: Unless you think you're a great stock picker or have the time and confidence to manage your own portfolio and enough discretionary income to give it a go, you're better off with what's already out there.
The new services differ in their approaches. With a minimum of $10,000 invested per basket, Fidelity's program is little more than a way to buy multiple securities at once. Unlike E-Trade's asset-based fee and twice-daily execution, investors are charged as if all the trades were done separately but at the exact time of the order.
The most appealing part of folios is the ability to keep taxes in check. This comes after a year in which many mutual funds surprised investors with capital gains taxes as they sold down to the bottom. "You'll know exactly what you own and will have more control over taxes," says Scott Berry, a fund analyst at Morningstar.
Technically, the folio products aren't registered as mutual funds, which face stringent regulations, but as broker-dealers. Mutual fund companies, which see the growing number of folio products as a threat in what is already a challenging market, have been pressuring regulators to impose tighter restrictions on the services.
If regulators comply, folio services could become more complex and less appealing to individual investors. For now, the biggest threat they pose comes from the inexperience of those using them. Novices are safer with their money in mutual funds. But for the seasoned stock picker, the folio services offer a chance to brag that they can beat the rocket scientists who manage money for big mutual funds.
| WANNA BUY A BASKET? | |||
| Company | Product | Fees | Launch |
| E-Trade | Up to 50 stocks per basket. Prepared by Standard Poor's, or pick 'em yourself. Twice-daily execution. Unlimited trading. | $5,000 basket account or $2,000 for an IRA. Annual fee of 0.75 percent to 1.25 percent based on assets. | Scheduled for August |
| Fidelity | Up to 50 stocks per basket. Pick 'em yourself. Immediate execution. Unlimited trading. | $10,000 minimum investment per basket. Charged per individual stock transaction at investor's current rate. | Scheduled for August |
| Foliofn | Up to 50 stocks per folio. Prepared, or pick 'em yourself. Unlimited trading in twice-daily execution window. | $29.95 per month or $295 per year for three folios; $9.95 per month or $95 per year for each additional basket; $14.95 fee for nonwindow trades. | March 2000 |
| Sources: Companies listed | |||