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Online Portfolios Move into Mainstream

Online portfolio products, derided by the Investment Company Institute of Washington D.C. as unregulated mutual funds, got a strong endorsement last week when it was revealed that Fidelity Investments of Boston and Charles Schwab of San Francisco would begin offering the products to investors.

The increased competition by two industry giants will go a long way towards convincing some investors that online portfolios are a viable alternative to mutual funds and not fringe products, said Nancy Smith, a vice president with FOLIO(fn) of Vienna, Va. FOLIO(fn) is one of the largest providers of online portfolios.

"Already I've had people say that this is really terrific and makes [them] feel more comfortable with the product," she said. "I think that you can draw the conclusion that this is a product that is really changing the landscape for individual investors. We look forward to the competition... It's a vindication of FOLIO's."

By bringing out these products, Fidelity and Schwab are probably putting themselves at odds with the ICI. The ICI wants the Securities and Exchange Commission to consider regulating online portfolio products under the Investment Company Act of 1940. Certain aspects of the products, especially fractionalized shares offered by some online portfolios, necessitate that the products be regulated under the 40 Act, the ICI says. Craig Tyle, the ICI's general counsel, wrote a letter July 12 requesting that the SEC consider whether FOLIOs "and other similar web-based programs" sell investors a separate security, similar to a mutual fund, rather than several securities that make up a portfolio. In addition, Tyle asked the SEC to consider if offering investors a prefabricated portfolio designed by an investment professional constituted professional management and advice, similar to a mutual fund. The ICI has not had contact with either Schwab or Fidelity regarding the development of the products, said John Collins, a spokesperson for the organization.

Fidelity's product is different from a mutual fund because it is not designed to appeal to traditional fund investors, said Tracey Esherick, an executive vice president with the company's online brokerage.

"You really aren't looking at an alternative to mutual funds; it's an alternative to individual securities," she said. "It's a different focus, it's a different part of the market and I think we're very cognizant of what the concerns of the industry are and we certainly had lots of conversations with Bob [Pozen] ... to make sure we are aware of those concerns and stay away from those issues."

Fidelity's portfolios are not professionally managed because the investor initiates any changes to the portfolios, Esherick said. But as with FOLIO(fn)'s product, Fidelity investors will purchase prefabricated, online portfolios using fractionalized shares, she said.

That differs from the product Schwab is currently testing in the Washington D.C. area, according to Mo Shafroth, a spokesperson for Schwab. Schwab is offering a product that can only be purchased in whole shares. But the product, called Portfolio Source, will be actively managed by U.S. Trust analysts, Shafroth said. Any portfolio changes the analysts make are e-mailed to investors who can decide whether they want to follow the analysts' moves, Shafroth said. Also, Schwab's product only includes ten stocks per portfolio, which does not offer the diversification of a mutual fund, he said.

"I think they are distinct offers," he said. "You've got mutual funds, you've got stocks and you've got Portfolio Source and the difference is pretty clear. ... With Portfolio Source, you have a product with ten stocks with the guidance from U.S. Trust in which clients make the investing decisions. So I think they are pretty distinct."

Still, Fidelity's and Schwab's portfolios are a sign that technology is precipitating the development of alternatives to mutual funds, said Burton Greenwald, president of BJ Greenwald Associates of Philadelphia, a mutual fund consulting firm.

"It's a further indication that there are an endless variety of products that are going to be developed that suit individual investors' needs," he said.

However, the new products will complement, not compete with, actively-managed mutual funds, Greenwald said.

"Most people in mutual funds want professional management, they want to be relieved of the ongoing responsibility to monitor their accounts and I sincerely believe in the long run, professional management is the most effective way to manage their serious money," said Greenwald.

Online portfolios are primarily used by investment advisors, but are not popular with individual investors, said Jonas Ferris, CEO and co-founder of, a website that tracks small and new mutual funds in addition to 45 online portfolio offered through of Las Vegas, Nev.