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FOLIOfn Offers $4 Trades to Attract Assets


In an attempt to lure retail investors, FOLIOfn of Vienna, Va., recently began waiving its monthly fee and offering $4 trades. The move is intended to attract investors new to online investing who are not ready to pay monthly fees, according to Steve Wallman, CEO and founder of FOLIOfn and a former commissioner with the Securities and Exchange Commission.

However, industry observers think FOLIOfn may be offering the lower pricing structure to offset a steep decline in assets and volume that has plagued many mutual fund companies and online brokerages due to the market downturn of the past two years.

FOLIOfn was the first firm to offer online "folios," or self-designed baskets of securities that can be bought and sold in a single transaction. For $14.95 a month, the company allows investors to perform up to 500 trades.

"I think there are investors [who] would like to try FOLIOfn, but a move to a monthly fee is too much of a jump for them," Wallman said. "It's tough to ask investors to change the way they're investing [as well as] how they pay."

FOLIOfn has been offering per-transaction pricing for credit unions for about a year, with nearly 500 credit unions now taking advantage of the pricing structure. The firm's initial business plan was to attract buy-and-hold investors willing to pay monthly fees, Wallman said. The firm has had some success, but it's been tough going, and so it is now trying to duplicate the success it has had with credit unions for the general public, Wallman said.

FOLIOfn would not disclose any data about its trading volume or number of accounts. Wallman said that both have grown, but have been significantly limited by the overall performance of the market.

"We've seen growth, but clearly that growth is something that would be greater if the market was performing better," he said.

Steep Decline in Volume

FOLIOfn's struggles come as no surprise, as most online brokerage firms have suffered a decline in volume of late. In 2001, the number of new accounts opened at E*Trade of Menlo Park, Calif., was down 31% and average daily transactions were down 25%, according to the firm.

New accounts at TDWaterhouse were 22% lower in March of this year than in March 2001 and daily trades were down 5%, according to the New York-based firm. And at Datek of Jersey City, N.J., the number of new accounts opened was down 29% for the first quarter of 2002 compared with that of 2001, and daily trades were down 21%, according to the firm.

Not all online trading firms are reporting decreases, however. Bellevue, Wash.-based Sharebuilder.com, which, like FOLIOfn, has no minimums and offers a monthly pricing plan of $12 for unlimited buys (sells are $15.95 each), has experienced tremendous growth lately. The number of accounts at Sharebuilder.com, which Wallman concedes is FOLIOfn's biggest competitor, grew to more than 390,000 in 2001, up 194%, according to the firm.

Last-Ditch Effort?

Some in the industry think that FOLIOfn's move to $4 trades might signal a last-ditch effort on the part of the firm to stay afloat and compete with Shareholder.com. In September 2001, Netfolio, which offered nearly identical services to FOLIOfn, was forced to shut down [see MFMN 9/10/01].

FOLIOfn itself has gone through major cutbacks. Citing the weak economy and the impact of the Sept.11 terrorist attacks, FOLIOfn laid off 36% of its staff in November and significantly cut executives' salaries.

"It does sound like [FOLIOfn's recent move is] an adaptation to the realities of a difficult market," said Don Cassidy, senior fund analyst at mutual fund researcher Lipper of New York. The firm appears to be trying to make itself more attractive by becoming a low-commission Internet brokerage firm, Cassidy said. However, there are already several other brokerages that offer trades from $0 to $7.

"A while back, we said that [FOLIOfn's offering] might be interesting to some. [But] the firm began operations at the tail end of a hot market," Cassidy said. FOLIOfn was founded in 1998, and its site went live in May 2000. "They were trying to take advantage of [the market run up]. To me, they fell into a niche of questionable size," Cassidy said.

According to Wallman, FOLIOfn is not offering the per-transaction fees in order to stay in business. While FOLIOfn's retail business has not been stellar, it is not its only source of revenue, Wallman said. The firm also offers its services to financial advisers and offers product licensing and consulting services, he said.

"It's certainly not a last-ditch effort," Wallman said. "We've introduced $4 buys and sells as an offering for a specific subset of investors who want to ease into FOLIOfn without the annual fees. But it's not a focal point of our efforts."

The focal point, according to Wallman, is and always has been to develop business with other financial services companies. The firm will soon release a press release announcing that it has aligned with fund companies to offer funds on its advisor site. Also, the firm is in talks with fund companies to have them offer folio baskets through FOLIOfn's system, Wallman added.

Last year, worried about folios competing with mutual funds, the Investment Company Institute tried to convince the SEC a second time that folios should be regulated the same way funds are. The SEC denied the ICI's petition [see MFMN 9/3/01]. The ICI has not pursued anything further and has no plans to do so, according to John Collins, an ICI spokesman.