Brokerages' next big threat? Portfolios to go

Apr 17, 2011 @ 12:01 am

By Bloomberg News

Andy Cohen uses exchange-traded-fund portfolios recommended by MarketRiders Inc. to manage his retirement plan and children's college savings. He's charged about $10 a month.

“I don't have enough money that I have a dedicated wealth manager,” said Mr. Cohen, 47, who lives in San Mateo, Calif., and is chief executive of “It got me a much more diversified portfolio than I could have ever done on my own.”

The next thundering herd on Wall Street may be the ranks of low-cost portfolio managers such as MarketRiders and Folio Investing, which cater to self-directed investors such as Mr. Cohen. Sites that sell prepackaged portfolios have attracted more than $3 billion in assets over the last three years as more investors have left their full-service brokers.

“Individual investors have started to realize they can actually do some things, as self-directed investors, reasonably well, if they're given a platform that allows them to invest more intelligently,” said Steven Wallman, chief executive of Folio Investing, where investors can purchase pre-designed and customized index portfolios for $29 a month.

Bank of America Corp.'s Merrill Lynch division and Morgan Stanley Smith Barney LLC, the top two full-service brokerages by client assets, had combined outflows of about $150 billion during 2009, the most recent year for which data are available.

“The No. 1 source of accounts is what we would refer to as full-commission brokers,” said Peter Sidebottom, executive vice president of product, marketing and client experience for TD Ameritrade Holding Corp., which caters to do-it-yourself investors.

Traditional brokerages are focusing more on their wealthiest clients in an effort to improve profitability, so the customers leaving these firms tend to be the ones with the smallest accounts, said Katharine Wolf, a senior analyst for Cerulli Associates Inc.

“They're not looking to target a client that has, say, under $250,000 to invest,” she said.

Those investors are potential customers for services such as Flat Fee Portfolios, which began opening accounts in February. Clients are offered several pre-designed portfolios with an annual review for a fee of $129 a month.

“It's for people who want good- quality asset management” at a price that is “accessible to a much wider demographic,” said Mark Cortazzo, Flat Fee Portfolios' founder. The firm charges $199 a month and provides semiannual reviews for accounts with at least $250,000.

At Hedgeable Inc., investors can choose from among 20 different exchange-traded-fund or stock model portfolios. Fees for the service, which began opening accounts through its website in December, range from 0.75% to 1.5%. Investors like the transparency of the web-based business models, said founder Mike Kane.


Some of the services leave in-vestors in control of their assets, and others take discretionary authority over client accounts. With Flat Fee Portfolios, managers have discretion over client assets. MarketRiders gives advice on investment decisions, such as re-balancing, which investors can take or leave. Other than Folio Investing, which is a broker-dealer, all of the firms are registered with the Securities and Exchange Commission as investment advisers.

“The beauty of it for me is that monthly e-mail that just says, "Here's how to do it,'” said Mr. Cohen, who has been using MarketRiders for about two years. “If I didn't get that e-mail, I'd never do it.”

Prepackaged portfolios from Folio Investing may contain individual stocks, mutual funds or exchange-traded funds. The company's moderate portfolio for investors planning to retire in 2040 is composed of 10 exchange-traded funds and notes that track stocks, real estate investment trusts and commodities, including the PowerShares QQQ fund, which follows the Nasdaq 100 stock index.

That portfolio returned 3% annualized over the three-year period ended April 6, compared with average returns of 1.3% for 2040 target date mutual funds, according to data from Folio Investing and Morningstar.


Covestor Ltd., which began managing money in November 2009, tracks the portfolios of about 30,000 users who can choose to make their investment actions viewable to others on the site. Users also can track the trades of about 150 pre-screened managers on the site.

“It's like an open-source hedge fund,” said Perry Blacher, CEO of Covestor. The managers range from Atlas Capital Advisors, which manages $175 million for high-net-worth investors, to “an ophthalmologist in Wisconsin,” he said.

MarketRiders has $2.7 billion in user portfolios. Traditional brokerages had about $4.7 trillion in assets under management at the end of 2009 and account for about 38% of all U.S. wealth management assets, according to data from Aite Group LLC. Folio Investing, which is closely held, has “multiple billions” invested, said Mr. Wallman, who wouldn't provide a specific figure. Mr. Blacher declined to disclose assets except to say that Covestar is gaining about 15% in assets each month.

Wealthfront Inc., which started in October 2009, lets users invest as little as $10,000 among 40 different registered investment advisers who normally have account minimums of $1 million. The firm has about $180 million in assets invested through its site.


Wealthfront chooses investment managers to participate the same way endowments do, by examining managers' historical trade details rather than just their performance history, said CEO Andy Rachleff, who is also vice chairman of the University of Pennsylvania's endowment investment committee.

Wealthfront managers have returned an average of 30% from the site's start in October 2009 through Feb. 18, compared with a 27% gain in the S&P 500. The managers charge average fees of 1.3%.

Richard Ferri, founder of Portfolio Solutions, builds index fund and exchange-traded-fund portfolios for clients and re-balances them periodically for a fee of 25 basis points. The firm manages almost $1 billion.


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