Four new Internet-based brokerage firms in the US have decided to capitalise on the widespread, growing discontent with conventional funds and have begun offering investors the opportunity to create their own mutual funds. Although they differ in detail - most notably their fee structures - Sharebuilder.com, BuyAndHold, Foliofn and eInvesting, all of which have been set up in the last year, allow investors to pick their own stocks and assemble diversified portfolios at a relatively low cost.
The premise of all four sites is that at least some investors can reap better rewards by creating "home-brewed" mutual funds, rather than entrusting their money to mutual fund managers. Each is designed to let individual investors gain greater control over their investments by allowing them to buy stocks in specified dollar amounts, rather than according to the number of shares. This means that investors can buy one share of a particular stock and even a fraction of a share. The way this works is that the brokerage firms pool the purchases (or sales) of all their customers, piecing together fractional share transactions to make whole shares.
Sharebuilder.com, which began doing business last November, and BuyAndHold.com, which started up in December, are designed mainly for low-asset investors but they do have the advantage of low commission costs, which allow investors to make small purchases and sales without giving up a substantial percentage of their assets. However, Foliofn, active since March, and eInvesting, which is still in the startup phase and not yet accepting accounts, are designed for higher net worth individuals - those with assets in the tens of thousands of dollars or more.
Foliofn was founded by Steven Wallman, a former commissioner with the Securities and Exchange Commission, as a viable alternative to mutal funds. Due to the Internet, with its cost saving advantages, Foliofn can provide its services at reasonable rates. It does not charge by the transaction but by a flat fee of US$29.95 per month or US$295 per year. That is roughly what the average mutual fund charges to manage a portfolio of $25,000. Foliofn's services should appeal to investors with considerably more than that, but its fee might seem too pricey to those with less.
San Francisco-based e-Investing, which does not yet have a certain date for going operational, was recently acquired by E-Trade Group, a major online brokerage. It may charge a fee based on the amount of assets in a customer's account.
Russ Kinnel, a research analyst with Morningstar, the Chicago-based firm that tracks mutual-fund performance, has called the build-your-own movement "innovative" and "really interesting" but has warned that many individual investors do not have the time or knowledge to make the best choices when they pick their own stocks: 'If you're not smarter than the market you may as well just buy an index fund or buy the services of a fund manager you think is smarter than the market', he said.
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