FolioInvesting CEO Steven Wallman describes how his company aims to help retail investors diversify. By using the portfolio strategies offered, retail investors are better able to stay the course, he tells MoneyShow.com.

Kate Stalter: Today’s guest is Steven Wallman, founder and CEO of FOLIOfn and FolioInvesting.

Steve, there are a number of intriguing angles that we can discuss today. I wanted to start out by pointing out that you are a former SEC commissioner, and I understand that one of your objectives in forming this company was to address what you saw as some unmet needs of individual investors?

Steven Wallman: That’s absolutely right. When I was investigating why individual investors seem to have trouble investing in a wise way, we discovered a number of things:

  • There was much less diversification than one would expect from those who were in the market.
  • There was no attention or almost no attention paid to taxes.
  • There was a misunderstanding as to fees and costs.
  • And there was a general tendency for people to go to one-size-fits-all investments without thinking about their own real risk levels, or how best to structure an investment for themselves.

So we started the company with the notion of creating a smarter, better way for people to invest, which would be through diversified portfolios that they can customize and tailor to meet their preferences and needs at very low cost.

We have a set of pricing plans that really allow for all the costs to be taken out, in terms of commissions that otherwise an investor would incur, and also to be able to look at after-tax returns as an important factor in thinking about how best to invest. We try very much to encourage people to diversify, and to diversify intelligently.

Kate Stalter: To follow up on that, it appears that you do have a couple of different divisions of the company, ways for the retail investor to either work through an advisor or be self-directed. How does that work?

Steven Wallman: We do have two divisions. One is direct to retail, which is our folioinvesting.com offering. The other is our platform for investment advisors, which is folioinstitutional.com offering.

What we discovered early on, when the company first opened its doors a little bit more than a decade ago, was that we had a number of investment advisors using our retail platform seeking to try to create good diversified portfolios for their advised clients. They came to us and said, “Can you guys build an institutional platform that really serves us well, so that we can use the same concepts that you are offering to individual investors for our clients?”

We sought out to do that, and we did. So, today on the platform, individual investors can invest the same way that, for example, large institutions and endowments have learned to invest, which is to really diversify well, to be able to think about the appropriate risk levels that they want to incur, and to act in a consistent manner that allows them to not try to time the market, but grow with the market.

On the advisor side, they get the same platform benefits, although in many cases they will create their own portfolios for use by themselves for their clients. Whereas on the retail side, we provide a whole series of portfolios that an investor can start with and further customize as they wish, or create their own and start from scratch with stock screeners or other lists that they may have, to provide a diversified portfolio for their own account.

Kate Stalter: I’m looking at the home page of your site right now as you’re describing this, and I see, right off the bat, a number of different portfolios that would appear to address various objectives. Can you just walk us through this, Steve? If I’m an individual investor approaching your site for the first time, what would I see, and what would I be looking for to start making some decisions?

Steven Wallman: We provide about 140 to 150 what we call “ready to go portfolios,” that are good starting points for an investor, somebody who really doesn’t quite know where to begin but wants to start to invest in a good way.

By going to the page that shows all those, you can see our featured ones and brand-name ones that come from people like Zacks and others, and be in a position to work through our offerings to create a great portfolio for them. They can be in various types of styles, risk levels, etc.

On the home page, we show, for example, the ones that have been performing best over the last three months. Those are interesting.

For example, in our Internet Five portfolio, it’s got five holdings, and those five holdings include Amazon (AMZN), Baidu (BIDU), EBay (EBAY), Google (GOOG), and Priceline (PCLN). Over the last three months that portfolio has been up almost 17%, over 16.9%. So, it’s returned quite well, and it’s a portfolio that allows people to invest with one click in those five stocks.

In addition, however, most of our portfolios actually are much more broadly based, and we’re very proud of our target-date portfolios. These are portfolios that are really very suitable for people looking to invest through their IRA or through a retirement account.

They come in different risk levels: Moderate, conservative, aggressive. And they reach from current—for folks who are already in retirement—to as distant as the 2050 and the 2055 timeframes going up to 2060.

They are comprised primarily of ETFs, and those ETF holdings include in most cases anywhere between eight and a dozen different ETFs from different providers. We put together those portfolios for people to be able to use and select to meet their retirement needs.

These portfolios have really performed quite well over the last four to four-and-a-half years. On this site, we actually provide a whole white paper describing how our portfolios differ very significantly from the traditional target-date mutual funds that are otherwise offered to investors.

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Kate Stalter: As you’re speaking, one thing that did occur to me is: How do you provide some guidance for people who say might want to balance, for example, some of the Internet growth names you were talking about, with perhaps something more conservative—an income portfolio, for example. How would a person make that determination?

Steven Wallman: We suggest that people start with, on our home page, the questionnaire that in essence asks, “what kind of investor are you?” That free questionnaire, which is simple for people to start to understand their risk tolerance and other needs, is available on the site with just a click with just a handful of questions needing to be answered.

We provide educational information to the investor saying, “Based on how you’ve responded to these questions, you appear to be a short-term investor or a long-term investor; you appear to be conservative or aggressive in your risk tolerance.” Then we provide a series of portfolios, that people can select, that if they put them together in their own account, would give them a good balance between the kinds of portfolios that might be too narrow or risky and those that are more conservative in order to create a more customized portfolio that really suits that person’s needs.

So if you end up being a medium-term conservative investor, what you end up with is a portfolio that you can look at and invest in, that would be suitable for a medium-term conservative person. The choice is yours.

We do not, ourselves, give advice. We have advisors who use our platform and give advice. We provide education, tools, information to allow a self-directed investor to make their own decision as to what’s best for them.

But we provide it with a lot of transparency, a lot of clarity, a lot of information, that really informs people. And the whole site is geared towards encouraging people to make a wiser, more intelligent decision as to how to invest through a change in their investing process.

They think then about diversification, they think about what their investing goals really are, and it moves them away from what we see a lot of other brokerages doing, which is really trying to convince people simply to trade, to churn, to pick the hot stock, to try to guess whether or not buying it at $320 is going to be an up or down price, and then pretend to act as if they are some kind of professional investor who is sitting there with all the professional tools and being able to outperform those kinds of investors.

It’s just very, very hard for a retail investor to play the same game as a professional and win at the professionals’ game. What a retail investor needs to do is to play a different game that they could win at.

It is a game that’s much more consistent with the kind played by endowments and very large institutional investors, pension plans, and others who have seen the benefits of really a much more consistent, diversified, attuned-to-risk levels approach that can be deployed intelligently and cost effectively, and that actually gives them a much better—at the end of the day—set of returns for the level of risk.

Kate Stalter: If we can follow up on that, one last question for you today: Given what you were just saying, obviously we had a nice rally in the markets in the first quarter, and then volatility seems to have returned again in Q2 thus far. Are you seeing any differences in the trends of what some of the retail investors are gravitating toward? Has that changed at all, from what you’ve observed?

Steven Wallman: It has, actually. On our platform, we’ve seen people increasingly able to stay the course.

Instead of attempting to time the market, as we saw the flows from what was reported with regard to other brokerages, and even mutual funds, we had many investors who stuck through 2011 and caught the rally in 2012 with portfolios that were well diversified.

Because they had diversified their portfolios earlier, they weren’t hit as hard as some others who were just in the wrong stock or wrong category at the wrong time, and who lost an awful lot. So, what we’ve seen is, notwithstanding the volatility, a good sense of consistency, which has rewarded investors well.

Because as you know, missing out on the rallies and the days when the market does really perform the way you want it to, really cuts into your returns over the long term. Because if you miss the rallies, it’s hard to make them up just by investing later on.

You need to be in the market before the rally starts, not after the rally is already well underway, or has already ended. The problem with a lot of individual investors is that they somewhat wait to ensure that the rally seems well underway before they dive in, and the result is that they’ve missed a good part of it.

Then, of course, on the other side, they hang on too long and don’t ensure that they’ve got protection on the down side. Our platform allows people to feel that they’ve got the downside benefit of a very diversified portfolio so they’re not going to be constrained to watch their account diminish because of a particular sector bet that went very wrong, or a particular individual stock that went very wrong. Instead, they’re going to be a consistent investor for the long term, and reap the benefits of that.