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April 30, 2000

Technology People: Tech Maven Launching Wrap Fee Trade System

By Peter Chapman

When Steven Wallman was a commissioner at the Securities and Exchange Commission from 1994 to 1997 he sang the praises of technology - especially the Internet's ability to empower the individual investor.

Now he intends to practice what he preached.

Wallman is launching an Internet brokerage called Folio[fn] that will offer small investors a sort of low-cost, self-directed wrap-fee account. The planned system, which has $75 million in capital from outsiders, is awaiting approval by his former employer, the SEC.

Conventional

The conventional wrap account is a professionally constructed portfolio offered by full-service brokerages to clients who have $100,000 to $300,000 to invest. Instead of paying a per-trade commission the customer pays a management fee of between one percent and three percent of the total assets. Folio[fn] also combines some elements of a mutual fund and individualized stock picking.

Annual Fee

At Folio[fn], an investor with at least $25,000 will buy into a pre-selected, or self-constructed portfolio of say, 25 to 30 stocks. He will pay an annual fee of $300. Most e-brokerages, such as Ameritrade or E*Trade, typically do not offer such services, making the bulk of their money from commissions and margin interest payments.

Buying all or part of a 20- to 30-stock portfolio at Folio[fn] is smarter and cheaper than picking stocks one-by-one, investing in a mutual fund or turning one's assets over to a full-service shop, according to Wallman.

The reasoning? He says stock picking is costly and time consuming; mutual funds generally underperform market indices and include a high annual fee (about 1.3 percent); and wrap accounts are similarly expensive.

Wallman, who has two degrees from the Massachusetts Institute of Technology, made his mark at the SEC in the early days of the Internet. He pushed for Internet road shows;' made it possible for companies to publish prospectuses and other filings on the Web; and had a hand in sanctioning the first Internet stock trading system created by Spring Street Brewery, the predecessor firm to investment bank WIT/Soundview.

Tech Power

"Our goal at Folio[fn] is to deploy the power of technology to make investing better for investors generally and smaller institutions and retail investors in particular," Wallman said. "That is why I started the company in the first place."

The former regulator says he has the small investor's best interests at heart, but at least one Folio[fn] policy conflicts with the views of some at the SEC. Like other brokers that route orders to Nasdaq market makers, Folio[fn] will accept payment for order flow.