What Do You Do When Your Firm Suddenly Acquires 200,000 Customers?

If you’re looking for a leisurely environment to support your trades, Folio Investing might be the place for you.

Through twice-daily “window trading” and opportunities to buy fractional shares, Folio encourages clients to buy into securities - and then coast.

Benzinga spoke with Senior Vice President Peter Jacobstein to discuss the firm’s genesis, its “buy and hold” philosophy and its new list of clients from the recently-shuttered Loyal3.

How did Folio get started?

Peter Jacobstein: We were founded in 2000 by Steven Wallman, who is our founder and to this day CEO of the company. He was the commissioner of the Securities & Exchange Commission prior to founding Folio, and he wanted to set up a brokerage that he felt would help investors to invest for the long term. So it’s that philosophy that infuses everything we do. We have five principles of smarter investing that infuse all the decisions we make about how we handle customers and how we want customers to interact with us.

What are those principles?

Jacobstein: The first of the five principles is diversification. What we see so often from individual investors is they’ll get a stock tip, they’ll buy the stock, they’ll watch the stock go up and think they’re geniuses, then the stock will crater and they’ll feel terrible, they’ll sell the stock, and then they won’t invest again. You see this particularly with novice investors all the time. So one of the things we want to do is create a brokerage platform that makes it easy for customers to diversify, to buy lots and lots of securities and to hold them for the long term.

Second is customization. We want our customers to set up portfolios that reflect their own needs and their own values.

Third is managing costs. We want customers to be aware of how much they’re spending to manage their investments and to make sure that the costs they’re investing don’t eat up their returns over time.

The fourth is tax awareness. We want customers to make sure that they’re managing their investments to manage their taxes in a smart way. We want to make sure, for example, that people don’t make the mistake that novice investors frequently make which is to buy high and sell low, get all excited about a stock as it’s riding up, wait for it to fall, and then sell it and incur both capital gains taxes and lose capital over the long term.

Then, finally, we want encourage investors to invest consistently so they can add money consistently and not try and time the market.

Who is your targeted client? Who is the typical Folio investor?

Jacobstein: Right now we serve lots of different customers. We have two very broad groups, the first being customers who really enjoy building and managing their portfolios.

Other customers want to manage their portfolio for the long term, but don’t want to get involved in the specifics of choosing individual stocks and constructing a portfolio. For those customers we have interfaces that make it very, very simple to build a diversified portfolio and hold it for the long term.

What are some of the most popular stocks that you offer?

Jacobstein: The short answer is I don’t know. We have a very, very broad range of stocks. In fact, if you look at the FolioFirst site, you can see the stocks that are available. We have a lot of very large cap stocks. We have some small and mid cap stocks, and we have 3 ETFs.

We really encourage people to diversify, so my guess is that if you look at our holdings, they look very much in the aggregate like the market in the aggregate — a very, very broad array of stocks. Our customers tend to be “buy and hold” customers, so what they tend to do is build broadly diversified portfolios.

Can you talk about fractional share trading and how that strategy works for Folio?

Jacobstein: The basic idea behind fractional share trading, of course, is that instead of buying shares by the number of shares, and at the time Folio was founded the norm was to buy shares in lots of 100. If you wanted a stock that sold for $30 the minimum you could invest would be $3,000.

The obvious problem with that is that if you had a limited amount of money and wanted to diversify your portfolio, it would be relatively difficult to do that. What fractional shares do is give you the ability to buy any dollar amount of a security that you want.

There are other fractional share brokerages out there. What distinguishes Folio?

Jacobstein: There are a few things. The first is that, as an organization, we really are dedicated to helping our customers invest according to our five principles. The entire ecosystem is architected to make it easy for people to diversify, to own lots and lots of different kinds of stocks.

One of the things that we’ve done is flat rate pricing. For example, we don’t charge a commission for each purchase of stock. We have a flat monthly fee. This way you don’t have to worry about making a trade at the margin. You can make as many trades as you need without thinking specifically about the cost of any individual trade. We want to do that because we want to encourage people not to trade frequently, but to diversify and to spread their bet among lots and lots of different stocks.

The fact that we use window trading [a method of executing orders in which orders are grouped by type and executed at different times rather than immediately] as opposed to bringing orders to market immediately, we think tamps down people’s temptation to buy and sell, to trade in and out of stocks quickly. It’s another philosophical difference. We do take market orders, so if someone wants to place a market order we will do that. We will allow people to do that on our Folio investing platform, but again, we encourage people to place window trades because we think it is a cost effective way to invest for the long term.

You recently acquired all the clients of the Loyal3. Tell me how the transition has gone.

Jacobstein: So far the transition has gone very smoothly. We’re very, very pleased with the progress that we’ve made. Of course, anytime you transition 200,000 customers you’re dealing with a lot of very large numbers, so we were worried about potential call volumes, potential customer confusion. We staffed up significantly in our customer service area. We’ve been able to manage the customer service volume very well, so that has been a tremendous relief to us. We’re seeing customers engaging with the platform and using our services, which makes us very happy.

What are some of the differences that the customers may have encountered as they switched over to your platform?

Jacobstein: I’ll start off by talking about maybe what’s the same. We were I think a very natural home for LOYAL3 customers because our brokerages were built on some of the same, very basic functionality, so for example, dollar based investing and fractional shares, no transaction fee for trading. So hopefully customers were coming into an environment which was at least somewhat familiar to them. We also use what we call “window trading”, what LOYAL3 called “batch trading.” So again, it was what we hope is a very, very familiar experience for customers.

To your question about what’s different, we wanted to build up for these folks for the long run. So we made a few changes that we hope will enable customers to stay with us for the long term. For example, we offer almost 3 times as many securities for sale on the site. LOYAL3 offered about 70. We offer over 200. We also offer 3 ETFs to customers. So that was one difference. We are getting ready to roll out additional account types. LOYAL3 customers had individual accounts only. We will be rolling out joint accounts as well as retirement accounts to customers later this summer.

This article is exlusive to Nasdaq.com; the interview has been lightly edited for brevity and clarity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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