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On some Web sites, various services pitch that you can invest in a chosen basket of stocks for a low fee — and without the high taxes and high fees that come with mutual fund investing. Like most political ads, these services misrepresent both their own merits and their potential drawbacks.
These "create your own funds" services pitch their investment products as a superior alternative to mutual funds. One such service calls its investment vehicles folios, charging you $29.95 per month ($299 if paid annually) to invest in folios, each of which can hold a few dozen stocks that are selected from the universe of stocks that this service makes available.
The fee covers trading in your folios that may occur only during two time windows each day that the stock market is open. The folio service claims that orders that are placed between 11 a.m. and 2 p.m. "are processed starting at 2 p.m."; orders that are placed between 2 p.m. and 11 a.m. "are processed starting at 11 a.m." So, in addition to the burden of managing your own portfolio of stocks, you have virtually no control over the timing of your trades during the trading day.
The site also says, "Mutual funds impose fees that can be very high — and hard to calculate." This is generally correct. However, without doing too much homework, an investor can easily avoid high-fee funds. For example, one could invest in the best index funds for an annual fee of 0.2 percent per year or less.
In addition, you need to be aware of additional fees. One folio service's Web site says (in fine print, of course) that it ". . . does charge for certain special services and does receive payment for order flow." You must be ready to shell out the dough if you
- Want to wire money out of your account — $30
- Need a copy of a prior statement or transaction — $5
- Hold any restricted securities (which are subject to SEC Rule 144) — $75
- Close out an account — $50
The site further warns, "Note: These are today's prices and fees, which are subject to change periodically."
 | You simply won't get the same level of service from a Web-based service as you do from the leading fund companies. These companies have trained representatives available by phone. Understanding and evaluating the performance of self-created funds is difficult, and unlike mutual funds, these funds have no standards or easily accessible services that report and track the performance of your customized folio. |
Folio services are geared toward those people who want to hold individual stocks, who trade a lot, and who seek to cap their annual trading costs. Although it's generally wiser to invest in the best mutual funds, you can invest in stocks of your own choosing — as long as you do so with a long-term perspective. But if you're going to simply buy and hold individual stocks, why would you want to pay a Web-based service $299 per year?
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