Deal with Brinker should give FOLIOfn room to breathe

A new investment offering that’s an oasis for executives at Brinker Capital Inc. seems like manna for those at FOLIOfn Inc.

The companies have teamed up on a deal that will free Brinker, an investment adviser in Wayne, Pa., from some headaches and expenses that come with running separate accounts.

At the same time, it likely will deliver a much-needed revenue stream to FOLIOfn of Vienna, Va., which has struggled to put its marquee product – fractional-share portfolios – in front of investors.

Since FOLIOfn’s much-ballyhooed launch in spring 2000, CEO Steven M.H. Wallman, a former member of the Securities and Exchange Commission, has watched his staff dwindle to roughly 80, from a peak of 200, due to both layoffs and resignations.

Some analysts and former employees have questioned the company’s long-term financial viability, although Mr. Wallman has said he expects the company to be profitable by yearend and that he has access to additional capital if necessary.

“We’ve long said that FOLIOfn is really a new brokerage technology,” says Paul Fullerton, senior analyst at Cerulli Associates Inc. in Boston. “Doing something like this makes a lot of sense.”

familiar look

The investments, called Brinker Capital Managed Portfolios, resemble the hot new multidiscipline accounts offered by a few large brokers such as Citigroup Inc.’s Salomon Smith Barney unit.

Various asset managers can divvy up an investor’s separate account without the typical $100,000 minimum required by each of those managers.

Of the roughly 40 independent money managers that Brinker uses for its separate accounts, 18 have signed on to the FOLIOfn program – enough to provide diversification typical in separate accounts.

In simple terms, Brinker is using FOLIOfn’s technology and back-office services to make running separate accounts easier for both Brinker and the money managers it hires.

Chuck Widger, Brinker’s CEO, estimates that $300 million will flow into the program over the next year. The company already manages more than $3 billion.

FOLIOfn will receive fees based on assets in the program. The company did not disclose details.

The fees will be revenue that sorely is needed at FOLIOfn.

The Brinker deal, if it works the way company executives expect it to, will go a long way toward solidifying FOLIOfn’s operations.

“This marketplace is a slam-dunk for [Mr. Wallman’s] business,” says Barker French, chief investment strategist for Brinker. “If he gets $2 billion or $3 billion in this program, he’ll clearly attract others.”

But, says Mr. French, part of the arrangement with FOLIOfn precludes Mr. Wallman from offering his technology to Brinker’s competitors for a certain time. Mr. French declined to name names or the time frame.

Mr. Wallman says Brinker understands that for FOLIOfn to be successful, it needs to pursue other clients.

“Obviously, we will have customers other than Brinker,” says Mr. Wallman. “We intend all of these partnerships to be long-term relationships. One needs to have several such partners to be a success.”

According to a recent Cerulli report, assets in separate accounts reached $319 billion at the end of 2001, a 6.8% rise for the year and an approximate 243% increase since the end of 1995.

Cerulli estimates that separate-account assets will hit $625 billion by the end of 2005.

But the report points out that operational and technology expenses can account for more than 40% of an asset manager’s business costs. “The operations of the business eat up a lot of resources, capital and personnel,” says Mr. Fullerton. “There’s a lot to be said for this deal.”

Brinker sees FOLIOfn’s automated electronic system as taking a whack at those costs.

The program comes with a minimum investment of $300,000 that could be spread across a handful of investment styles.

Mr. Widger says the fees for the program will depend on the allocation and run from 1% to 1.25% of assets, not including an adviser fee.

Money managers, meanwhile, can make changes to the FOLIOfn accounts electronically in one fell swoop – deletion of a stock from the allocation model takes effect across all accounts.

As for speculation about FOLIOfn’s financial situation, Brinker executives are unfazed. “We think it will work out. Otherwise we wouldn’t be doing this,” says Mr. Widger.