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The Muscular Portfolios NewsletterNo. 32 Dec. 30, 2020
Table of contents
 
Goodbye Folio — hello to, um, what exactly?
Margin hits an all-time high — a bad sign 
You can substitute these ETFs for small-cap exposure 
Proof that investing doesn’t mean you’re rational 
How to access past paid content 

 
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Goodbye Folio — hello to, um, what exactly?

Brian LivingstonBy Brian Livingston

As I reported two weeks ago, Folio Investing has been acquired by Goldman Sachs. All individual accounts that remain at Folio on Jan. 8 will be transferred to Interactive Brokers (IB) by Jan. 13. See Newsletter #31.

But you don’t have to accept IB. You can transfer your assets to almost any brokerage firm you like. Understanding this process is important to all investors — not just those who have accounts at Folio.

If you own a 401(k) or similar plan, Folio probably doesn’t manage your assets and you won’t be affected by the IB situation. But it’s essential that you know how easy it can be to transfer an IRA, Roth, or taxable account from an expensive brokerage firm to a low-cost one. You could save big-time.

THE WRONG WAY: Don’t transfer an account like this — (A) sell all of your securities at Broker #1, (B) withdraw the money, (C) deposit it at Broker #2, and then (D) repurchase a new set of securities. Besides being an insecure way to handle a large chunk of cash, the sales can subject you to capital-gains taxes that you could have avoided by not actually selling anything.

THE RIGHT WAY: To change firms efficiently, use what’s called a broker-to-broker transfer. This is also known as an in-kind transaction or an Automated Customer Account Transfer. Your first step is to complete an ACAT form at the “receiving brokerage.” That firm then pulls your assets smoothly from your old brokerage, saving you hassles and taxes.

Figure 1 shows the ACAT process, using Fidelity Investments as the receiving brokerage in this example.
Automated Customer Account Transfer (ACAT) to Fidelity
Figure 1. Using Fidelity as an example, you complete an online form, after which Fidelity arranges for your account to transfer smoothly, with no taxes incurred. Illustration by Fidelity Investments.
For a complete explanation of the ACAT process, including some important record-keeping tips, read a detailed NerdWallet article on the subject.

I’ve been trading securities since my days as the assistant IT manager of the New York headquarters of UBS Securities in 1986–1988. To hold my personal wealth over the years, I’ve used accounts at Fidelity, Charles Schwab, TD Ameritrade, Folio, Interactive Brokers, Motif Investing, and numerous 401(k) custodians.

Folio opened to the public in 2000. I established my first account there way back in 2001. So it hurts for me to lose that firm’s comforts. But if we have to change brokers, we want to make the best decision possible.
Let’s try to replicate Folio’s low cost and ease of use

Whenever we move from one service to another, we should make a list of the features we liked. We want to find as many of these as possible elsewhere before we switch.

The book Muscular Portfolios recommended Folio Investing for asset-rotation strategies because of the following features:
  • Low fees, considering what the competition was charging. Back in 2018, when the book was published, other brokerages imposed commissions of $7.99 to $9.99 per trade. Folio charged only $4 for its “window trades.” These trades occurred more than an hour away from the market’s open and close, when trading costs can be unpredictably high. Individual trades dropped from $4 to $0 with Folio’s Unlimited Account, which cost $290 per year. (That was a bargain for me, given the seven different accounts my wife and I at one point traded: two IRAs, two SEPs, two Roths, and a joint taxable account.)
     
  • Extreme ease of allocating your account using percentages. Figure 2 shows how simple Folio made it to order 34% of your money to be put into one ETF and 33% into each of two others. To make percentage ordering possible, Folio arguably was the inventor of “fractional shares” in 2000. Other firms waste your time, forcing you to calculate the number of shares to buy and sell. Only recently have some other brokerage firms begun to support fractional shares: IB since November 2019 and Fidelity since February 2020, to name two.
Folio order process
Figure 2. Folio made it easy for you to (1) order an ETF for 34% of your account, (2) order two ETFs at 33% each, (3) click Replace, (4) click Add — and you were done! If you were selling only one ETF and buying only one other, you needed to enter just one line representing the new ETF you wanted to “append” to your account. Source: Folio Investing.
Today, of course, most brokerage firms have moved to so-called zero-commission accounts — but watch out for hidden fees, as we’ll discuss later. Commissions, therefore, no longer distinguish most brokers from each other. That makes “ease of use” a bigger factor in our decision.

Folio did not reply to a request last week for comment from an executive. We’ll have to bid Folio a fond adieu and choose a different brokerage that’s just right for us.
Preferred alternative: Fidelity Investments

For this article, I analyzed the findings of eight major brokerage reviews by respected journalists. In all eight, Fidelity Investments was at the top: either tied for first place or tied for second place. That’s a remarkable achievement, considering that Fidelity faced more than a dozen competitors.

For details on each brokerage, read some or all of the following reviews. (Note: Many of these reviews were written before Morgan Stanley acquired E-Trade on Oct. 2 and Schwab acquired TD Ameritrade on Oct. 6.)

Brokerage ratings: Bankrate, Barron’s, Brokerage-Review, Investor Junkie, Kiplinger, Motley Fool, NerdWallet, and StockBrokers.

Fidelity offers commission-free trades on hundreds of stocks, ETFs, and mutual funds but charges a fee for Vanguard ETFs. On each page that describes a Vanguard ETF, Fidelity links to a similar ETF of its own, which tracks the identical index without a trading fee.
Figure 3. Fidelity allows dollar-based transactions and fractional shares of securities. This example shows Fidelity’s smartphone app. Illustration by Fidelity Investments.
On Jan. 1 — after I’ve preserved all of my historical data from Folio — I’ll begin the ACAT process to transfer my Muscular Portfolio tracking accounts to Fidelity. I’ll also send an opt-out email, informing Folio not to move my accounts to Interactive Brokers. (This message could be redundant, since the ACAT notice should do the job. But given the tight Jan. 8 deadline, the receiving brokerage might not be able to act in time.) Folio’s special address for this process is optout “at” FolioInvesting.com, or customers can call 888-973-7890.

Fidelity’s ACAT form is available on its transfer-assets page.

In a future newsletter, I’ll report on how the service at Fidelity is working out for me.
Second alternative: Move to Interactive Brokers

If you don’t mind using Interactive Brokers, the easiest thing if you’re a Folio user might be to simply allow your account to transfer to IB on Jan. 13. That way, there’s no need for you to fill out any ACAT forms. IB will send you emails that confirm the new location of your account.

Interactive Brokers — which I’ve used since 2010 for a family trust I administer —  is designed for professional wealth managers, day traders, currency speculators, and options buyers. The firm’s “Wall Street pro” orientation makes its user interface rather technical.
Interactive Brokers (IB) order process
Figure 4. The IB user interface has no Buy or Sell buttons. To sell or purchase a security, you click a cell in the Bid or Ask column of your account. This opens a dialog box. Source: Screen shot of Interactive Brokers.
Although I’ve been a computer programmer since my IBM 360 training in 1968, I initially had to call IB customer support just to figure out how to buy and sell securities. The interface includes no Buy or Sell buttons. Instead, the trick is that you must click a cell in the Bid or Ask column of your account, as shown in Figure 4.

Once you’ve learned IB’s unique way of doing things, it’s a strong contender. It’s tied with Fidelity for first place in Barron’s brokerage review, for example, and it’s also highly ranked by Bankrate and Kiplinger.
A newcomer worth watching: M1 Finance

M1 Finance is a relatively new brokerage that completed its registration with FINRA (the Financial Industry Regulatory Authority) as recently as 2016. It offers an easy allocation method in which you enter percentages of stocks or ETFs. This is very similar to Folio’s long-established method.

Portfolios at M1 are called “pies,” as shown in Figure 5. You can slice them into as many as 100 pieces — a minimum of 1% per security.
Figure 5. M1 Finance allows you to allocate securities by entering percentages. This creates portfolios the website calls “pies.” Illustration by M1 Finance.
As convenient as percentage ordering is, it’s hard for me to recommend M1 Finance. It’s so new and small that it isn’t even mentioned in seven of the eight major brokerage reviews that I listed above.

The exception was Brokerage-Review, which ranked M1 as one of the three “best online brokers for beginners.” Muscular Portfolios followers are hardly beginners, but it’s true that we desire ease of use. We’ll keep an eye on M1 and see whether it earns high marks when subjected to more scrutiny by inquisitive reviewers.

At present, M1 can’t support custodial accounts, which are typically set up for minors and other people who have fiscal guardians. Also, you can’t freely “try out” M1 along with a few other firms. “Transferring an account to another broker costs a fairly steep $100,” as Brokerage-Review puts it.
What about Robinhood and Vanguard?

The book recommended Robinhood — a trading app that’s been popular with millennials since 2015 — but said it should be used only for accounts under $10,000 and people following the Baby Bear (Jack Bogle’s buy-and-hold portfolio). Back in 2018, Robinhood was one of the few brokerage firms that offered zero-commission ETFs. Paying, say, $120 a year in monthly inactivity fees for a $10,000 account, as IB charges, would be a needless drag on your returns.

Since that time, Robinhood’s dependence on non-commission income has stained its reputation. The Securities & Exchange Commission (SEC) fined Robinhood $65 million this month for failing to disclose until 2018 the amount it makes from high-frequency traders who pay Robinhood for the right to execute customers’ orders. These “payments for order flow” made up 80% of Robinhood’s revenue in 2016, according to the SEC complaint (PDF).

Customers paid $34 million more at Robinhood from 2016 to 2019 than they would have at other brokerage firms, the SEC said. For orders of more than 100 shares, customers would have been better off paying a commission of $5 elsewhere than buying the same shares commission-free at Robinhood. Talk about hidden fees!

Of course, users of the Baby Bear — which makes no more than two small rebalancing trades a year — would hardly notice the bite. So for the smallest investors, payment for order flow is a minor concern.

As far as the Vanguard Group is concerned, it’s very good at driving down the expense ratios of mutual funds and ETFs, but not so great as a brokerage firm. Bankrate gives Vanguard’s brokerage a score of only 3 out of 5. Barron’s annual broker review in 2018 called Vanguard “the highest-cost online broker.” Since that slam, Vanguard made many ETFs commission-free. But the firm declined to participate in Barron’s 2019 and 2020 surveys, the magazine said this year, keeping Vanguard out of the latest rankings.

The particular brokerage you use is probably not as important to your gains as whether you’re consistent in monitoring your portfolio for necessary course corrections. Wherever your money may reside, be sure to keep costs down, watch out for hidden fees, and check our website monthly.
 
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About the author: Brian Livingston is a successful dot-com entrepreneur, an award-winning business journalist, a contributor to MarketWatch and StockCharts, and the author of Muscular Portfolios (2018, BenBella Books). He is also the author or co-author of 11 books in the Windows Secrets series (1991–2007, John Wiley & Sons), with over 2.5 million copies sold. From 1986 to 1991, he worked in New York City as the assistant IT manager of UBS Securities; as a consultant for Morgan Guaranty Trust (now JPMorgan Chase); and as technology adviser for Lazard Ltd. He was the weekly Windows columnist for InfoWorld magazine from 1991 to 2003. During portions of that period, he was also a contributing editor of CNET, PC World, eWeek, PC/Computing, Datamation, and Windows magazine, and the editor of E-Business Secrets. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold the business in 2010. He is president emeritus of the Seattle regional chapter of the American Association of Individual Investors (AAII). Stipple illustration by The Wall Street Journal.

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