Word has been out on the Street that the race is on this summer to bring in real money management capabilities for a couple of the online community investing sites, like Covestor and kaching. I’ve written about both sites recently. This has been confirmed by an email sent this morning to users by Covestor CEO, Perry Blacher.
With Vestopia effectively out of the race due to a torn business model, it will be super interesting to see how this all plays out.
Remember, Covestor audits real trading records of financial bloggers/asset managers and kaching uses virtual portfolios. So, both firms are approaching this from different angles. These sites allow what I call “blogger-analysts” to maintain portfolios and track their performance. Other users can subscribe to follow additions and subtractions to these portfolios and read the blogger-analyst commentary providing the rationale behind any activity. This community-wide criticism certainly adds to the experience of following and learning from better performing investment managers.
So while community leaders have been vetted out and the men now stand in contrast to the boys (see my interview with top Covestor man-ager, Sean Hannon), these managers are going to have an opportunity to run some real OPM (Other People’s Money). I think this will be a hurdle for some kaching best athletes since they are managing only virtual portfolios as well as for some Covestor managers who will see that performance changes when you’ve got OPM at stake.
In his email to Covestor users, Blacher wrote:
CVIM (Covestor Investment Management) allows you to automatically invest alongside individual and professional investors, who manage their own accounts. We license real time trading data from investors, create a model of each and then give you the information to choose which you would like to subscribe to, to be auto traded for you in a managed account. Using the CVIM console you are then given a complete view into your positions and performance, per model in your MMA (Multi Manager Account).
The system has some smarts — for instance, if you’re following two different managers and one is long and the other is short, the system creates a net position in your account, which can be managed either via TD Ameritrade of Interactive Brokers, at this point. Fractional shares and specific client requests (an insider at a particular company who can’t trade easily in the company’s stock) are also worked into the platform.
In essence, this is a similar platform that brokers and other investment advisors have used for managed accounts for clients. Platforms like Fidelity’s Envestnet have the capabilities to combine multiple managers. But never have retail investors had a DIY way to gain access to these types of accounts with all the transparency of a Covestor platform in their own online brokerage account.
I think this is a terrific development and the ultimate culmination of all of Covestor’s work and activities. My main concern at this point is that with all the focus on the end investor — from costs to transparency to performance — a highly active manager on the CVIM platform could result in extremely high transaction costs for investors because CVIM passes trading costs on to the investor. So, while fees may start reasonably, there are a couple beta managers that average 30 or so trades a month. That’s a lot of trading costs at $2, $5, or $9 for a minimum account size of $10-15,000. With scale and a track record, I think Covestor will be able to wrap up those fees but it’s something to be aware of.
I’m excited to see how it pans out.