Another industry disintermediated

Here’s another industry opened up by the internet: mutual funds and financial advise.

Covestor – a company in which I have a small investment – just introduced its new multi-managed account service. What the hell is that? I had to have it explained to me, too. Think of it this way: It opens up the mutual fund with transparency to and control by the investor.

Here’s how it works: You can pick an investor whose strategy (and luck) you like and say, “Do whatever he says.” When he buys Apple, you buy Apple. When he sells, you sell. When you decide to stop following him, you get rid of all the positions he put you in. This investor doesn’t take control your money. Your funds sit in your own brokerage account. Covestor just created the means for you to follow his actions, to shadow him. For that, the investor and Covestor get a small cut. This also means that you can follow multiple investors at a time – just like the rich folks. And for all of them, you know just what they’re doing because Covestor has the means to track their decisions, successes, and failures.

Think of it as Twitter – the idea of following – combined with blogging – transparency – but about money, your money.

This thing is built for someone like me because I’m a lousy investor. I bought Google at $512. I still have a f****g Time Warner Stock. I bought Sirius. I held onto my Microsoft. Get the picture? I finally cried uncle – actually, our family friend the broker made me cry uncle – and put all my money in mutual funds. But that is almost entirely opaque. And I do miss out on the fun and control of trading myself. I plan to use Covestor’s CV.IM with a small start to see how it works for me.

Fuller disclosure: Covestor was founded by Rikki Tahta, who was a fellow board director of mine on Nick Denton’s last company, Moreover. He’s a tough and brilliant businessman, so I invested along with him – I followed him and now I can follow others.

/plug

  • zywotkowitz

    As you say, the point of having mutual funds is that you can broadly select your risk tolerance and not actively pay attention to your portfolio.

    Covestor looks like a new trick to lure people into day trading, which is terrific for brokers because of all the fees they collect.

  • DumbIdea

    With all due respect, you clearly don’t understand the financial services industry!

    This idea is as old as the hills – people always have FOLLOWED supposed experts…isn’t that how you’ve made such bad investments.

    A good mutual fund is far superior to this dumb idea.

  • http://cv.im Rikki Tahta

    Hi zywotkowitz and Dumbidea,

    This is Rikki here from Covestor. Thanks for your comments. In quick response:

    Z: This is fundamentally different to Mutual Funds as you have full transparency, own the assets and have a closer relationship to the person managing the money. Covestor does not get compensated by the brokers. It is not in our interest to day trade if that is not in your best interest.

    D: Have a look at how the process works. Mutual funds used to be really good for following an index – but now ETFs are better. If you believe someone is talented, you can either invest in their hedge fund (with the Madoff risk) or have them manage a separately managed account for you. That is what large institutions and family offices often ask of their managers. At Covestor we’re bringing that down to the retail level.

    In response to both of you – its all about transparency. Knowing who’s managing the money, what are they doing and then leveraging someone else’s hard work if you like them.

    Hope that helps

    Cheers Rikki

    • DumbIdea

      You clearly don’t understand the money management world and simply are a shill for your new/old idea

  • Foobarista

    The biggest problem with this will be timing. Hard-core stock pickers who know what they’re doing (and I don’t, so I mostly use index funds) do lots of charting and careful planning to figure out exactly when they want to buy a stock. Even a few seconds may be too late if this guy’s buy moved the market for a given stock, and definitely anything longer than a day won’t work.

  • http://cv.im Rikki Tahta

    Hi Foobarista

    Agreed, managing the back-end is non-trivial. This is how it works: https://cv.im/behind-the-scenes – we also have a concept of ‘drift’ which is a measure of how much you diverge from the model you are following. Again as before – its down to transparency.

    Cheers Rikki

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  • http://npharder.wordpress.com ken

    Interesting, but is it really disintermediation and does it deserve whatever WWGD magic comes along with that word? Its a new type of intermediary, Covestor, who subcontracts out to individuals that essentially act as fund managers but who aren’t burdened with SEC governance. Instead of just me and a mutual fund company (1 other entity), its me, Covestor and their employees, a discount brokerage, and a bunch of people I can follow (3 other entities). Although transparency, I’ll grant you that. So what’s to stop them from peddling their followers? Risk of discovery and losing followers doesn’t seem to be enough of a deterrent. I’d want long jail sentences.

  • http://www.facesofseinfeld.com Ken

    What safeguards are put into place to avoid sophisticated Pump and Dump scams?

  • David R.

    For most investors, low-cost index funds have been and will continue to be the best value for their money.

  • dcpi

    How is this any different than RunMoney.com or Foliofn.com or the “baskets” concept? In short, why will it succeed where a good half dozen separate account startups that try to sell direct have failed?

  • http://www.lidadestek.com/ lida

    What safeguards are put into place to avoid sophisticated Pump and Dump scams?

  • http://www.shareholdr.com/ JP @ Shareholdr.com

    Still no reply to Lida?