Covestor - Another Start-Up Wants to Democratize Investing

""It's the way of the future," said Albert Wenger, a partner at Union Square Ventures, which has invested in Covestor along with Spark Capital and Amadeus Capital Partners. "It's motivated by best performance and not ulterior motives" that might come along with traditional asset management firms that are less transparent, he said."

December 9, 2009, 11:10 AM

Another Start-Up Wants to Democratize Investing

By CLAIRE CAIN MILLER

Generally, when people look for money managers to help them invest their savings, they are limited to hiring people who do that professionally.

But there are many people who invest as a hobby, and some of them are quite good. A start-up called Covestor is making it possible for people to use them as money managers instead of the professionals.

"In the last few years, the world has really flattened, and investors have the same access and tools as pros, but I can't invest alongside them," said Perry Blacher, Covestor's chief executive. "I have to invest alongside someone who gets paid fees whether or not he does a good job." Covestor changes that by letting people choose whose investment model they want to follow, he said.

Here's how it works. Covestor, which was founded in 2006, has always let investors post their portfolios so other people could view them and copy their trades, and 25,000 investors have done so. Now, customers can open a brokerage account with either Interactive Brokers or TD Ameritrade and link their account to Covestor. Then, any time one of the investors they choose to follow makes a trade, the same trade is automatically made in their own account.

"It's the way of the future," said Albert Wenger, a partner at Union Square Ventures, which has invested in Covestor along with Spark Capital and Amadeus Capital Partners. "It's motivated by best performance and not ulterior motives" that might come along with traditional asset management firms that are less transparent, he said.

We have covered another start-up that offers this, called KaChing. The main difference is that on KaChing, people can follow only certain investors who meet KaChing's standards, which are based on risk-adjusted returns, whether investors stick to their strategies and the quality of the research they provide to explain their ideas.

On Covestor, on the other hand, people can follow almost any investor. The only limits are that the investor have a year-long history on the site and trade within the rules, which include avoiding illegal behavior, like pumping and dumping shares of a certain company, and sticking to companies with at least a $50 million market capitalization and a minimum daily trading volume.

Covestor charges a management fee of between 0.5 percent and 2.5 percent, based on the risk of the investment model. There are no entry or exit fees or trade commissions. They pay the investors a portion of the fee.

 

--
- Best, Tan Yinglan