UsableMarkets

There’s a whole new breed of investing sites out there these days, bringing power to the people (or the crowd, as the case may be). Covestor is one of the more interesting of these, and recently Co-Founder Perry Blacher graciously agreed to respond to some questions via email. Read on to find out what makes Covestor so interesting.

UsableMarkets: Can you briefly describe what Covestor is.

Perry Blacher: Covestor.com aims to de-institutionalize money management. We provide a real-trade sharing service that offers self-directed investors the opportunity to compete with, and be rewarded like, professionals. By sharing the work they already do for themselves we build each of our members an institutional grade track record, and allow them to track the real portfolios of other proven investors.

UM: Describe the market opportunity you saw that made Covestor seem like a good idea?

PB: With the advent of the internet the distinction between the amateur and the so called “pros” is increasingly blurred. Today self directed investors have the same tools, access to information and transaction costs. There are tens of millions of people with online broker accounts and only tens of thousands of institutional funds. Why can’t I invest alongside a brilliant self-directed investor doing it with their own money rather than in an expensive under performing fund?

UM: What type of investor is drawn to Covestor? Obviously they’re the “do-it-yourself” types, but they also have to be interested in sharing their portfolio with others. How would you describe the typical Covestor user?

PB: All types of investors have joined the community, from those just starting out through to professional RIAs. Our typical users are actively managing their own money, keen to learn and happy to help others.

UM: How do you keep stock jobbers and the like off the site?

PB: Covestor is the only service to share what real people are really investing in, i.e. no stock picks, fantasy or virtual portfolios. Alongside a members commentary you can see what people are really doing. We monitor all trading activity, and verify their investment credentials, so it is perhaps the worst forum on the web for pumping stocks at others expense.

UM: I’m assuming there is some resistance to people linking up their Covestor accounts with their brokerage accounts. How have you overcome this resistance?

PB: Thousands of investors have already linked up their broker accounts. Security is the most important thing for us at Covestor. That is why we chose to work with Yodlee in providing the “view only” secure data link to a members account. Yodlee use the same data aggregation technology with over 100 financial institutions in the US. We do not store or have access to credentials once entered, they are maintained by Yodlee. This creates one way view only access to activity data (no personal data such as social security no etc). If preferred we do offer members the alternative to update their accounts manually, verified against their paper brokerage records.

UM: It seems one of the main intents of the site is to uncover those investors who are performing better than others. How can you be sure you’re not just promoting lucky investors?

PB: Over time the “better” investors will inevitably rise to the top, but we don’t actively “promote” anyone. Covestor is an unbiased view, warts and all, of investment activity and unlike mutual funds our members cannot be selective of what data to display. It should be said that there aren’t really “better” or “top members.” When it comes to investments the person who has the highest return may well have taken the greatest risk. As such we already have over 150 different ranking categories to allow members to find others who best match their own investment goals.

UM: What “wisdom of the crowds” elements does Covestor leverage?

PB: Covestor is not about the “wisdom of the crowds.” There are plenty of great forums on the web based on consensus, or sentiment, and in reality the market best represents the crowd’s “wisdom.” We are all about great performing individuals doing the hard work for themselves and enabling them and others to leverage their expertise.

UM: The site is very open, so that even users who are not logged in or registered can see the most held stocks, and the like. What’s your thinking about being so open?

PB: The web is all about being open, and Covestor is about investing in public view. Mutual funds maintain excessive profits at the expense of consumers from their lack of transparency. Our role is to help investors find a more transparent, better performing alternative

UM: Obviously you don’t provide this site as a public service. What’s the business model?

PB: Covestor is an asset management business. We will make money when our members make money. We will shortly be launching the capability for members to continue to share their trades for free or to get paid. If they choose to get paid anyone following them will have to follow their investments with money, i.e. to fund a managed broker account which will track the trades of the lead investor. The lead investor will be compensated for the information they are sharing and Covestor will take a management fee.

UM: How have Covestor investors been doing this year against the S&P500?

PB: Slightly better than one in five of our members have consistently outperformed the S&P consecutively for the last three months. More importantly there are some serious rock stars on the site you can follow today for free so check it out …

UM: Thanks for your time, Perry.

Additionally, Perry has made some member codes available to me, so if you’re interested in checking our Covestor, you can contact me for one, or just go to the site.

As always, thanks for listening.
~alex