Social networking has reshaped the Internet and is now part of American culture. Facebook, the Internet's most popular social networking site, has 400 million members worldwide and more than 130 million unique visitors monthly. Twitter, the micro-blogging site, lures 22 million unique visitors a month, while LinkedIn, the social media site for professionals, registers 15 million unique visitors monthly. The vast majority of users registered in the last three years. Google, the world's dominant Internet company, just integrated social networking capabilities into Gmail because it fears losing its grip on Web traffic to other sites.

And now a newer phenomenon has emerged that uses social media technology to make investment decisions. I call it social network investing. The trend is just now in its infancy, but it could mean a sudden, radical shift in the way most investors behave, and its popularity is almost sure to grow over the next decade, just as online brokers revolutionized the way Americans invested in the 1990s.

I made up the term "social network investing" to describe a new Web site called Covestor. The site enables individuals to shadow trades of professional investors. When a pro makes a trade, Covestor can automatically and immediately duplicate the trades in the portfolios of those subscribing to the professional's advice. It ensures that the securities are listed on U.S. exchanges and that they meet capitalization and liquidity requirements. If you subscribe to a model, it purchases the security for you to reflect the same weighting that's in the model.

Covestor gets paid an advisory fee for allowing subscribers to follow the professional investor, and it splits the fee evenly with the professional. The more people who follow the professional, the higher the fee he can charge.

There are a handful of other Web sites that allow users to track professional investors (and wannabe professionals), but Covestor is the only one I could find that has built a platform to support the automated execution of shadow trades. The site is sure to be the first of many that will enable the instant replication of a portfolio.

This is the way the world is headed because people love social media. It empowers anyone to become a star or a famous expert (like Obama Girl), it taps the collective wisdom of the crowd (as Amazon's ratings do) and it instills a trust born of transparency (as eBay does). Social network investing plays on all these strengths.

Covestor has smart money and people behind it. Union Square Ventures, one of the venture capital firms providing it with funding, has backed some of the hottest properties on the Web, including Twitter, Foursquare and Clickable. Covestor's three co-founders have all experienced success previously: Perry Blacher headed business development for Microsoft MSN in Europe, and later was a principal with Chase Capital Partners, a private equity unit of the big bank. Richard Tahta previously held senior roles at several startups, including ARK Information (which was acquired by Thomson Financial), WebTrack (acquired by Jupiter Communications), Steelhead Systems (acquired by Merrill Lynch) and Bookpages (acquired by Amazon.com).  Simon Veingard spent six years managing Goldman Sachs' Investment Banking information services across Europe and Asia before joining Ernst & Young as a management consultant.

Among the other social networking sites is Stockpickr, owned by TheStreet.com, which allows its community members to see the stock picks of other members as well as those of professional investors. Zecco is an online brokerage that offers free stock trades and access to a community of investors who can choose to make their portfolios and track record public. The site Marketocracy, meanwhile, displays the track records of "analysts" and offers some related investment products based on their recommendations, though the analyst's portfolios are only models and do not show real trades executed with real money.
Covestor is different from these because its traders can use real money and its followers can copy all their trades as soon as they are made.

Covestor.com, the public site that is free to join, lets members create and track a portfolio like these other social network investing sites. Your positions and trades allow you to create a track record. One major difference is that Covestor.com tracks an actual portfolio using real money. You can create a profile that includes information about your investment style, your risk profile and your personal information. You can also import posts from your blog and create a fact sheet about yourself, and your holdings and track are displayed. Any member of Covestor can click on your profile and see all this information. Members can also post questions to you and your answers are displayed.

After creating a one-year track record on Covestor.com, you qualify to move on to the company's next service: Covestor Investment Management (CVIM). This is a separate secure Web site where your portfolio can be replicated for investors and you can make money by charging a fee. CVIM is a registered investment advisor and the actual manager of the portfolio you run. You can be a sub-advisor on CVIM, splitting the fees with it evenly. Even if you are not an IA representative, CVIM's contract still allows you to be paid for running your portfolio. You set your fee and indeed some CVIM sub-advisors levy hefty fees of 2%. But if you have a good track record, people will theoretically be willing to pay it and subscribe to your portfolio.
Your portfolio performance is tracked by Advent Software Inc., and your results comply with global investment performance standards administered by the CFA Institute.

Advisors can be listed on CVIM even without establishing a one-year track record on Covestor.com. But you must provide CVIM with brokerage statements showing your trades in a portfolio for one year.

When you are listed on CVIM, your profile, performance and other information remain displayed for all members on Covestor.com. However, your Covestor.com track record is not displayed on CVIM. The only track record displayed on the CVIM profile is your CVIM performance.

To join CVIM and be able to subscribe to its sub-advisors' portfolios, you must open a brokerage account with a minimum of $10,000 and fill in a lengthy risk tolerance questionnaire. I went through the process and established an account to get the full experience of the site and write this story. It took less than 30 minutes to fill in the forms. The questionnaire asked if I was interested in different speculative investments and I checked "yes" repeatedly. However, because the funds I transferred into my CVIM account came from an IRA, my risk score was a lowly 2 out of 5. Alas, I would not be able to subscribe to managers using high-risk strategies, such as shorting.

Subscribers can set up a brokerage account with any of numerous online discounters. However, Interactive Brokers, which specializes in serving professional investors, is the lowest cost provider by far, charging just $1.08 per trade-a fraction of the $8.95 charged by major discounters.

CVIM has only 40 managers on its platform for subscribers to choose from. However, it expects to add another ten in coming weeks and plans to add more professionals for subscribers to follow regularly in 2010.

While looking at the list of sub-advisors CVIM offers subscribers, I discovered a familiar name: Mosaic Financial Partners of San Francisco. Mosaic was founded by Norm Boone and manages about $300 million, according to its Form ADV. A Stanford University graduate with an MBA from Harvard University, Boone has long been an innovator in the industry. Along with his partner, Linda Lubitz Boone, he owns IPS AdvisorPro, software used by many leading advisory firms to produce investment policy statements. Boone told me his firm's director of investments, David Cowles, came upon Covestor and they decided to give it a try.

"It's an attempt to find a way to service small accounts," says Cowles. "We have a $1.5 million minimum, but if we could set up a model on Covestor then investors who don't meet our minimum can be handled because we don't have to service them. Covestor services them."

Cowles says Mosaic had to make some portfolio adjustments to make its model work. For instance, Covestor portfolios cannot trade mutual funds, just ETFs. So ETFs equivalent to Mosaic's favorite funds had to be used. Also, instead of using a small- and large-cap ETF, Cowles says he found a total market ETF to keep trading costs low on small portfolios. (CVIM portfolios only trade listed securities and not options, foreign currencies, fixed income or commodities.)

Whatever you call it, social network investing seems poised to reshape the competitive landscape of the financial services industry, and it could have major implications for independent advisors. It's wise to keep a close eye on it.

Will such sites make financial advisors obsolete? No. Advisors won't see a mass exodus.

In the late 1990s, when online trading transactions became a major force in the financial services business, fear was rampant that online discount brokers-which were, ironically, the companies RIAs relied on for conducting business-would automate advice and advisors would become less and less important. It didn't happen.

Online trading grew dramatically and did cut into some advisor business. But wealthy investors have continued to seek advice. Moreover, RIAs and independent advisors have been hurt far less by the trend toward self-directed online trading than full-service Wall Street brokerages have because they offer more personal service and professional advice than brokers. So while online investing has continued to grow quickly-the number of online trades at Schwab more than doubled in the ten years ended in 2009, despite two bear markets-the independent advisor business has nonetheless continued to grow as well.
Still, Internet investing has evolved in ways no one could have imagined even five years ago, and social network investing could make it even more popular.

I asked Cowles if Mosaic was concerned that Covestor would wind up being a competitor.

"We're financial planners and not just investment managers," says Cowles. "Plus, Covestor is serving a different marketplace. I cannot imagine someone doing this with a $1 million or $2 million portfolio." Cowles says there are too many compromises, such as the investments that can be made and the fact that you cannot manage a portfolio for taxes.

I suggested that a Covestor sub-advisor could create a tax-managed portfolio, and I asked Cowles again if he was worried that Covestor could wind up competing with him. "It's possible, and it is a risk," Cowles concedes, "but isn't that a better reason to figure out how to participate?"

"We don't see that as a real risk, but if the industry evolves that way, and if investment management is commoditized, then a financial planning firm would offer planning with no investment implementation, and people might go to Covestor for investment management," Cowles says. "If that's how the market evolves, we want to be there. We cannot make it go away by pretending it's not there."

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.