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Trading Spaces

March 2, 2010 • Page 3 of 3

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.

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3 Comments

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EverydayTenacity 14 years ago

Another site that is making inroads to "Social Network Investing" is financialjoe.com. Sites like Covestor and FinancialJoe may or may not have long term futures, but as you correctly pointed out, advisors and investment managers have to be aware of these new challengers. [url]http://bit.ly/9ln9Tb[/url]
14 years ago

Covestor

I have been test driving the Covestor platform as a model manager on http://www.cv.im now for about six months because I thought it would be an interesting channel for the RIA's that I work with at my firm (http://www.wiredadvisor.com)to consider. I also posted about this subject that I call "new media investing" on my blog (http://www.stephaniesammons.com/new-media-investing/new-media-investment-platforms-empowering-investors)back in December and discussed the various platforms. (you did not mention kaching.com which is similar to Covestor but seems to be solely focused on RIA's as model managers rather than everyday people). The Covestor platform is quite fascinating in that you can simply make changes in your strategy and those are implemented almost instantaneously across your subscriber base accounts. You get the opportunity also to post your insights once a month. The challenges for RIA's that I see are retaining subscribers (you really have no way to call them up and keep them engaged through tough times), and standing out from the crowd of managers. For example, top performers are highlighted, and in some cases those managers could be taking substantial risks (i.e.very concentrated positions or penny stock portfolios). We all know that clients understand how much risk they are taking until they lose money! I know Covestor is working through these issues to ensure that investors get a true picture of how much risk they are taking. Currently, I am still seeing the age-old problem of investors gravitating toward the hot dot (top performers). For someone like myself who is managing a fairly balanced (and boring) ETF portfolio, it is highly unlikely that I would stand out. In that case, the RIA would have to drive business to their Covestor site and hope that the investor didn't get tempted by the other hot performers and make a different decision. In addition, all of your portfolio activity is public so if you have a secret sauce, it will no longer be a secret. Transparency has not been an issue for me though. I think it's probably a healthy thing. People still like to know why you bought or sold a position! The platforms aren't perfect, but they are truly revolutionary and I am really enjoying being a part of Covestor team. The management team is terrific.
14 years ago

Covestor

As an aspiring asset manager, and a newly active model manager on Covestor(I'm sure that there are some asterisks that I should add, and I hope that the folks at CV don't take exception to me posting here), I found the article quite interesting. The thing that intrigued me about Covestor was (and is) that I believe there are quite a few skilled investors in the non-professional community, and Covestor first and foremost allows us to passively share our strategies and gleen insights from one another. If professional money managers want to join the community and share their own trading ideas, that would be a great plus, but myself, personally, I hope it continues to attract talented non-professionals. As for the tax management, which was what originally prompted me to want to write in; there are many tax ineffiecient investment strategies - mutual funds, for instance, force new investors to shoulder the tax burden of previous investors. But one would hope that because investors who share their trading data via Covestor are sharing the data relating to their own personal accounts, that those same investors will be tax sensitive to themselves, and, by extension, to people following them. It's fiduciary duty, but in reverse. Obviously, it's up to the investor to decide if a model is appropriate for them; a tax-exempt entity that sees a model manager investing heavily in tax-exempt issues would hopefully look elsehwere, just as the Trustee of a Charitable Remainder Trust would hopefully know better than to utilize a model that invests using margin. To everything, there are tradeoffs. If anything, the last two years have taught us that due diligence is one of the important tools an investor has in their arsenal. And with that, Covestor creates a level of openness that is unaccessible to investors of mutual funds, hedge funds, etc.