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Covestor: Bringing Web 2.0 To Investment Strategies
By David Worlock
June 18, 2007
Important Details: Covestor is a recent London start-up, developed by experienced investment market executives, with the clear intention of doing for private investors what tracking systems and performance tables do for professional brokerages. It is in essence a ‘club’, which allows a user, after depositing a profile of checkable information, to assume an identity and then allow all subsequent trades to become part of a performance track record. Covestor members continue to trade as normal with their online broker account, but provide in Covestor a Track Record, which establishes their risk metrics, and creates a fact sheet on each player. Every trade a ‘Covestor’ then makes builds an auditable, time-stamped verifiable record which continues through subsequent trading. By using these fact sheets and track records, other investors can review relative performances, risk and return, and performance against chosen benchmarks.
‘Covestors’ benefit from all of this in two ways. They can obtain ‘widgets’ - certification of membership and performance - which they can export to their own stock blogs or investment websites. Or they can earn fees. In the latter instance they will limit other investor access to their investment decisions by only allowing access to those investors who invest in a managed account which tracks their decisions via their data feed. The Covestor company sets up these accounts in the name of each follower, earning fees both for the star investor and for itself. Until investment patterns and volume are built up, and star investors emerge, the Covestor site is free to everyone prepared to deposit the necessary information and demonstrate their bona fides as an investor.
Implications: Here then is an initiative in the tradition of Zillow or Prosper or Zopa. If it does not pose too much of a threat to Merrill Lynch and Goldman Sachs on day one, it is at least a reminder that some of the key essentials of network development follow the investment cycle very closely. This is a world where trackable performance and reputation mean everything, where investors have always suspected that some private investors have niche knowledge that puts them on a par with big firm professionals (if only you could tap into that knowledge), and where the ability to make your investment moves in step with your chosen models would materially improve performance, reduce risk and increase returns.
In all these senses investment is classic community, and therefore probably overdue for a Web 2.0 solution. Covestor is clearly well-crafted for this mission, and its proponents understand the markets and the structures. While it may take a very long time to make an impact on the large brokerages, this type of disintermediation can produce acceptable results quite quickly. Its competitive danger is rapid emulation by investment houses, and by being free and fleet of foot its founders will hope to build volume and brand before this becomes a widespread bureau facilitation. In the longer term it does offer an interesting possibility for the services and solutions players in the financial sector as they seek to rebalance their relationships with their major brokerage clients. And, of course, for those in equity research who feel that some of their markets show signs of disruption by network short circuiting, this is an object lesson, demonstrating that the same features can occur on their own home patch.