Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=187027
Story Retrieval Date: 12/6/2013 9:05:09 AM CST
Currensee.com/ Jiyoon Jane Yu/MEDILL
Camille Varlet, 32, is a busy marketing manager at L’Oreal, and when it came to investing, she felt she didn’t have the time or the sophistication to be successful on her own. “So I wanted something that would work but also something very easy for me to manage.” The Chicagoan’s main concerns were ease of use and accessibility, and “Betterment offers that.”
Betterment.com is an alternative online investing site that pools users’ investments into the same portfolio and allows them to “see what other people are doing, giving customers a sense of being part of a community,” according to Chief Executive Officer Jon Stein. The company utilizes “social data in that we share how other people are allocating their assets.”
“It’s not like you have chat rooms,” Varlet explains. “But I can see what my peers are doing. They are aggregated and [the information] comes from a credible source, so I can still track and see what they’re doing.”
With the ever-expanding reach of the Internet, along with a greater ability to collaborate online, social networking is penetrating areas of finance and investing in new ways, including making investment portfolios public and even letting others take some degree of control over them.
A 2011 survey by TD Ameritrade Holding Corp. revealed that one in three Generation Y respondents said they turn to social media for guidance in investing.
A similar survey conducted by Cisco Internet Business Solutions Groups reflected that 55 percent of respondents under 50 have used social network for investment advice.
“It’s got to be a trend,” said Stein of Betterment.com. “We’re seeing a much younger demographic. These people are comfortable online.”
Varlet confirmed his thoughts: “I do everything online, [like] my demographics, those who are younger,” she said. “And there are more and more tools to help you do that, so you’re not going at it blind. This is part of a larger trend.”
The TD Ameritrade survey showed that only 10 percent of Gen Y considers professional investment advisors as the most valuable source of financial news and information. Many, the survey reflected, turn to Twitter.
Perry Blacher, chief executive officer of Covestor, an alternative investing site, explained that investors are turning away from pricey advisors and seeking more social help that provides continuous accessibility. At the same time, experts are becoming “more willing to be public and show what they’re doing.”
This trend of encouraging transparency has led to the increasing popularity of “mirrored investing,” a form of money management that allows individual investors to “mirror” the portfolios and strategies of expert traders.
Mirroring seems simple enough: an investor signs up for the service online, opens an account and chooses the professional traders whom he wishes to follow. His portfolio then gets auto-traded every time the mirrored traders make a move. With the transparency of the experts’ portfolios, he is able to watch everything that happens and can pull out whenever he wants.
“The momentum has been hugely picking up,” Blacher said, “among young people particularly, as they’re trying to express themselves financially.”
Covestor launched in 2006 as “a Facebook for investing,” according to Blacher. The site is now a platform to track personal records – with more than 7,000 people sharing nearly $800 million – as well as a place for mirrored investing, where clients are able to replicate the stock trades of “model managers.”
There are currently 124 model managers offering 174 investment methods. Over $150 million of mirrored trades have been through the system, with assets growing at over 10 percent monthly, Blacher asserts. The average account size of Covestor’s users is about $40,000 compared with the minimum balance of $10,000.
Jason Miller, 29, a subscriber of Covestor’s service, said he believes information is crucial in trading. “100 percent. It’s all about being better informed,” he said.
A few years back, Miller, a resident of California, entered an investing contest, where he put together a fake portfolio and tried to beat out other contestants.
“I did OK,” he said. “But there were other people who did really well.” Miller reached out to them and asked questions like, “How are you investing? How do you pick these companies?”
Asking questions and sharing information with other investors, Miller said, was one way “to be smart about my money.”
Stein of Betterment agrees. “People want to learn from each other: budgeting, goals, and so on,” he said. “All of that, I think, is important to share.”
From the Cisco survey, two out of three under-50 respondents also answered that they were at least “interested” in an online investing community.
And that’s what Mike Snooke, 49, found available for him on Currensee.
The Arizona resident has been a trader for eight years and began following the foreign exchange marketplace almost three years ago. In realizing “there were better traders out there,” he grouped up with others to enhance his trading experience.
They then decided to take advantage of not just one, but “a number of different traders, different strategies” by joining the recently launched alternative investment service for the world currency market. Currensee enables investors to leverage the expertise of its elite traders called “Trade Leaders” by following and automatically executing the moves of the experts.
“I’m at my highest balance right now,” Snooke said. He joined about three months ago with $50,000 and saw a relatively flat first two months. At first he was following four "trade leaders," but along the way, dropped two because he was not satisfied, and now follows the rest.
“One is up about 30-something percent, and another one at about 15 percent,” and those figures get directly reflected in his own portfolio, he said. “You can see what kind of trades are going on. Currensee has a very open policy, as transparent as possible.”
Snooke calls it social networking at a business level, “the newest way of forex trading.”
Chief Executive Officer Dave Lemont said, “You’re picking traders, essentially, to trade for you.” The Boston, Mass.-based company says it has more than 8,000 members in its network and 16 trade leaders. Since its launch in October 2010, more than $3 billion has been traded.
“It keeps you in the game active, but it doesn’t require you to be an expert,” Lemont said.
But just as with any investment, there is risk involved. “You have to be careful about mirrored trading services,” he said, since people are basically vesting control to a particular model. And even professionals don’t always come out ahead.
Stein added that social networking in investment is not for everyone. “People are still wary of sharing too much financial information,” and trying to beat the market is “a fool’s game.”
The companies do have risk-minimizing mechanisms. For instance, they test the investors at the beginning to accurately gauge their risk appetite, and they make sure every move, win or loss, is transparent.
“The main thing I like is that these model managers are investing for themselves,” Miller said of Covestor.
“They don’t even know you’re linked to them.” CEO Blacher explained that the people being followed have their own money at stake, and they essentially “have their own skin in the game.”
Betterment’s employees, although they don’t offer mirroring services, are all in the same portfolio, too, “so we’re all in it together,” Stein said.