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Unfazed by declining assets, VC-backed Covestor has another go with a new CEO and some concessions to the old-fashioned machinery of investment advice

The good news is that it has 400 clients -- up from 150 a year ago -- but can the company still be seen as primarily web-based?

Friday, March 23, 2012 – 4:25 AM by Cecily O'Connor
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CEO Asheesh Advani aspires to partner Covestor with broker-dealers and institutional investors, and to expand the firm's content.

Brooke’s Note: The retail investor’s choices for investing run the gamut including stockbrokers, self-directed accounts, financial planners, wealth managers, direct-to-mutual funds, life insurance … and mattresses. But from the perspective of venture capitalists, these are all outmoded forms of investing rife with time-consumption, complication, cost and questionable results. That’s why we see efforts like Covestor and Wealthfront popping up on the landscape — and even after years of red ink — displaying impressive staying power. If they ever get it right, they could really hit it big. Imagine an Amazon.com or Kayak.com of investing. Joe Duran talks about it frequently. See: Why Joe Duran believes that classic RIA firms face extinction. At RIABiz, we have our doubts — but not so much that we don’t keep an eye on what they’re up to — at least with our peripheral journalistic vision. Here is word on Covestor’s latest efforts. The irony is that it’s seeking help from the middlemen — broker-dealers, RIAs and custodians. It’s also introducing another un-web-like aspect — quarterly telephone conversations.

If you’re going to reinvent the way investors invest, you had better be a good tinkerer. To that end, the owners of Covestor Investment Management have enacted a blizzard of changes since the last time we looked in on them in April. See: How Covestor got VC backing, became an RIA and is waving a fist at mutual fund giants.

Covestor, a New York-based online asset management company, was launched in 2007 as a way for individual investors to mirror the transactions of professional investors, or “model managers.” Along the way, it also has morphed into a site that enables RIAs to easily market their investing ideas and strategies.

Eric Esterkin: We needed U.S.-based leadership.
Eric Esterkin: We needed U.S.-based leadership.

The firm initially raised more than $10 million in venture capital from Union Square Ventures, Spark Capital and Amadeus Capital Partners. Now, it offers roughly 200 models managed by more than 150 model managers with an average account size of roughly $40,000. Fees range up to 2.5% of assets under management, which are split between Covestor and the money managers on the platform. Covestor charges a minimum of $12.50 per subscription.

Assets under management were $10.79 million as of Nov. 30, all of which is managed on a discretionary basis, according to the company’s Form ADV. That’s down from $12.3 million as of March 31, 2011. Stock market fluctuations — the S&P 500 dropped roughly 6.4% during the eight-month period — contributed to the decline, says Eric Esterkin, Covestor’s director of corporate development., noting that his firm actually received $5 million in deposits between April and November.

Covestor is a privately held company and does not disclose revenue or profits.

Since naming a new chief executive last summer, Covestor has ramped up its branding and is pursuing various partnerships in an attempt to expand the business and reduce its growing pains. RIAs are still a big part of the plan, but so too now are broker-dealers and custodians, and even institutional investors will be welcome down the road.

Flawed business model?

Covestor’s ability to expand hinges on its ability to change the way investors manage their money and receive financial advice. But, overall, online advice and money management is a work in progress. There are no clear success stories to try to emulate, and sites like Covestor and Wealthfront are wrestling with ways to attract individual investors, many of whom still rely on professional advisory relationships. See: Why the launch of Merrill Edge may be a shrewder move by BoA than it first appears.

“They have a flawed business model,” says Adam Bold, founder of The Mutual Fund Store, an RIA with 70 U.S. retail locations. “Some years ago we looked at doing an online service like this but … when we talked to potential customers they wanted to meet with a real live human being.” See: Executive leaves Bloomberg with ambitious plan to unify the retail bond market.

Adam Bold: They have a flawed business model.
Adam Bold: They have a flawed
business model.

The validators

However, executives at Covestor think the portfolio mirroring is showing real potential and will gain traction among investors that want greater control, transparency and guidance as needed. Such an investor, known as a validator, is Covestor’s target client.

In general, validators have left their broker or advisor and have tried their hand at online trading sites such as Schwab. See: Morgan Stanley report: TD Ameritrade and other rivals may face pricing dilemma after Schwab price chop.

Validators “like the control and transparency associated with [online trading sites] but they are looking for a little more advice,” Esterkin says.

“There’s always a learning curve when a new product comes to market,” he says, citing both mutual funds and exchange-traded funds as examples. However, portfolio mirroring “is a new concept that’s catching on.” See: 10 reasons why Schwab’s move into ETFs may be an even bigger deal than it appears.

So for Covestor, the big question is whether changes being made by the company — including plans to expand via content, broker-dealer and institutional partnerships — will help it attract a meaningful client base.

“Our goal is to achieve the hockey stick growth,” says Esterkin. “We’re VC-funded so that’s what they are looking for. We have targets around deposit AUM, which is harder for us to control but a metric that we’re judged by. So we’re looking for scalable growth.”

Track record needed

More work is being done on the client acquisition front, he says. Covestor currently has about 400 clients, up from 150 a year ago.

“Our strategies on the platform have limited track records, and given the limited track record and our limited brand exposure, I think we have done an excellent job of attracting assets,” Esterkin says. “We need broader distribution, and we see [that] coming from a couple different areas.”

One area is Covestor is focusing on is forming broker-dealer partnerships. The firm currently relies on Interactive Brokers LLC for its custodial needs, and would like to add more broker-dealers to the platform, says Esterkin, who declined to provide specifics.

“That will give us huge distribution to the client bases of those broker-dealers,” Esterkin says.

Another area is content. Covestor markets through content distribution deals that feature investment reports and trade rationales from some of Covestor’s model managers on sites such as MarketWatch.com, Benzinga, MarketPlayground.com and Yahoo! Finance. In fact, Covestor recently expanded its editorial staff from one to three to edit and curate growing model-manager content.

Lastly, Covestor sees potential for institutional investors to invest in some of the 200 investment models on its platform — arrangements that could, for example, be part of some revenue-sharing deal in which Covestor gains distribution to clients of hedge funds and other large investors, Esterkin says.

“This is in the very early stages,” he says. “Institutions really need to see longer track records.”

Elevating the brand

Charles Sizemore: It hasn't been a big pipeline of business, but has been great for publicity, exposure and content generation.
Charles Sizemore: It hasn’t been a
big pipeline of business, but has
been great for publicity, exposure and
content generation.

The engine behind the effort to forge such partnerships is Asheesh Advani, Covestor’s CEO, Esterkin says. Advani, who is in the firm’s New York headquarters, replaced Perry Blacher, who worked out of Covestor’s London office.

“Ninety percent to 95% of our clients are based in the U.S., so the board determined we needed U.S.-based leadership,” Esterkin says. Advani “has been on board for about six months and has really wrapped his head around the business, and we are executing on his vision, which is expanding via the broker-dealers and elevating the brand.”

Before Covestor, Advani was the global head of financial advisor products for Lipper. Prior to that, he founded CircleLending, a social lending company.

Voice time

Despite Covestor’s outline for growth, one consultant expresses concern about the company’s shot at success.

“The Internet enables business, but it also creates the illusion that it’s easy to do, and financial services are extremely hard,” says Timothy Welsh, president and founder of Nexus Strategy, a consulting firm.

Consider that Wealthfront, an early Covestor competitor, recently redefined its target client and changed its approach to focus exclusively on ETFs. Andrew Rachleff, Wealthfront’s president and chief executive officer, declined to comment for this article. See: Why big RIAs are taking a risk on Wealthfront.

Under Advani’s leadership, Covestor recently relaunched its website to better reach the validators out there. Covestor, which has a $10,000 investment minimum, enables investors to search for a model manager that best meets their investing goals and style. Once they have chosen a manager to follow, Covestor sets up a “mirroring” account that automatically recreates the manager’s portfolio. So when a model manager makes money, clients following that manager will, too.

Timothy Welsh: The Internet enables business, but it also creates the illusion that it's easy to do.
Timothy Welsh: The Internet enables business,
but it also creates the illusion
that it’s easy to do.

A validator needing extra hand-holding can turn to “Covestor Wealth.” This offering comes with various fees. and is available at three levels of investment: $50,000 to $99,000; $100,000 to $499,000; and $500,000 and up. Some of the extra help includes quarterly conversations with the Covestor investment team to reassess risk or catch up on investments.

“There are different segments of the population, some of which still want this one-one-one-relationship, and this do-it-yourself [investor], and we’re trying to address both segments,” Esterkin says.

Publicity and exposure

Meanwhile, social media, through networking sites like Covestor, is adding to the ways in which advisors can find and cultivate client relationships. Forrester Research recently cited social media among the top five trends in digital wealth management for 2012. See: Three ways to use social media in turbulent markets.

Still, online asset management will “never replace the face-to-face, handshaking relationship,” says Charles Sizemore, chief investment officer of Sizemore Capital Management, a registered investment advisor in Dallas. But the ability to build rapport through social media is complementary. See: Early adopters of social media, RIAs are growing disenchanted with its power to drum up new business.

Sizemore, who launched the first of three investment models on the Covestor site in July, said so far Covestor has not provided “a big pipeline of business, but has been great for publicity, exposure and content generation.”

Through Covestor, Sizemore has been writing a column appearing on MarketWatch.com now for several months, a development that’s helped attract paid subscribers to a separate investment newsletter he writes as part of his existing advisory business.

“I am very confident [the column] will lead to some money management clients,” he says.

Showing your work

Bill DeShurko: As a small RIA, it's a compliance nightmare to post returns. [Covestor] is one place I can send clients as an example of the type of work I do.
Bill DeShurko: As a small RIA,
it’s a compliance nightmare to post
returns. [Covestor] is one place I
can send clients as an example
of the type of work I
do.

Bill DeShurko, head of 401 Advisor LLC and model manager for two years, says he has about seven Covestor clients subscribing to his model. DeShurko, who also has a MarketWatch column, says Covestor takes away some of the headaches RIAs face when it comes to administrative tasks.

“As a small RIA, it’s a compliance nightmare to post returns, and Covestor is one place I can send clients as an example of the type of work I do,” he says.

401 Advisor is based in Centerville, Ohio, and has $50 million in assets under management.

What’s 'Next’?

Each month, Covestor receives about 25 applications from RIAs and individuals who would like to showcase their portfolios. If selected, model managers undergo various due-diligence and background checks.

“Now that we have built liquidity on the platform, we are more selective and do a better job of screening managers, so that’s a positive for the platform and clients because it helps minimize performance drift and retain managers,” Esterkin says.

Going forward, Covestor plans to expand the number of model managers in line with assets.

Investors gained an additional window into the Covestor brand and its model managers this week as the company held its first virtual conference, called “Next Invest.”


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Brooke Southall

Brooke Southall

June 27, 2012 — 7:16 PM

Are you sure on your facts and…

Don’t all successful entrepreneurs have a failure or two under their belts?

Greg V.

Greg V.

June 28, 2012 — 12:25 PM

I’m sure of the facts are they are that Advani stayed with a losing idea, social lending, way to long and fired may good executives who knew it. He is good at raising money but leading a company not so good.

Greg V.

Greg V.

June 27, 2012 — 7:03 PM

Advani was and odd hire for Covestor having run Virgin Money into the ground losing 50 million. He has no ties to the broker dealer community and with a large falure under his belt there is little chance of him changing a conservative group like broker dealers.

Brett M

Brett M

July 25, 2012 — 5:31 PM

[Comment removed by admin on request. This comment was not posted by Brett M.]

<strike>As an employee I tell you it is true what has been said about Advani. No one in the copy had a clue about the direction and we couldn’t believe Virgin let him go that long. </strike>

Paul C

Paul C

September 8, 2012 — 11:44 AM

Hmmm… These comments sound like sour grapes from former employees. From a shareholder
perspective, Advani did a remarkable job as CEO of CircleLending and timing is everything. He sold the company to Virgin in 2007 before the financial meltdown, gave the early investors a great return on our money, and groups like Intel Capital and Hub Angels who sold stock to Virgin fared exceptionally well. The folks who stuck with Virgin during the recession did not fare as well but c’est la vie. Advani timed the market well and left two years before Virgin Money focused all of its capital on the UK and becoming a chartered bank. There are also some inaccuracies in the posts above – such as the assumption that the company blew through $50m. Much of that capital from Virgin was used to buy out shareholders and the company even returned cash during the recession – so now Advani can count dozens of family offices and private investors like me as his friends. It will be interesting to see what he can make happen in the investment management world.

Dan

Dan

October 16, 2012 — 5:16 PM

Paul, the comments about Advani are true, all of the Virgin 50 mil is gone and blown with him at the helm. Only 8 mil was used to buy out earlier investors and 1 mil of it went to Advani. He blew a ton of the money on an over the top office space reminicent of the dot com era.

The only reason you and others got the return on investment was so Advani could put money in his own pocket.

Brett

Brett

October 18, 2012 — 1:54 PM

This is the real Brett M. Whoever is using my name to post opinions please stop. If you have an opinion that you would like to express please use your own name and stop hiding behind other people’s names.

Tom

Tom

February 14, 2013 — 5:46 PM

What happened Brett, why the change of hart?

Paul C

Paul C

September 8, 2012 — 11:44 AM

Hmmm… These comments sound like sour grapes from former employees. From a shareholder
perspective, Advani did a remarkable job as CEO of CircleLending and timing is everything. He sold the company to Virgin in 2007 before the financial meltdown, gave the early investors a great return on our money, and groups like Intel Capital and Hub Angels who sold stock to Virgin fared exceptionally well. The folks who stuck with Virgin during the recession did not fare as well but c’est la vie. Advani timed the market well and left two years before Virgin Money focused all of its capital on the UK and becoming a chartered bank. There are also some inaccuracies in the posts above – such as the assumption that the company blew through $50m. Much of that capital from Virgin was used to buy out shareholders and the company even returned cash during the recession – so now Advani can count dozens of family offices and private investors like me as his friends. It will be interesting to see what he can make happen in the investment management world.

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