The web has been instrumental in leveling the competitive playing field between amateurs and professionals across many fields of endeavor. From photography to music, if you’ve got the talent, you will be noticed. For obvious reasons there are some professions where this does not hold true – we don’t want unqualified people giving out legal or medical advice, for example. But there are other fields of endeavor where talented individuals lack recognition, not due to a lack of ability, but rather due to institutional barriers and mandatory professional qualifications that have proven to be of dubious value.
Consider funds management. An issue that has occupied the minds of financial academics for some time now is whether or not the performance of active fund managers justifies their compensation – on average, active fund managers do not beat the market after management fees are deducted. This lackluster performance, in conjunction with a general lack of transparency in the industry, signals scope for disruptive companies to provide consumers with greater transparency and greater insight into the investment processes employed by fund managers.
Palo Alto-based kaChing, the investing talent marketplace, is poised to become a key agent for disruption of the managed funds industry through its service which democratizes access to investing talent. The service, which first launched in 2007, allows users to create virtual portfolios of stocks and exchange traded funds, and share trading ideas among other users. Most notably, the company recently introduced two major initiatives which were under development for 18 months: Invest like a Genius and Investing IQ.
Investing IQ is an objective measure of investing talent which considers factors beyond past returns. The measure is based on insights gained by Andy Rachleff, kaChing’s CEO, through his role as member of the University of Pennsylvania’s endowment investment committee, into the way Ivy League Endowment managers evaluate investing talent. It is calculated using an algorithm which considers risk-adjusted returns, the extent to which the investor sticks to their declared investment strategy and the community response to the investor’s research.
The Invest like a Genius functionality allows consumers to closely monitor Genius investors, providing insight into their portfolio listings, trading performance and risk metrics, among other things. (An investor is granted Genius status if they have an Investing IQ of 140 or higher.) Consumers can follow Genius investors for free and receive notifications each time a Genius makes a trade. Theoretically, users are able to use this information to invest in close accordance with a Genius that they follow. But for the added convenience of not having to manually execute trades after receiving a notification, consumers are now able to mirror the trades of a Genius. After a Genius has been selected to mirror, kaChing establishes a brokerage account for the consumer with Interactive Brokers – the consumer does not need to manually open a brokerage account – and trades are executed automatically in accordance with the investment decisions being made by the Genius. This convenience is made possible though a commercial relationship the company has established with Interactive Brokers.
This is a powerful concept that provides consumers with investor transparency and aspiring investment managers with exposure. The level of transparency on offer is unprecedented – few can imagine sending a message to their mutual funds manager, for example. The mirroring functionality also provides kaChing with a solid path to monetization. Geniuses are able to specify a money management fee – the average management fee is 1.5% of funds under management – and kaChing keep 25% of total fees generated.
While the concept is compelling and the execution to date has been impressive, one should not underestimate the potential pitfalls of operating in the regulatory minefield that is the financial services industry. The company is a Securities and Exchange Commission (SEC) Registered Investment Advisor (RIA) and, while Geniuses are not required to be professional RIAs, many are. Fairview Capital, an institutional funds manager with $400 million under management, is a professional RIA Genius which normally only accepts individual investments of $1 million or more. Using kaChing, however, consumers are able to invest as little as $3,000 to mirror Fairview (this is the minimum investment required to mirroring any Genius). This low minimum investment requirement is made possible because all of the back office and marketing functions are handled by kaChing, while Geniuses are able to concentrate on what they do best – investing. Note that Geniuses not registered with the SEC are unable to see who is mirroring their trades, due to regulatory constraints. While this might not be a major issue for all Geniuses, it is indicative of the broader regulatory framework that kaChing – and its users – are required to comply with.
kaChing raised an undisclosed amount of seed funding in 2008 from an impressive group of angel investors, including: Marc Andreessen (formerly Netscape, Opsware, now Andreessen-Horowitz); Ben Horowitz (formerly Opsware, now Andreessen-Horowitz); Kevin Compton (partner at Kleiner Perkins Caufield & Byers); Bruce Dunlevie (partner at Benchmark Capital); and Andy Rachleff (general partner at Benchmark Capital and now CEO of kaChing). These investors, which all invested as individuals, will no doubt help the company navigate the intensely competitive market for social investing services, which includes Cake Financial, Covestor and Social Picks.
At first glance it would seem that now is not the best time to be pursuing new ventures in the investment industry – all things related to finance have been to some extent tarnished by the global financial crisis. However, while the regulatory burdens associated with being a RIA will likely present future challenges, particularly given the political attention being given to the perceived need for regulatory reform of the financial sector, there is clearly a public appetite for new approaches to investment management that go beyond the hallowed trading rooms of Wall Street. kaChing is innovating in a way that will help drive the finance industry forward, and the company’s advocacy of new, more transparent and more meritocratic approaches to investment management should be commended. Go long on this one.