Covestor brings the clarity and efficiency of an online marketplace to the world of money management. Investors can compare and select from a transparent marketplace of money management talent that includes top performing portfolio managers and successful investors.
Covestor bills itself as "Investment Management,” its appeal is to novice investors who can mirror the trades of experts, or Model Managers in Covestor parlance. Largely populated by registered financial advisers who would like extra profit from their investments, these expert investors allow you to electronically and automatically perform the same trades they make with their own money in exchange for 50% of the management fees charged by Covestor. As a follower, your fees equate to a percentage of the money you have allocated to the Manager. This percentage is set by Covestor based on that Manager’s risk, performance, approach and other factors.
After subscribing, you get to follow the trades of the selected experts without having to actually manage them. You can also set restrictions so that your money will never be traded outside your comfort zone. By answering some personal questions about your investment preferences, your account will be classified with a risk score of 1 - 5. Lower levels of risk will exclude you from certain trades deemed too volatile, and it means you would rather make smaller stable gains than risk your money for larger returns. A risk score of 3 or above frees your money to be traded either on margin or to short sell a stock. A risk score of 5 gives complete freedom to the manager and should ideally only be used if you have money to spare.
Covestor provides detailed bios of its managers before you subscribe or even sign up, so you know the types of investors they consider experts. You can see their top 5 stock holdings, overall, yearly and monthly performance as well as best and worst months. You will also be provided with commentary on the models by analysts and experts alike. Once you subscribe, you will be given access to information on all of their stocks and up to date return information. As with all types of investing, especially mirroring services, you need to research the models and strategies of those you want to follow.
Pros Cons Model commentary provided regularly by analysts Expensive - $10,000 minimum Full list of Managers’ holdings Mirroring can exclude many trades Free detailed bios of Managers Free, detailed bios of Managers
Your total fees are ultimately determined by the Manager(s) you choose to follow, as money will be taken from him to cover the costs of running your account. The money coming out of your pocket will equal between 0.5 to 2.3 percent annually per subscription model you choose to mirror; you will have to pay each manager the fee they have stipulated based on the money you have subscribed to their model. Even if you join late in the month or lose, there will always be a minimum $5 per month subscription fee, regardless of trade activity ($5 is the minimum amount you can pay -- it can be higher). These fees will then be split evenly with Covestor. You do not pay fees on any unallocated money in your account.
Furthermore since with Covestor you are actually performing trades, you must keep in mind the transaction costs. Covestor charges $1 per trade: the amount that it costs its broker, Interactive Brokers (IB), to process trades.
As an automated service Covestor runs smoothly, investing your money with almost no input on your end. Unfortunately, you need to be near a computer to check out the latest, as Covestor does not currently have any mobile presence. This certainly hinders the entire service as a whole in a time when apps are ubiquitous, especially when it concerns your money or investments. This could repel a large community of potential new investors, although a representative said the company has plans to bring both Android and iPhone apps to market. These apps could help with managing subscriptions, following new Managers and keeping informed of the status of your investments on the go.
Minimum Investment Requirement/Breadth
A $10,000 minimum is needed to fund an account, which is held by Interactive Brokers. There is a separate minimum needed for each subscription, found next to the percent fee that the Manager charges. This is the minimum you will need to invest to follow that specific model. This minimum will vary by Manager, but is calculated by the manager and Covestor’s Head of Manager Relations based on the characteristics of that particular model. Many Managers’ minimums hover at the $10,000 mark, but some can reach higher than $50,000. In general, higher risk models will require larger minimum investments but this is not always the case, as some high risk models require just $5,000 to begin.
Covestor offers a 15-day free trial, which allows you to subscribe virtual dollars to different Covestor models.
Since Covestor limits your investing to just one brokerage, it has ensured that connectivity will be simple and straightforward. After opening a Covestor account you will be led to IB to actually fund it. Therefore, only IB will hold money that actually gets invested and you can access your money as freely as the brokerage allows.
However, as a mirroring service, Covestor has to deal with what they call performance drift, or the connection between you and your Manager. Although Covestor strives to perform trades exactly, a number of factors could come in between:
- If a Manager makes a trade in his own account outside of the Covestor trading rules, or if you have excluded certain securities, you will not mirror those trades.
- Your account might be a different size than that of your Manager’s account and therefore the allocations might not match up exactly.
- Covestor will not sell positions smaller than the value of the commission you pay in a Mirroring Account or buy positions if they are not more than 10x the value of the commission. This ensures that all trades will at least be cost effective.
- The small amount of lag time, usually under two minutes, that passes after a trade is executed and when your account picks it up could see a slight change in price.
- The broker may not have the exact amount of stock available to fulfill all orders sent through (principally affects stock shorts).
Keep in mind that the results of drift can work to your disadvantage or benefit.
Covestor has a large network of expert Managers who invest their own money before you invest yours. You can decide who to follow by looking at metrics such as risk rating, best and worst 30 day performances, yearly and overall returns, approach, asset class and all of an investor’s stock holdings. Many of these investors are professional wealth managers or have another professional financial position. Covestor does its best to ensure that its Managers are as upfront and transparent as possible about their investing strategies so you can make an educated decision on whom to follow. Each must display his approach, allocation and sell discipline, as well as the research he has done.
Covestor includes a section of content on its site entitled “How to pick investment models,” so that you do not follow an investor based merely on his returns; you need to find someone who has an approach with which you can agree. Covestor also features a blog that has articles from the Managers as well as relevant news about the market for smarter investing.
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