I think people need to understand one thing: these markets are extremely difficult to trade. They’re slaughtering professionals and amateurs alike.

Right now, a lot of money has been pulled from the market and I’d suggest that the money flow is coming primarily from short-term traders who are playing the swings.

For most people, being in the market now is a bad idea regardless of who you’re trusting with your money.

I look forward to seeing how this space pans out.

Your FAQ states:

Covestor will make money when one member pays to track the account of another. Covestor only makes money when members make money. Like a standard managed account with a brokerage firm, investors will pay a management fee to invest their funds in a managed account, supervised by a regulated investment advisor, that in turn pays a data fee to the member being tracked.

So Covestor earns a management fee that I’m assuming is a percentage of the total funds in the account being managed? What will the data fee for the member being tracked be? Is it a flat fee that is not based on the size of the account?

How much information will members who are being tracked have about the accounts that are tracking them? This is an important point depending on how your system works. For instance, one of your most “successful” members, Tim Sykes, trades penny stocks. Take for instance IDAE, which he last traded in October. Average daily volume is about 30,000 shares for a stock that was $2 at the time he was trading it. If you have a sizable account, no real money can be made trading a stock like this and the risk is huge because one big block trade caused by automatic execution could distort the market.

Which brings me to the question: how are trades handled and trade sizes determined? The big problem I see is that unless the members who are being tracked are Covestor employees (or investment adviser representatives), you’d have to (or want to) have an employee validate each and every trade before you allow it to be executed for the client. After all, if the client believes that there is some protection because you’re a Registered Investment Adviser, the last thing you want is to be responsible for decisions made by tracked members who have no real fiduciary duty to (or direct relationship with) Covestor’s clients. Bad trades are not limited to bad “picks” but also to bad position sizes.

In my opinion, these types of issues are more important than any SEC issues. Even assuming that everything is kosher as far as the SEC is concerned, the last thing I’d want is to be responsible for a bunch of really bad trades that were made by members and that I was accused of endorsing even though I had not vetted them before they were executed.

And that’s the biggest problem I see with all of these services. Having some control of other people’s money and investments is not only a huge legal burden, it’s a huge ethical burden. There’s a lot of responsibility. Giving the Average Joe the ability to put his money into the hands of another Average Joe and vice versa seems like it’s inviting trouble, especially in these treacherous markets.

I can’t comment on the specifics of the execution at this point but when it is up and running I would value your input as we are obviously working to do this in full compliance with regulation

All the best
Perry

1. Have you received any formal ruling from the SEC that supports your FAQ pledge to Covestor “members” that they will be able to generate a data fee from each account that tracks [their] investments”?

2. Do you have a formal agreement from a reputable broker dealer AND clearing firm to establish and trade these accounts, putting themselves and their licenses in harms way (from FINRA and as “deep pockets” in the inevitable investor lawsuits)?

Or like kaChing, are you and your investors just praying it works out (even thought there is no mention of such prayers on your website)?

To be clear though ours are not ‘managers’. We have never called them managers, do not treat them as managers and they do not act as managers. Our fiduciary duty is the most important thing to us. Drama 2.0 is correct – someone has to have legal/fiduciary responsibility to clients and in our case that will be us.