Anyone for a cafeteria-style SMA?

In a unique twist on the separately managed account model, a new platform is tapping day traders and non-registered amateurs to manage the portfolios of individual investors.

The platform, CV.IM, was launched two weeks ago by Covestor Investment Management of New York. The firm claims to have built a database of more than 20,000 traders with verifiable track records over the past two and a half years.

The Covestor platform, which is being marketed as a retail multimanaged account that does not require a financial intermediary, gets points for creativity but falls well short in the area of serious investing, according to Len Reinhart, president of Reinhart Consulting Group in West Chester, Pa.

“It’s pretty creative, but it looks like just a group of retail day traders sharing ideas,” said Mr. Reinhart, founder of Lockwood Advisors Inc. of Malvern, Pa., a pioneer in the field of separately managed accounts that is now an affiliate of Pershing LLC of Jersey City, N.J. “That to me is not a long-term strategy for somebody who is looking to have their money managed.”

Simon Veingard, Covestor’s chief financial officer, disagrees.

“We have a variety of model managers on the platform, from the more active traders to long-term buy-and-hold investors,” he said. “We’re really trying to cater to many different investment niches.”

The SMA format traditionally has relied on institutional-class money managers to provide portfolio management, either through a model portfolio strategy or through direct account management.

The $1.2 trillion managed-accounts industry is heavily concentrated among the full-service brokerage firms and is accessed almost exclusively through financial advisers and brokerage reps.

Covestor, by contrast, is letting individual investors set up their own accounts that track, within two minutes of each trade, the portfolios of money managers on the platform.

Investors can do their own research by evaluating the performance and profiles of the money managers listed on the website. However, Covestor is not ruling out opportunities for financial intermediaries.

“We look at it as an open platform for investment talent, but it’s not that different from any other unified managed account,” said Perry Blacher, Covestor’s president.

The platform went live by initially giving investors 10 money managers from which to choose, but he said the plan is to add 10 manager choices each month.

In order to post their portfolios and make them available for tracking, money managers must have a verifiable track record, a detailed profile that is posted on the website and a “coherent strategy,” according to Mr. Blacher.

A quick review shows that some strategies are more coherent than others.

One market-timing strategy listed under the heading of “recent models” is holding just two positions, including a 92% allocation to cash.

The strategy, managed by Jeff Boarman of Richmond, Va., identified as a mechanical-systems trader, declined by 3.7% in July, which compares with a 7.4% gain by the Standard & Poor’s 500 stock index over the same period.

Not all the portfolios are managed with such extreme concentrations, but critics warned that investors should pay careful attention to how their money is being allocated under such a program.

“Typically, whenever you’re dealing in the investment blogosphere, they tend to have very concentrated portfolios and a great deal of risk,” said Jeff Tjornehoj, senior research analyst at Lipper Inc. in Denver.

He added that the Covestor platform could benefit from being launched in the midst of a strong stock market rally, but he doesn’t see a bright future in what he described as a “flavor-of-the-month strategy.”

“The current market is very frothy, and people are paying attention to this kind of stuff as they try to figure out what matters and what doesn’t,” Mr. Tjornehoj said. “The blogging and social-networking phenomenon will seem less relevant down the road, and in the end, people will go back to the old-fashioned way of doing business.”

In the meantime, Mr. Blacher said he’s has seen a “huge interest” from professional traders and registered investment advisers.

“It gives the portfolio managers another [distribution] avenue,” he said.

In the fledgling stages of the platform, the financial incentives for portfolio managers will be minimal.

Mr. Blacher said managers who are registered investment advisers will earn a share of the fees charged to investors to track their portfolios. Those annual fees range from 0.5% to 1.5% of assets under management, depending on the strategy, which is comparable to traditional managed-account platforms.

Non-professional managers are paid a flat fee of $120 per year for each investor following their model.

“I view it as a wholesale-distribution channel, where I have no direct client interaction,” said Sean Hannon, president of Epic Advisors LLC, a Westfield, N.J.-based firm with $25 million under management.

His profile on the Covestor site describes him as a value manager with a portfolio of 23 securities.

The strategy has an 89% allocation to cash and gained 2.9% in July.

According to the site, Mr. Hannon’s strategy has a Covestor history dating back to August 2007 and generated an annualized return 87.6% through June.

“As with anything that’s new, the devil’s in the details, and if I were going to use this, I would be drilling down to the source of the numbers,” Mr. Reinhart said. “Anytime you do something new, there are scary parts, and we’ve all just been through the Bernie Madoff thing.”

According to Mr. Blacher, the performance and portfolio data are verified through relationships with each manager’s brokerage firm, which is linked to Covestor, an RIA.

In order to sign up to track a manager, investors must link their own brokerage account to Covestor.

The portfolio managers on the site never have access to the accounts of the investors who are following their strategies. All tracking trades are executed through the Covestor platform and at each investor’s brokerage firm.

E-mail Jeff Benjamin at [email protected].

Related Topics: Separately Managed Accounts (SMAs)