With the release of a new product this week, kaChing wants to help you to invest like a genius. But will its idea, which is intended to uproot the traditional mutual fund model, take hold?
Since last year, kaChing's Website has allowed the average person to track the holdings of a select group of investing "geniuses" with strong track records. Monday, the company began to allow users willing to commit at least $3,000 to actually mirror the trades of those investors.
While promoting the new service, kaChing CEO Andy Rachleff, a venture capitalist and cofounder of the Silicon Valley firm Benchmark Capital, takes a number of shots at the mutual fund industry, particularly for what he considers to be a culture of secrecy. "Because of the lack of transparency, there's no good way to evaluate which managers are lucky and which managers are skilled," he says.
Looking to change this, kaChing requires its experts to publicly disclose detailed information about their strategies and to justify their trading patterns. KaChing then assigns them an "Investing IQ" based on their risk-adjusted returns, how well they stick to their strategies, and the types of rationales they provide for their positions. These criteria, according to kaChing founder Daniel Carroll, are based on the traits that Ivy League endowment managers value.
Those with Investing IQs of at least 140 are dubbed geniuses and become eligible to profit from the service. That's because users can now synch their accounts with a genius, meaning that when the genius makes a trade, kaChing will instantaneously make the same one for the user. These experts get to set management fees and will receive 75 percent of them, with kaChing pocketing the rest. "They only pay 25 basis points to outsource all of their accounting, all of their reporting, perhaps even some of their compliance," says Rachleff.
So far, the experts have tended to be smaller investors, including registered advisers, but the project has also received startup capital from a number of big names in Silicon Valley. Eventually, the goal is to provide investors with a strong alternative to mutual funds.
In attempting this, kaChing is playing off of a social networking model for investing that has been popularized by sites like Covester and Cake Financial. KaChing's site even feels a bit like a chat room, with users posting questions for investors on a comment wall. And in building up to Monday's launch, kaChing made use of applications on both Facebook and the iPhone, which have allowed users to track—but not actually invest in—model portfolios.
For Rachleff, these platforms and the transparency they engender allow the Internet to take on new relevance in investing. "Without an ability to drill down to do any analysis, there really is no role for the Internet to play and no ability to disrupt [the mutual fund] business," he says.
Still, these upstarts are a bit like the Davids of the world looking to take on significantly better-established companies. KaChing, for example, manages about $2.3 million in investments, compared to the $10 trillion under management by mutual funds. So while such sites certainly have a niche audience, investors shouldn't expect much market disruption—at least not anytime soon.