Investing: The Net Wisdom of Peers

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Cake tracks stocks, ETFs, and mutual funds and plans to add options and fixed-income trades in the future. While all the trading activity that Cake imports can be measured, members don't have to reveal their net worth, the amount they're investing, or the number of shares they're trading. Eliminating the sensitive information allows users to communicate freely with each other, says Carpenter.

Cake's service is free, but once membership has grown to at least 10,000, Carpenter says he'll create low-cost, customized asset-management services based on the aggregated performance metrics of Cake's members. The idea is to take aggregated performance data and overlay it on a member's portfolio to show what stocks he should sell and which ones he should hold on to. A premium service would show members the asset allocations of their top 10 model investors and notify them via e-mail whenever one of these people buys or sells a stock, or even adds a stock to his watch list.

Fund Management Insight

For Covestor, the imperatives are verification and evening out the playing field for retail investors. By giving them the same tools that a hedge fund manager has, such as the analytics that help them understand the risk they take vs. the returns they get, and how those compare with their peers, benchmarks, and professionals, Tahta hopes to "burst open the fund management world."

Covestor is currently a free service, but plans to go to a compensation business model sometime in 2008, under which members would pay a fee to follow top performers' portfolios, and Covestor would collect a small percentage of the fees charged by its top performers.

When ValueForum launched in late 2003, it offered a flat fee for lifetime membership to the first 200 people to sign up for the service, and within six weeks it had sold out. Through those early adopters telling friends, the community has grown to 1,400 members—most of them age 55 and older and retired with an average portfolio of $1 million, says co-founder and Chief Operating Officer Adam Menzel. Members pay an annual fee of $220 to use the site.

ValueForum doesn't import and track members' investment accounts, but it gives members the chance to gauge each other's performance in other ways, such as quarterly contests where each person chooses three stocks they think will rise during that three-month period.

Growth in Self-Directed Portfolios

Another reason that investors are looking for new ways to exchange financial advice is that broker-advisers are showing less interest in handling portfolios valued under $1 million. That leaves 15 million U.S. households with assets between $100,000 and $1 million looking elsewhere for investing advice. These households' assets total $4.5 trillion, or 35% of U.S. retail assets, most of which is being serviced by the mutual fund industry, according to a study by Forrester Research (FORR) published in March, 2006.

Institutional investors are also getting involved in online investing communities. Marketocracy.com, a San Mateo (Calif.)-based investment company that launched in July, 2000, uses a social network to generate the research that informs its funds' investment decisions.

Marketocracy's founders, Ken Kam and Mark Taguchi, opted for an alternative to Wall Street research based on what they learned while co-managing a top-rated technology fund at Firsthand Capital Management in the late 1990s. Kam, who had previously worked in the medical devices industry and was running the fund's health-care/medical portion, found that the best ideas about a company and its business prospects came from people working in that particular industry, not from Wall Street analysts and brokers.