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This blog post examines what social investing is, how it has evolved, and future trends in an interview with Bill Schreiner, Managing Director at 1000 Trees and former EVP, Social Media at FOLIOfn.

Q: Social investing seems to be gaining traction in the marketplace.  What is meant by social investing and what does it involve?

A: There are really two different meanings. One is about people who have a double bottom line; that is, they invest in companies and other securities both to make money and also do something good for society. For example, investing in green technology because it will help with sustainability in society overall. 

The other meaning is investing in the context of a social group or connecting with other investors as you’re making investment decisions.  An investment club has historically been the model for this—neighbors and social groups pooling money and managing a portfolio as a group.  We could call this social investing 1.0.

The problem with social investing 1.0 it’s unlikely that all group members have similar portfolio preferences and risk/reward tolerances and needs.  Each person’s portfolio typically will land in a different place from a risk/reward profile perspective.  So it’s unlikely the group portfolio is going to work very well for 10 or 20 different people. 

The 2.0 model, which has the concept of ‘following’ (like Facebook, Linkedin and so on) deeply embedded in it, is the act of one or more people following the trading activity of one or more individuals. They use modern platforms and tools like chat boards, alerts, data displays, forums and so on, and are able to leverage publicly shared trading information.  You can in essence draft onto someone else’s investment actions to make your own investment decisions. In this model everybody is doing some leading and some following.

One of the unique features of a modern social investing platform is users may have the option to follow a single aspect or portion of someone else’s portfolio.  For example, you might only want to draft onto the retirement portion of someone’s portfolio (longer time horizon) or maybe that portion dedicated to college planning (shorter time horizon).  So in that sense users can create risk/reward tolerances for specific components of a portfolio, and not necessarily the entire portfolio.

Q: When did you get into the space and what attracted you to it?

A: I’ve been in the social media space for a long time. I’ve always been very interested in the way people collaborate and work together in groups for a variety of objectives.

I have seen that human beings are at their most creative and productive when they work as part of a social group.  They do better in social environments than the lone wolf (the investor or inventor who sits off by himself).  In America we have a tendency to celebrate the lone wolf but it’s really an illusion. Thomas Edison, for example, worked closely with a group of 30 people to develop the light bulb.  Apple is a very social place in terms of how they solve things – not every Apple product sprung from Steve Jobs’ brain including the original Mac. 

As related to investing specifically, in my experience, people who cling to social groups during stressful times often handle stress better in the context of a group.  So they are much less likely to make abrupt or poor investment decisions.

Q: How has social investing developed over the past 5-10 years?

A: Primarily what you’re seeing now is early experimentation in the space.  Folio, where I worked most recently has experimented with a model portfolio exchange for registered investment advisors.  E*TRADE I think has a social community that they’ve launched.  So these tools and models are out there but it’s still early on. But these things are definitely on the Web, they are real products and services that are here to stay.

Q: Who are some of the key market players and target audiences in social investing? 

A: Covestor is a popular one.  Kaching was another, which has changed and rebranded as Wealthfront—now experimenting with simply being an online registered investment advisor.  In addition, some of the large investment firms like TD Ameritrade, Schwab, E*TRADE, etc. have also begun to offer these kinds of tools and services. 

Compared to the brokerage houses, third-party platforms can offer a much broader array of features, functionality and services.  As well the decision to join one of these is more based on the people you may want to follow rather than the brokerage they are using.  But it may be easier for institutions to get in earlier on a technical level because the followers and followees would be on the same platform. They may see it as a marketing opportunity. I could see this in particular with portfolios made up of commission-free ETF’s where there is no commission penalty for making changes in the portfolio.

Target audiences would be investors with about $30K up to ½ million in investable funds—that’s a very sizeable market.  Above that investable funds level, the investor is probably going to a professional investment advisor for assistance in managing money.  Especially in the lower levels of investable funds, investors are really looking for someone to follow or draft onto because they don’t have a high level of investment knowledge or experience themselves.

Q: What are some of the key features and benefits of social investing?

A: Transparency is a key feature.  You want to have enough data to make good decisions about someone you might want to be following—how much they trade, components of their portfolio, the kinds of things they’re invested in.  On a social level, you would want a comment board, alerts and controls (similar to any social platform.  Also, as a user, you probably want to follow people who have similar personal profiles as you do (for a greater level of comfort and trust) so the ability to view personal profile information is important.

Q: What Are Your thoughts on Trust, Privacy and Security in Social Investing?

A: It’s really critical that (as a user) you believe the data you’re seeing is true and accurate, and subscribes to one of the industry standards of reporting investment performance. Registered Investment Advisors (RIAs), for example, will use a standard methodology to report their performance. But one of the nice things about social investing is that it’s transparent.  In other words, if you’re following someone else’s portfolio and you mirror those investments in your own portfolio then both portfolios should perform the same.  So there’s kind of a self-correcting mechanism at work.

On the privacy front, I think you’d want to see all the trading and performance level data but have the ability to hide personal information and give lots of control over that to users.  For example, the amount of money someone personally has invested in a particular portfolio should remain private at all times.  Individual account information should always remain veiled.  But when they trade, the transaction level information—sold this or bought that—that‘s really the key piece of information that needs to be transmitted out to other people in the social platform.

Q: What are different business models in social investing, and how do you see this evolving?

A: If it’s an institution – like an E*TRADE – of course every time there’s a trade they make money. Also most portfolios have a portion in cash and brokerages make some money on arbitrage.

For third party social platforms so far they have made their money acting as a registered investment advisor on your behalf; that is, they charge a percentage of the money you have invested with them. 

I’d like to see somebody experiment with advertising as the business model to make it more practical and appealing to people who have less investable funds.  Keep in mind that a base of engaged investors is a very appealing advertiser target – not only for financial services firms but also for other categories like travel, shopping and so on.  In my experience at companies like Aol the personal finance audience has always been very appealing to a broad set of advertisers.

Q: What are some of the main challenges with social investing?

A: From an implementation and adoption perspective it’s easier to build a social platform when everyone has an account at the same brokerage institution because there are heightened security requirements coming from SEC and FINRA for financial transactions online. So this may cause the space to evolve more slowly.  But it’s inevitable that it will grow – just like people today now regularly use comparison shopping sites like Amazon and Trip Advisor to inform and make retail purchase decisions.  And that’s leveraging social platforms.  I think this applies directly to the investing space as well.

Q: Do you think social investing is a fad or here to stay?  What does the future of social investing look like in your opinion?

A: I think slow growth and continued experimentation is where we are right now. The 1.0 version has been around for a while—message boards, stock message broads, and so on serve some purpose.  But they have low quality social contacts in those environments and those conversations are not tightly coupled with investing products and platforms.

The 2.0 version will include features and functionality like you see with Facebook, Twitter and Linkedin. I think you’ll see a very different landscape five years from now.

Q: What advice do you have for companies interested in pursuing the social investing space?

A: The number one thing is to look at the universe from the perspective of the potential investor.  And, take out as much friction from the process as possible. Not everyone wants to become an investment advisor or spend a lot of time supervising and minding investment strategies. This is one of the advantages of drafting onto someone else’s investment choices.  Simplifying the process but also making it smart so you don’t have to put a massive amount of time into it is really important.

The second thing is having a clear notion and a firm grip on the business model. A successful product will have its own natural gravity just like other social platforms have done without a huge marketing spend. 

But some of the early examples I’ve seen weren’t so simple from a user perspective.  They had lots of forms to fill out and had high barriers with regard to investable funds required.

You have to remember, especially with investing, people tend to want to take baby steps when there’s a new behavior in the marketplace.  But this is normal for every new technology—these are the birthing pains in a particular category, and I think we’re in the early days of this product category.

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