The idea behind SharingAlpha had been boiling in my head for years. Once I decided it was time to execute, I called up my brother who is an extremely talented and experienced programmer and asked him whether he would like to join me on this journey. I have over 20 years of experience in the financial industry and I cover the “Fin” part. My brother, now aged 46, has been writing code since the age of 13 and comprises the “Tech” part.

Over US$100 trillion are managed globally by active managers. Most of the assets flow to managers who have performed well in the past and outflow from those that have underperformed, although research has proven time and time again that past performance is not an indicator for future results. It is not just a disclaimer at the bottom of every fact sheet, but actually a reality.

One might compare this with lottery players who decide to select last week’s winning numbers, while most of us are aware of the fact that doing so does not improve their chances. In the asset management world, crowding behaviour might actually be harmful since every strategy has its capacity limitations and therefore, buying into what is known as “mega funds” that have performed well in the past actually decreases their chances of achieving outperformance in the future.

The natural question to ask is: “Why do investors behave this way, or in other words, what is the current market structure that leads to this market failure?”

Most investors do not manage their own savings, but rely on financial advisors. Naturally, those advisors need to have solid reasons for the selection they make on behalf of their clients. Investing other people’s money into a fund that has performed terribly, or has yet to gain a significant track record, would leave the advisor exposed in case post-investment performance remained poor. In order to avoid such a situation, most advisors prefer to play it safe and rely on some kind of past performance analysis, although, once again, the proof suggests that this strategy will not add value to the end investors.

Therefore, it is difficult for investors to select an advisor who has a proven track record of adding value to his or her clients in the past. An objective measurement is unavailable and as a result, advisor selection is dependent solely on factors such as service and presentation capabilities rather than hard and indisputable numbers.

Since historically, advisors were allowed to receive kickbacks from fund managers, clients were happy to receive “free” advice and this serious conflict of interest definitely did not work in the best interest of investors.

Prior to the 2008 financial crisis, regulators took a passive approach and did not interfere in the way this market was structured. In recent years, things have started to change and currently we see more and more countries in which retrocessions are a thing of the past. This dramatic change is placing plenty of pressure on advisors, who now need to ask their clients to pay them for the advice they can offer.

This regulatory change has led many advisors to move away from active funds – which could no longer pay them – to passive alternatives that require less research and more importantly are a safer bet, rather than having to explain later why they chose a manager that underperformed its benchmark when they could simply, and cheaply, buy the benchmark itself.

On the back of the above changes, we are currently witnessing one of the greatest movements of assets ever seen in the asset management industry towards cheaper solutions like exchange-traded funds (ETFs) and robo-advisors. Is this the beginning of the end for active managers and human advisors, or can this market still survive?

In my opinion, the only way forward is further transparency and the use of a platform that will enable advisors to select winning managers in advance and offer investors simple and objective tools to select the advisor that has a proven track record of adding true value to investors.

Since I couldn’t find such a platform, I decided to take the initiative and create one. With the support of my brother, who has been writing code for over 30 years, we turned this idea into a reality. We called it SharingAlpha and that’s exactly what it aims to achieve.

It’s Time for a Rating Platform

The SharingAlpha platform aims to gather the views of a large group of advisors and to measure their success rate.

The greatest advantage that a platform of professionals using a user-generated fund rating platform brings to the market is the possibility to grow to scale more rapidly and effectively. This is done by moving from the current rating model, where advisors work in silos, to a more centralized approach in which their views are shared on a dedicated platform.

This change can be compared with the traditional encyclopaedias that were created through costly, complex and difficult-to-manage supply chains of academic experts, writers and editors. Using a platform model, Wikipedia has built an information source comparable to Britannica in quality and scope by leveraging a community of external contributors to grow and police the content.

The successful introduction of the platform model to the asset management industry creates plenty of opportunities for those members of this community that do adapt to the change. On the other hand, investment advisors that fail to adapt will be taking on a serious risk of being left out. The sharp decline in valuation of the NYC taxi medallion (from over US$1.2 million in 2013 to less than US$300,000 today, due to Uber) should serve as a warning sign to firms and individuals that make their living from selecting funds. Unless they are able to hold proof of their actual added value, then their chances of keeping their current “valuations” is rather questionable.

This Leads Us to the Question: What Do Investment Advisors and Fund Selectors Have in Common?

Both have no independently proven track record to present to prospective and existing clients. This lack of track record has led many clients to choose cheaper solutions, known as robo-advisors. A user-generated fund rating platform offers to combat the robo alternative by offering investors a way to select investment advisers or fund selectors that have been proven to add real value. The platform ranks the individual raters in terms of their talent in selecting funds.

An additional feature enables investment advisors to build virtual funds of funds and in turn SharingAlpha ranks them based on their performance, not only as fund selectors but also as asset allocators. Their fund selection and asset allocation track record enables them to test their analysis, and if they choose, they are able to present their proven track record to existing and potential clients or receive better pay as an employed fund selector or asset allocator.

We have taken into account that putting people’s professional ability online for everyone to see can be risky. For that reason we have put in place a policy that enables our users to remain anonymous. However, the assumption is that once advisors build a successful track record, they will probably be interested in showing their performance and at that stage they will decide that sharing their identity publicly is beneficial.

We launched the platform as quickly as possible, after less than six months of development. We later added further functionalities based on the feedback that we received from our initial users. Many platforms grow on top of other networks. Instagram and Zynga have achieved their growth by leveraging on Facebook as the underlying network. SharingAlpha has so far leveraged on my large network of connections on LinkedIn (currently reaching more than 20,000 people, mainly from the asset management industry). Like the rest of the successful platforms, we had to be open to suggestions from users. For example, eBay has moved from auction pricing to mainly regular pricing as a result of demand from their user base. Similarly, we have allowed users to keep their identity private while building their track record, hence providing our advisors with a free option where they have nothing to lose by starting out and building their proven track record in terms of fund selection and asset allocation.

Instead of seeking external funding, both my brother and I agreed that it would be quicker to simply withhold salary payments. The other costs have so far been covered by us; however, we are fully aware that not all founders can afford such a setup and are forced to seek external funding at a very early stage.

In summary, on SharingAlpha investment advisers or fund selectors can either:

• start building a track record, be successful and have a competitive advantage;
• start building a track record and constantly improve until they are successful; or
• do nothing.

Obviously doing nothing is very risky. Imagine – two years down the line and many of your co-workers or competitors have created a proven track record. They can be compared while you cannot even enter the playing field!