Decoupling Advisory From Custody

I had coffee with a friend last week. He's been working on wall street for most of his career. Over the past few years he has built a fast growing business inside a large asset management firm that allows the largest institutions (pension funds, endowments, insurance companies) to invest with the leading hedge funds without giving them custody. Instead of wiring funds to the hedge fund, they keep custody of their capital and the hedge fund makes the trades for them. This arrangement is both less expensive and more attractive to the large institutions. If another financial crisis hits and the gates come down on the hedge funds again, that will not impact these large institutions because they have custody of their capital and securities and can liquidate the securities themsleves if they want.

This is identical in many ways to the way our portfolio company Covestor operates in the retail side of wall street. We have had a Covestor account for something like three or four years now. I select model managers on Covestor to trade our account but all of our cash and securities are at an online brokerage account that I control and can trade in any time I want. When I "unsubscribe" from a model manager, Covestor automatically liquidates all the securities bought for us by that model manager. If I just want out of the whole thing, I could sell all the securities myself. The only publicly traded securities that the Gotham Gal and I own outside of securities that have come from our venture capital investments are in our Covestor account.We don't have the time to trade stocks for ourselves and we don't want to give custody of our money and securities to anyone else.

Both of these companies are taking advantage of a trend that we are seeing in the world of finance and that is the decoupling of custody and advisory. As I have said many times, money is just "bits on a wire" and the wires are starting to connect all over the place. Many banks and brokerage firms are putting in place APIs, including read/write APIs in some cases, that allow money to move and securities to be traded by third parties who don't actually have custody of the account.

I think we will see this play out all over the world of finance in the next ten to twenty years. It was with this in mind that I suggested last thursday night that the venture capital business will not look like it does now in 25 years. I think the idea of a 10 year fund where the VCs have custody of the LPs' capital and make all the decisions is not going to be the norm. Companies like our portfolio company CircleUp and AngelList are building important new platforms and paving the way with regulators to allow the same kind of thing that is happening in the stock market to happen in the venture capital market. And that's a good thing. Change is good, even in my own business.

#hacking finance

Comments (Archived):

  1. JamesHRH

    As usual, you have the long term trend nailed.This is, essentially, a macro version of computerized trading. Riding the hot hand.What is interesting is that the old retail stock bromide still applies – “it is not about buying a stock (replaced w advisor now), its about selling.”

    1. fredwilson

      selling is way harder than buying

      1. Matt A. Myers

        I imagine platforms like Riskalyze, Covestor, etc. will make it easier for selling to the masses.

        1. Kasi Viswanathan Agilandam

          U definitely are going to get an upvote from @aaron klein πŸ™‚

          1. Matt A. Myers

            I better.. πŸ˜›

          2. ShanaC

            nope it was a guest post

    2. pointsnfigures

      I don’t think it’s a macro version of computerized trading, at least, the way I understand computerized trading.

  2. Tom Labus

    Custody works only if the markets are liquid. In 08 during the Crash if didn’t matter since CDO’s etc could not be sold or liquidated at any price.Crisises have their own set of rules, unfortunately

    1. fredwilson

      Right but not all of the fund was in CDOs. You could have sold the liquid parts of the portfolio

      1. teegee

        OK if the liquid part of the portfolio was enough to cover your ass. Otherwise, not so much. I agree with Tom.

    2. ShanaC

      isn’t venture an inherently illiquid part of the market, even with SecondMarket

      1. Tom Labus

        I was talking about crisis time and that all rules are out the window at that point regardless of structure of ownership.It’s bookkeeping since someone has to make the calls

  3. jason wright

    Wealth Front has merit?

    1. Vineeth Kariappa

      Create ” your account”, which will be controlled by “you” (imitates trades of another person), other person buys crap, “you” auto buy crap. Haven’t understood the model.

      1. jason wright

        i’m still getting my head around Fred’s post. perhaps I should start drinking coffee.

  4. Mark Essel

    25 years is a very conservative estimate for that transition.

    1. fredwilson

      VC funds have a ten year life

      1. Vineeth Kariappa n the private company index (4got the name) may see a 100 mill round for a start up in 5 years.

      2. ShanaC

        so wouldn’t 30 be better?

      3. Donna Brewington White

        You said… “I think the idea of a 10 year fund where the VCs have custody of the LPs’ capital and make all the decisions is not going to be the norm.”Did you mean that the “10 year fund” will not be the norm or “where the VCs have custody of the LPs’ capital and make all the decisions” will not be the norm, or both?Either way 25 years seems like a long time given the level of potentially disruptive activity happening.

  5. Andrew Kennedy

    There is the liquidation benefit (assuming the asset is liquid), but also an accounting benefit as well re: marking the value of the asset yourself. Maybe not a large benefit, but certainly gives you more control over how you present your financials and I am sure some people play that game more aggressively than others.

    1. fredwilson


  6. Timothy Meade

    That is an interesting and I assume beneficial model to all involved. I’ve come to think that certain things should be left in the control of, for lack of a better word, interchangeable providers. I’ve been working on a similar idea but related to the web hosting space: the hosting account remains in the custody of the company paying to have their site built, along with the domain and certificates, but my service allows a contractor that company hires to do the work to have access to the technical side of the equation. I’m working on a few value add features and getting this thing ready for validation. All that’s missing when it comes to interacting with brokers is an universal pluggable API that management providers can use to execute trades, and it looks like Covestor is working on that. Also a more robust form of OAuth2 with very well defined tokens that allow specific classes of trades but not others would be a good addition.

  7. vsistla

    I bet equity based crowd funding will also play an important role to usher this change for venture financing industry – maybe even in next 5 to 10 years.

  8. Kasi Viswanathan Agilandam

    With my very little understanding on finance …I don’t understand what the LPs will do without custody…If LP’s are not given custody where is the freedom to operate?Then LP becomes literally Lending Pawns.

  9. andyswan

    Decoupling of advisory from custody is a real trend, but it’s just the beginning, and quite frankly the least beneficial/exciting step. In fact, it’s very likely to backfire on the individual level, because more often than not, performance BENEFITS greatly from restricting the asset owner from “emotional liquidity”.The more exciting stages of this for me will be the decoupling of custody from transaction.Think twillio for brokerage.That’s my vision. If you’re interested in working on it with me, shoot me a note….

    1. fredwilson

      Why wait?

      1. andyswan

        Some regulatory waters to navigate, but you’re right…I’ve edited the “start date” out.

    2. Richard

      Doesn’t this set up another just one more opportunity for algorithmic traders to pounce?

    3. Aaron Klein

      I’m excited to see where this goes and how we’ll work together on it.As you know, this is something I’m obsessed with. The idea that if we can get people invested within the bounds of their risk tolerance, we can stop this horrible cycle for individual investors: that when the market pulls back, their portfolio drops faster than they can tolerate, so they sell, lock in a horrible loss, wait until the market “feels safe” again and buy back in at the high.Rinse and repeat for 30 years, and that’s a REALLY bad retirement.That’s why our mission is aligning the world’s investments with investor risk tolerance, and we’re not going to stop until we’ve accomplished that.

      1. Richard

        When you show your cards to a machine (Algos), you pay.

        1. Aaron Klein

          Fear of algorithmic trading is way overblown.

          1. howardlindzon

            yes fear is silly. just stand further away. cant beat em…just adjust

          2. Aaron Klein


      2. ShanaC

        I don’t think their risk tolerance is a good model – as I mentioned to you earlier at one point, just because you can tolerate the risk doesn’t mean you should, or even be told you should

        1. Aaron Klein

          Firmly disagree. :)First of all, Riskalyze shows that being 100% invested in the S&P 500 index carries a six month downside risk of –21%. However, if you could tolerate that kind of risk and had invested in that for the last 25 years, you’d have averaged an annual gain of 9.7%. Not a bad place to be IF you can tolerate that really high level of risk.Second, the data simply doesn’t support the idea that there are a significant number of people taking bad risks that they can tolerate.However, there is an EPIDEMIC of people who are invested with ridiculous levels of risk that they can’t tolerate. Which leads to the dangerous and destructive “sell low, buy high” cycle I described above.Last year, the stock market returned 13%. Active managers averaged together returned 11%. And individual investors, plagued by the “sell low, buy high” cycle earned 2%.Risk tolerance matters. Big time.

          1. ShanaC

            Note to those who care, I have an abnormally high risk tolerance.Is it that they can’t tolerate risk because they can’t understand it or because they can’t tolerate risk?if it is the first, well then what risk you show should be decoupled from what you invest in.This is especially true if you are not extremely numerate. The understanding of risk is way out of proportion to what you can conceive as risky.

          2. Aaron Klein

            I do not think you have an abnormally high risk tolerance. You are young and have plenty of time before you need the money for retirement. It’s actually fairly common.IF you can control yourself and not sell when you encounter a 20% or 30% drop in your portfolio’s value, you could easily put 100% of your money in the S&P 500 and you’ll have a more valuable portfolio 25 years from now than most of your peers.The problem is, most humans do not have that kind of self control. They freak out and they sell when the markets pull back. So they are better off dialing down their risk to fit within their risk tolerance, so they can stay invested and not miss the recovery.On the other hand, if you’re talking about people who aren’t literate enough to know what it means for their portfolio to drop 21% in six months, they shouldn’t be investing at all – they should open a CD at their bank.

          3. ShanaC

            I’m pretty certain I do compared to my peer group.(note: the reason I know that i have a high risk tolerance is twofold – I took the old beta version of riskalyze test 2x, and a classroom story, to be told below. For those curious, I scored the maximum risk score allowed in the system as far as I can tell)So brief classroom story:I once took a class called the history of business since the 1980s. On the first day of class, he did a summary of some very important concepts in business so that we could understand history of business. One of these was a risk discussion involving a 50/50 coin and bets. The other was about choice of employer.I was one of the few people who went extremely high with both the coin bet discussion and didn’t care about employer issues (most people were very concerned about stable jobs and benefits packages..and almost everyone was an undergraduate). Also, almost everyone in that class had taken single variable calculus, with most taking multivariable.It is totally not an age thing, or a numeracy thing. it was literally fear of risk because they couldn’t process it

          4. Aaron Klein

            I don’t question that your risk tolerance was higher…but I just don’t think it was abnormal. And hey, I admire your risk tolerance! :)I see lots of younger people in the 90s on our risk scale, because they don’t have such a huge amount to invest that losing it all would change their life significantly…

          5. Donna Brewington White

            This is a good explanation.

          6. Aaron Klein


          7. jason wright

            if you haven’t already seen this interview i recommend it. one hour of wisdom and insight. he talks about risk tolerance and demographics;

    4. ShanaC

      how do you decouple custody from the transaction without advisory playing a role?

    5. howardlindzon

      lets catch up on this idea.

  10. takingpitches

    in addition to bits on a wire, the other trend is transparency of talent, meaning access to undervalued talent by clients and ability for that talent to be more easily found and recognized.i like how clearly covestor provides a managers’s track record and strategy.

    1. fredwilson


      1. Justin Short

        My startup, just going live, has a new approach to finding and nurturing trading talent. Our app pays weekly cash awards to all skilled players but is completely free to use, plus if you invite someone who goes on to trade well, you get a bonus % of their income. It’s also real-time, which is a lot more fun. So there’s every incentive for people to hear of and use the service. Anyone with a smartphone and a minute free can play.How we expect to fund this is also unusual. Although there are several options our preferred route is to take the signals from all players (crowd-sourced alpha), and use that to trade in our own HF, and then take a % of the management profit and feed it back into rewards. This is also a defensible business: it’s not easy to replicate.Unlike most similar services, there really is no risk at all for the users – because it’s not funded by them. I believe there is a lot of talent to be found which really has no ability or appetite to take any personal risk. Avoidance of loss is a poor incentive. Also a lot of gaming talent that is not interested in finance or stock-picking.Background: I was in finance for 15 years, and regional Director of Electronic Trading Product Development and Quant at a top tier IB for the last 5. I loved it! I quit that to do this, because I couldn’t not do it once I’d thought of it. And I’m hoping Fred’ll notice because I might be looking for funding at some point!

  11. pointsnfigures

    I tried to do exactly that-but the people and family offices I spoke with didn’t quite get it. So we reverted to a fund. I have a friend at McNally Capital in Chicago that is doing that with Private Equity. It becomes bespoke investment. There are a few firms that are also doing similar things to Covester, Ditto Trade is one. RobinHood is another, and TradingView does some interesting things.When I traded in the pit, there were always followers. Guys that tried to follow what the good traders did.True story. Friend of mine was the largest trader in a particular contract. Goldman Sachs paid a guy to follow his trades and keep track of his position. One day, my friend looked at him and said, “Let me see what you got.”. The GS guy showed him and he said, “Nope, you have it wrong. This is what it really is. Start over.”!That’s confidence.And by the way, efficient market hypothesis works. You can’t beat the market. better to own an index fund that replicates the S+P than own stocks. Active investors cannot win.

    1. fredwilson

      Great story

    2. andyswan

      We were “auto-trading” through thinkorswim in 2004. There’s nothing particularly new here on the equities side.Much better product would be to let me automatically take the other side of Joe Retail. Of course, I guess that’s what the CBOE ultimately is…

      1. pointsnfigures

        If I could have traded against Joe Retail, I wouldn’t be commenting on this blog. I’d own an island and would be oblivious to the outside world.Essentially, that is how the stock market is set up today. In the old days, it was the specialists. The firms disintermediated them through regulation, and created payment for order flow, dark pools, internalization etc to trade against them.I was a part of two movements at the CME. First one ended dual trading. (was wildly unpopular with brokers and broker groups) Second one forced CME to pour money into technology and become an electronic exchange. (was wildly unpopular with broker groups) Both cost me a lot of money when totaled up in opportunity costs.I would have loved to pay for order flow, stood on the top step and traded against customers while arbing against the pit. Would have taken me about four unemployment numbers to look like I won the lotto.

    3. Richard


    4. Bhargav Shivarthy

      Part of our job at Covestor is to source great investment talent from around the world and bring them before our clients for consideration. Be it the passive indexer, the fundamentals driven buy and holder, the technical swing trader or even Tommy Dorsey who solely uses ‘points&figures’ ->… ;-)At the core, we believe that great investment talent cannot be monopolized by large institutions and that talented investors can use the web to gain and monetize a following.The other part of our job is to showcase risks inherent in every type of investment strategy available in our marketplace, our internal client advisers help our clients understand these and assume only that which makes prudent sense.We deliver this through a transparent and liquid managed account structure for the additional level of safety and security this affords to our end clients.Call us, you might be surprised at the depth of our money manager roster.

      1. ShanaC

        i think you guys should talk with the guys at betterment because they are capturing a low point in the market

        1. Bhargav Shivarthy

          I love what betterment is building Shana and have a huge amount of respect for Jon, his team and the front-end simplicity of the product they are building.My personal experience has been that there is no one magic way to invest. Modern Portfolio Theory is one world/investment view that works for some ppl but I think there is value in having a variety of different approaches and viewpoints under one roof.

          1. ShanaC

            the reason I think you guys should talk is I wish I could be in covestor, but I don’t have the minimum requirement – and I think they might be a good partner to get people to that point πŸ™‚

          2. Bhargav Shivarthy

            ah. I hear you. we have been talking about lowering our minimums. I will reach out to you when we do it.

          3. kidmercury

            modern portfolio theory’s primary value in today’s world is to provide the rest of us with something to make fun of.

          4. Bhargav Shivarthy

            :)The premise is pretty solid though, you have to admit. Buy a variety of assets that are non-correlated. Then proceed to sell your winners and buy your losers as all of them revert back to their mean. Simple enough.Personally, I think the problem really is when correlations move higher and is a real issue when access to credit for all of these asset classes come from the same handful of institutions.

          5. kidmercury

            you nailed the problem — when correlations change. which is a huge problem, because they absolutely will. all these stupid theories have the same problem, which is that they are based on ridiculous, naive assumptions that attempt to put the whole world into a convenient little formula. if any of that actually worked, we wouldn’t have the kind of panics/crashes/bubbles that are now routinely experienced.

          6. Dave Pinsen

            That’s where hedging comes in. Diversification alone doesn’t protect against market risk, because when the crap hits the fan, correlations climb.

          7. Bhargav Shivarthy

            ‘stupid’ and ‘ridiculous’ are a bit harsh.I’d just say that there is value in not being indoctrinated into one way of thinking, especially as it relates to investing strategies. Looking up and noticing that there are many different investing approaches, none of which work all the time or through all time-frames is half the battle.Understanding that no one lives into this theoretical ‘long-term’ we are constantly sold on and that client emotions and psychographics are as real as performance and risk metrics is the other half.I hate selling #magicbullets, I have in the past and swore to myself never to do it again. If anybody says they have discovered ‘the best’ and ‘only’ way to invest, run.

        2. Richard

          Why give away 35 basis point when you can invest directly in the ETFs?

          1. ShanaC

            because setting up a simple brokerage account (I tried for a roth) meant answering complicated questions about my parents house.

      2. Donna Brewington White

        “At the core, we believe that great investment talent cannot be monopolized by large institutions…”I would love you just for this alone.

    5. ShanaC

      if you are going to own index funds – they still have fees. CHoose ones with cheap fees

    6. Capitalistic

      You can beat the market, but it’s purely luck, timing, duration and exit. From 2008 to 2010-ish distressed debt/assets beat the market.

  12. Anthony Serina

    Decoupling of advisory from custody was a trend when I worked on wall street but the real problems are not solved by ring fencing assets. The problems arise when hedge funds use leverage and as a result there longs are lent out or rehypothecated to street when other shops are looking for a borrow to go short. If the borrower goes belly up, the long holder is in trouble. When a name is failing across the street, it can cause problems (I have seen it). The banks do not talk about that but instead provide false protection through the “managed account platform.” In addition, when funds use leverage the custody account is used as collateral for haircut requirements even though the funds don’t move entities – so ultimately they have access to it anyway. It is kind of a joke.

    1. teegee

      completely correct. decoupling doesn’t solve problems when the hedge funds are choosing to invest in illiquid assets (or assets that become illiquid in a crisis)… The reality is that you won’t necessarily be able to sell out when you want / need to.

      1. jason wright

        yes, this is the point in the post that doesn’t quite work out in my head.”If another financial crisis hits and the gates come down on the hedge funds again, that will not impact these large institutions because they have custody of their capital and securities and can liquidate the securities themsleves if they want.”

        1. teegee

          yep. doesn’t work like that.

      2. fredwilson

        yeah, but if they do that you will see them in your account and will know they are doing things like that which you may not likeanother big advantage of decoupling custody from advisory is transparency

        1. teegee

          Yes, transparency is a major plus point. But the fund manager “doing things you don’t like” and liquidity are two very different things. Bad investments tend to turn illiquid at the wrong time (e.g. when you want to sell) and don’t necessarily look bad until it’s too late. I do think that decoupling (& the accompanying transparency) is the right way to go, but I don’t agree with the whole of your argument behind it.

          1. fredwilson

            that’s fair

        2. ShanaC

          are there other ways to force transparency without the decoupling – maybe the actual trend is the trend to transparency.

  13. Elie Seidman

    In the case of your friend, are the fees that the endowments/pension funds are paying different (lower) than what they would pay if they outright gave the money to the hedge fund?In your Pandodaily interview, I heard you say two things about the VC industry that are contrarian 1) it’s an old persons business 2) the traditional fund model will phase out.I don’t know what the statistics say but casual observation says that the way a lot of VCs get started these days is in the VC business, straight out of one of three or four MBA programs. But USV seems to not have that type of person on the team. Since you view the way you came up the ranks – straight out of MBA – as having been a negative, it would be great to read more of your thoughts about the subject.

    1. fredwilson

      yes the fees are lower but the carry is noti did talk a lot in the pando interview about why the approach i took to getting into the business is the wrong one

  14. William Mougayar

    Taking this decoupling trend one step further. How about a potential decoupling of funding from equity into startups too?One could imagine a scenario where the funds are committed from the VC but transferred on an operating basis as opposed to a one-lump basis. There are term implications of course. There is more control from the VC side, and it puts a bit more pressure on the startup. It’s a half-baked idea, but not far fetched.

    1. btrautsc

      This exists. Whether it is half-baked, well… anyone’s opinion. But I can vouch that it is in practice.

      1. William Mougayar

        Any examples you can talk about please?

        1. btrautsc

          I have experienced (& continue to) in a *somewhat* similar situation as Kasi mentions above… results have been…very good at times & frustrating at others… experimental on a number of fronts, and iterating in real time. we are still around though and in a better positon than ever, so I think the concept has legs.we could take it offline? btrautsc + gmail

    2. Kasi Viswanathan Agilandam

      tranche. That is one of the worst thing we had to face while R&D ing…it works well atscaling phase….pump-the-money-as-you-scale.As an entreprenuer why u want to dig your own grave William Mougayar ..:-)

      1. William Mougayar

        I would do it if the VC gave up their liquidation preference. Makes it all open, transparent and equal. I would take money in 3 months chunks, renewable to another 3months with a 3-month wind-down notice. Almost like an an extended accelerator program.Too many startups run for too long on little money to survive anyways, and that doesn’t make a difference about their future.Either it takes off, or it doesn’t. I would do this in the early stages,- up to the first 1 to 1.5 years or until the product-market fit is nailed.Yes, it takes a bit more management from the VC side, but that’s where the VC’s operating experience will come into play.

        1. Kasi Viswanathan Agilandam

          Giving up LP….ha…ha…ha… I can see the VC’s coming with shotgun in the rear view mirror…..never in our life time….I am happy with 1LP…there are ugly fellows who ask 2xLP.Get the money for the runway in one-tranche and take-off OR park the flight next to the vespa and start all-over-again.

        2. ShanaC

          basically how do you get around Too many startups run for too long on little money to survive anyways, and that doesn’t make a difference about their future. without the venture model since I doubt there will be enough individuals able to make up such a shortfall

          1. William Mougayar

            I don’t think the VC model is negatively affected. This doesn’t have to apply to all startups.

      2. fredwilson

        i don’t like tranching

        1. Kasi Viswanathan Agilandam

          I know fred….I have heard it from you 3-years back and about Liquidation preference as well…I am not talking about you.

        2. William Mougayar

          Ok. So decoupling has its limits.How about an extended accelerator model where the startup gets an additional 3-6 months tranche. Many startups leave the accelerators before they are ready to take a real round.

        3. btrautsc

          I’m interested in hearing more

      3. Cam MacRae

        Yeah, sucks for research. Gimme 3 years funding!

  15. Tereza

    I’m trying to envision how the Founder’s job changes in this scenario, vis-Γ -vis managing the cap table and also investor comms. Any thoughts?

    1. William Mougayar

      Tereza…2 days in row. Wow. Welcooooome baaaack!

      1. Tereza

        I feel so loved! Trying to set up a new cadence and felt like I need me some AVC in my life. Thanks, William! It’s great to be back! Missed you guys.

        1. fredwilson

          you should also be feeling so missed.

          1. Tereza


        2. William Mougayar

          We do therapy treatments. Just type here and you’ll be cured.

          1. Tereza

            Perfect! So, William, how do I get my kids’ school to understand that when they cancel a parent/kid event due to rain, and reschedule it the night before for the very next day, that it’s really untenable for working parents with real jobs? <sigh.>Discuss.

          2. William Mougayar

            Get a chauffeur or a really nice neighbor. just kidding …Does it rain that often where you live? lolIt has been raining a lot this June btw. not typical.nonetheless, that doesn’t explain your many months of pass, but a little sympathy.

          3. Tereza

            I was on an AVC moratorium because I get tend to get sucked in, William. β€œHi. My name is Tereza and I’m a commenting addict.” Also been managing and participating in a bunch of different communities. Spread a little thin, yo. BTW I really love the Disqus Windows Phone app.

          4. William Mougayar

            Everything is good in moderation as per Fred’s post yesterday.Put a limit of 5-10 comments/day & check-in only twice per day…if you can.What Disqus Windows app?

          5. Tereza

            @wmoug:disqus you never saw this??… (sorry folks, i’m not selling….just sharing info)

          6. William Mougayar

            Wow. I had no idea. Thanks for mentioning it. Does it have discovery?You’re probably more productive than any of us now from mobile!It says they have no plans for iPhone or Android πŸ™

        3. LE

          I had noticed as well.

        4. Donna Brewington White

          And AVC needs some Tereza as well. So good to see you here sister. Missed you terribly!!!

        5. ShanaC

          what are you thinking about in terms of new cadence?

          1. Tereza

            Well my current role is not as entrepreneur but working for MSFT to work with many entrepreneurs. So I’m figuring out how do deal with that scale.

          2. ShanaC

            if you need help – just email. Scaling is a very different sort of problem, and it tends to rely on lots of numbers….

          3. Tereza

            We have scale, thanks. It’s a question of managing it. ☺

    2. btrautsc

      I worry it starts to get really scary/ inefficient. That is if you have passionate/ involved investors. On the other hand, maybe you have a wide swatch of people who committed what they consider nominal amounts and just want exposure to a “startup” – in that case, they are less involved, and you may lose some of the support system.I have seen a team that raised a decent sum from a lot of angels (50+) pre-angellist… I suspect they would not recommend it.

      1. Tereza

        I’m worried about that too, especially if your group is a bunch of less experienced angel investors without entrepreneurial experience. They can be tone-deaf to Founders’ time, and it multiplies.

        1. Donna Brewington White

          I’ve noticed that some angels like to tinker and this can be counterproductive.

      2. ShanaC

        i can’t seem to get around the fact that many startups would be forced into a party round where it is way more than a party, and then continually forced into doing it over and over. Sounds like a nightmare scenario aas there are too many people pulling on you.All the negatives of big business people management without any of the pluses

        1. btrautsc

          Agreed. That is my biggest issue with the crowdfunding of startups… It is one thing to kickstart a product or project – perfect, the development is paid for, then you get it (whether it is a gadget watch or a Zach Braff flick)… for a startup, that buy in is totally different – I might need to call you (the investor) at some crazy hour to ask a major strategy question, and you are 1 of 50 or 500, and you’re buy in is just different.the buy in is where i really get hung up. Will the person who never met you, but invested via X-service to get your logo on their profile really put their neck out there for you? Send you a list of new hire candidates? Come to your office and sweat through the tough times?And yes, if things get rough (which they will) now you have 50-500 voices of opinions – if they still care – the potential bureaucracy is nuts.

          1. ShanaC

            i have no idea how to handle it, and I’m supposedly good at handling that sort of thing. At some level, this could cause big fraud issues

    3. fredwilson

      there will most likely still be some sort of entity involved but it will get built deal by deal instead of upfront

      1. Tereza

        I think there needs to be a standard, so the throngs of investors behave. A founder could go down fast with that kind of maintenance.

    4. pointsnfigures

      for crowdfunding that is difficult. my suggestion is to take control of your financing. in the initial round, set up an LLC and have the crowdfunded investors go through it. That way on the cap table, it looks like one entity. It’s highly doubtful you will get added value out of a crowdfunded round-outside of the money. Explain to later round financiers that you did your seed round “crowdfunded”. ]If you are a crowdfunding type investor, expect you get no seat on the board, no observation rights, and are just along for the ride. Spray and pray.

  16. William Mougayar

    How do you envision this to play out in the VC sector, since you’ve mentioned CircleUp and AngelList? That was a tease at the end “to allow the same kind of thing that is happening in the stock market to happen in the venture capital market. “2-3 years out for e.g., what will be the first of these changes?

      1. William Mougayar

        That’s a great doc. Thanks.

  17. Xavier Faure

    VC is highly illiquid. When things turn bad on a liquid investment, you sell. On a VC investment, your only choice is to fix the situation.Huge difference. Which means imho that the value of governance and exit will stay high even if the value of money aggregation drops to zero.

    1. fredwilson

      yup. that is where i see the VC value add. that’s the point i made and Pando picked up

  18. Girish Mehta

    Fred, might not have understood correctly but curious – might this reduce the “mgt+carry” fee structure by reducing the mgt fees (and maybe increase the perf component) ? And if so, address the ‘mathematical outcome’ problem of fund sizes and returns…also, allow more smaller size investments ? I am also thinking in context of Christensen’s comments about how the VC industry is ripe for disruption. Sorry if on tangent, and I did not understand at all…I dont have any personal experience here. Thanks.

    1. fredwilson

      yup, you are right on all counts

      1. Girish Mehta


      2. Stuart Willson

        as it relates to public market institutional investing, mgmt fees are typically lower on managed accounts b/c of the leverage these institutions/investors have over the manager. because a typical managed account investment is larger, the institution/investor uses that to negotiate a lower fee. all else equal, managed accounts would, if anything, increase the fixed costs of managing money given incremental compliance related costs. so today, at least, maintaining custody shouldn’t directly translate to lower management fees charged by the fund.

  19. Joseph Zaccardi

    AlphaHedge is a firm that falls between these two companies you described. AlphaHedge provides access to long/short equity hedge funds to accredited investors in a separately managed account (individual brokerage account). The idea is to provide full transparency and liquidity to a strategy that has traditionally been more opaque.As you and several of the comments mention, these decoupling of the services marks the direction of the industry. Investors are demanding the right to know exactly what is in their portfolio, as well as the ability to liquidate their positions as needed.Not mentioned, is that the full transparency provided by these accounts has a benefit to investors in the traditional LP model. By providing access to each position, it can help to prevent certain types of fraud. For instance, services such as these may price their securities utilizing different resources than the LP. This can act as an additional check and ensure accuracy, which can be especially important when calculating that incentive fee…(Full disclosure: I am employed at Persimmon Capital which provides the operational and manager due diligence to AlphaHedge Capital).

  20. William Mougayar

    The analogy isn’t unlike “managed services in the cloud”. You own the servers but they are managed in the cloud. You can pull them anytime.Investment in the cloud really.

    1. LE

      The physical servers are rapidly depreciating assets.Pulling physical servers also involves ip blocks which are specific to a particular colo place or cloud provider. Unless you have your own ip block. And you probably don’t it’s not trivial to get and configure that. But even then it’s a complete mess and not easy to coordinate the move of physical equipment. And if it’s not your ip block then you’ve got a large job with re-configuration (which might involve notifying and coordinating with people you connect to of your new ip’s in case you are security restricted). Well thought out of course there are ways around this or to minimize. I guess my point is that being the owner of the servers is only 1 very small part and not really that big especially when you factor rapidly dropping hardware values.That said I understand your point and the analogy is good (except for the devil..)

      1. William Mougayar

        Fair enough! It was a light analogy about the decoupling, but you’re right operationally not as easy as move my funds, although if some are locked and have no liquidity you need time to clear that out.

        1. LE

          Yeah I’m a devil in the details person. Comes from years of having to manage minutia and seeing what can and does go wrong. Not specifically technology. Your statement “you can pull” triggered the chess game in my mind.

  21. Jason_Adrian

    From what I’ve seen, many mid-size hedge fund managers have had to move to the ‘separate account’ model for large institutional investors. Similar to retail advisors, who don’t technically have custody since they are only authorized to debit fees, these managers trade for the fund and certain separate account along-side one another. It can lead to more administrative costs (though you save on the audits and legal structuring costs), but can mean less overall headache

  22. LE

    We have had a Covestor account for something like three or four years now. I select model managers on Covestor to trade our account but all of our cash and securities are at an online brokerage account that I control and can trade in any time I want.My emphasis.The above peaked my interest.So I went to the covestor home page (which is pretty well done down to the gray hair and yuppies etc.) but that point isn’t being hammered home (the point you made above). Infact I don’t even see it mentioned. At all. Anywhere that I can tell after a quick look. And that’s all that people do. They don’t rtfm.That’s a big miss.Infact even after spending a few minutes on the page (before writing this – about the amount of time I would spend before deciding “nothing to see here move along”) I still don’t see it.I am now going to go back and try to see where they say that Because it’s really important.The quote above should be front and center on the covestor site. All I see is “you deserve a smarter way to invest”. That’s like saying “you deserve to eat healthy”. A total waste.

    1. Martin Eriksson

      Thanks for the feedback, we’re always tweaking the site to get the message across – it’s a tough one to do in one sentence! The control aspect is implied in the separately managed account but I’ll look at ways to make it more explicit.

      1. LE

        Great. Would point out that the other company that Fred mentioned, circleup has it nailed:…Let’s say there’s a brand that you believe is going places. Maybe you know the owner. Maybe you’re a customer. Or maybe there’s just something about the company that seems like the next big thing. The point is, you want in.Extremely well put. The only thing I would add is that I’d like to see that message on the home page as well.

        1. LaVonne Reimer

          This is an incredibly useful exchange. Most of us aren’t so lucky to have Fred tell us our value prop but in your back and forth you remind me to listen, listen to what our audience says they connect with the most.

          1. Martin Eriksson

            We’re lucky enough to have him both as a loyal client and as an investor. The USV team have been nothing but helpful, including but certainly not limited to our latest B-round ;-).

        2. Martin Eriksson

          To me that seems almost a little condescending – especially considering the target market is an accredited investor ($2m+ liquid assets)…

          1. LE

            Well you could test that theory out of course but my gut is that simply being an accredited investor doesn’t equate to a level of sophistication that would render that approach a turn off or even to what extent (missed opportunities vs. benefit).Instead to me at least it hits the nail on the head. Noting also that Fred and Joanne have invested in many businesses in their local community literally for the reason laid out in that copy. I believe many of their angel investments (I know of a few that I’ve dealt with) fit that statement perfectly.Here is one example:

      2. ShanaC

        normally I wouldn’t ask in a public forum – but I hope you’re testing extensively

        1. LE

          The people who know the product well are sometimes the least likely to be able to identity copy that would work with someone who knows nothing.Consequently simply showing the site for a really brief period to a target group of people (and if that’s not available people sitting at a starbucks for many products are a good start) is a way to judge reactions and get feedback.Watch where their eyes go then grab away the device showing the site (laptop or tablet) and ask “what am I selling here?”. See what jumped out at them. See what they say. See if they get it and understand.If possible film their reactions and study the frowns and perk ups. I would I wouldn’t even ask. But that’s me.Now of course you can get as involved with this as you want. You don’t have to start with your site you can start with a site that’s not yours or sandwich your site between some others to get a baseline reaction.

          1. karen_e

            And thusly was the marketing department borne.

          2. ShanaC


        2. Martin Eriksson

          Of course! Goes without saying. The homepage (which has now already been tweaked to incorporate LE and Fred’s “quote”) is based on what we have been hearing from our clients and target clients. Always learning, always testing.

    2. Donna Brewington White

      You’ve got a good marketing eye, LE.

  23. markslater

    custody is a form of aggregation. go back to umairs theorys of the first half of the last decade…..aggregation models will take some punishment from innovation. its happening everywhere from studios in hollywood to dispatchers in taxis……in your fair city today… you a virtual wave from downtown…..

    1. LaVonne Reimer

      Umair Haque? Hadn’t heard of him before. Very interesting guy. I read this and think figuratively. In what other ways are we able to create value out of or make money from something without taking custody? I’m thinking about a data aggregation philosophy that says we are “stewards” of your data. Without having studied Haque in any depth, is that the gist?

      1. markslater

        he was more about the power heading the edge from the core……


    Good information, thanks Fred.

  25. howardlindzon

    amen…there is no hambrecht and quist and montgomery this cycle because of angel list etc…. but we do need a move back to smaller IPO’s as currency is needed to allow smaller companies with vision to become mid caps…right now its winners take all with all the cash. not end of the world, just different and not best case.

    1. PhilipSugar

      Don’t leave out Alex Brown.I really miss those guys. LE how much to buy that parked site?

      1. LE

        Last owned by DB they let it lapse in 2007 so it was deleted and snapped up by someone.Last registrant before whois privacy (and you know I hate that privacy stuff):Registrant: Deutsche Bank AG Joerg Nielsen Alfred-Herrhausen-Allee 16-24 Eschborn D-65760 DE [email protected] 049-699-1039539 Fax: 049-699-1035389 Domain Name: ALEXBROWN.COMI’ll see if I can find out the “asking” price.

  26. Guest

    Basel capital accords are fundamentally changing how custody works.In part the decoupling means that the bigger institutions have greater control over the risk profiles of that capital; it’s in their hands rather than the hands of the hedge funds.In technology and management (e.g. Professor Eric Von Hippel of MIT) we talk about “wisdom of the crowds”. Yet, historically, capital and investment decisions and asset allocation have been in the hands of the select few; some are market-savvy and deliver genuine value, some invest from ivory tower mentality, some are recklessly risky.There was a trust that these select few had the domain expertise and efficient platforms to cultivate and grow value. The global financial crisis showed otherwise.So platforms like AngelList etc increase the transparency for the investment process and marketplace dynamics for founders and investors alike.If these platforms can help filter in the good opportunities and filter out the bad actors then that’s progress for everyone.

  27. Sean Hull

    It’s times like these I wish I had an MBA.

    1. Donna Brewington White


      1. Sean Hull

        Hmmm… where do I start.Custody I’m guessing means control. When one opens a shwab account to trade stocks or a vanguard index fund which is traded for them, I’m guessing one *doesn’t* have custody. Does that have to do with the amount of time it takes to cash out or liquidate such an account? Extra steps basically?Selling off securities means selling off financial instruments, whatever they may be stocks, bonds, other types of paper etc & turning them into cash?Decoupling in engineering means removing dependencies so things can happen independently. So I’m guessing decoupling advisory & custody means that traditionally they are connecting and tied together. But what is advisory? Is that what a fund manager does in deciding where to invest financial assets?When you get down to APIs, now there’s a term I understand and know very well. Technology terms, great! But then I’m wondering how can a firm trade without custody or control of money? So I guess I am not clear on what custody is.I’ll bet you’re glad you asked, @donnawhite:disqus πŸ™‚

        1. Donna Brewington White

          I think your comment is on to something. Just as there is a need to help non-tech types understand the tech side of things, there is a need to facilitate tech types understanding the business side.Maybe that is part of what is behind Fred’s MBA Mondays.I am a business type (business undergrad) but not necessarily schooled in investment– I subscribe to Investor Words and get an email everyday with a new term. The knowledge is out there but really, it’s just superfluous unless you need it. I end up using google alongside AVC at times (shhh) to keep up with the convo. For instance this was helpful:…I find that if I read the comments, a post that is less familiar becomes more understandable to me as more context develops. I am here at AVC as a student.I am glad I asked, actually. Thanks for responding. For one it helps me to better understand another need that might be out there for helping startups be more successful. I think what you described might make for a great course at GA.BTW, it took me a while to really understand what APIs are and I still could use having someone sit down with me and explain it.

          1. Sean Hull

            Do you have a link to Investor Words? That’s a great brand name too. I host a newsletter myself called Scalable Startups. I should do a piece on “What’s an API?” Those kind of topics for broad audiences have done well.Here’s a link to one of the past newsletters. Subscribe is at the bottom.http://us1.campaign-archive

          2. Donna Brewington White

            The URL is and when you go onto the site, you can sign up for the daily email to receive the “term of the day.”If you do the API piece, I definitely want to read that. Who is the target audience for your newsletter? BTW, there was an “unsubscribe” button but not a “subscribe”

          3. Sean Hull

            Hmmm… that’s a mailchimp campaign archive. Not sure what happened to the subscribe link. You can also signup here:

  28. Dave Pinsen

    This isn’t a new model, but technology may be making it more common. Separately managed accounts go back decades. I sold them as a wholesaler for a mid-sized asset management company 10 years ago.One additional feature of SMAs: there’s no chance of getting caught in a Ponzi scheme.

  29. kidmercury

    i’d like to beef with the notion that money is just “bits on a wire.” money is deeply political and comes along with all the political baggage. currencies and payments are just “bits on a wire,” though the distinction between money and currency is crucial, and will become more intuitively understood as the monetary system continues its march towards self-destruction. the general lack of appreciation for the distinction between money and currency is what is holding back all the cyber currency stuff; when the right one comes along that understands the distinction, strategizes accordingly, and has a product that is good enough, the monetary revolution will begin.regulation is also going to be a big factor the decoupling/custodian stuff. capital controls are already here and will only become more prevalent. that will spoil a lot of fun for everyone, at least until the political battle is in engaged in effectively.

    1. Matt A. Myers

      I think he was meaning it should just be bits on a wire – however I’d disagree with that too, at least preferred it never touched wire or even paper currency. The world would be a better place if you had to do 1-to-1 face-to-face interactions and exchanges. You’d become much more responsible for your actions then.

    2. Girish Mehta

      Just trying to understand your comment better. Money has, or should have, three characteristics -(1) – Medium of Exchange (2) – Unit of Account and (3) – Store of Value. Am I right in inferring that when you draw the distinction between money and currency, you are referring to characteristic (3) ? Thanks.

      1. kidmercury

        yup! i also view #3 as “the big one” — meaning it dictates the others. so, i think what happens to money dictates what happens to currency.

        1. howardlindzon

          oy i worry about your worrying. so young…..

          1. kidmercury

            I’m not worried at all. The calamity that is coming will be difficult and contain a few surprises for sure, but I believe it will end up making me a very wealthy man, and will provide the opportunity for the world to create a renaissance if it so desires.

    3. ShanaC

      yes money is deeply political but even gold loses value

      1. Girish Mehta

        Careful Shana :-)…to the point kidmercury is making, I am guessing his response to this – How do you know gold lost value ? :-).

        1. ShanaC

…I know a thing or two about the philosophical underpinnings of economics and that the idea of a thing is often more powerful than the thing itself. Gold’s value is based off an idea (outside of some very limited applications in processors and jewelry . Except for the lack of printer, it is as fiat as anything else.

          1. Girish Mehta

            True. And go sufficiently back in history, and even gold coins have been debased with other metals. Buffett has great quote on this which you have probably heard (from one hole in the ground to another..watched closely by men with guns). Thanks.

      2. kidmercury

        no one said it didn’t.

    4. CJ

      It’ll never happen precisely for the reasons that you say. Money is literally power, look at the EU and you can see it playing out right now. Those who have, and I know you draw this distinction, hard currency are running the show. Those who don’t have it are at their mercy. Now look at the US and the UK and hell, even Iceland. We’re all laughing at them because if we need more money, we just print more currency. Inflation? Who cares.However, if you remove the power to print currency when you’re out of money, you remove to power to be a POWER. And that’s why bitcoin et al. are great ideas and will be cool small scale projects but will never disrupt an established nation’s economy. No fool of a Took government would ever give away that much power, they couldn’t give it away and still MAINTAIN power. Again, witness the situation in the EU. Those governments DID give away that power and they are living examples of why it’ll never happen again.

      1. kidmercury

        throughout history the inflation scam has almost always resulted in the self-destruction of the monetary system. i don’t think it will be any different this time.

        1. CJ

          Maybe, but never has one nation had the reach, the might, and been the de facto currency for the entire world. The reach is most important, because Rome is a good comparison to the US but they didn’t have the technology to reach the ends of the earth in minutes, nor the might to squash opposition to their self interests with the push of a button.These things took time in Rome’s day, they are nothing for us. Globalization both created and secured our empire at the same time, and the proceeds from that expansion bankrolled our might to keep it.

          1. kidmercury

            Every empire collapses.when it runs out of money. In the case of the US, that means when the US dollar and US treasury bond market collapse. dollar had been falling for over a decade now; treasury bind just broke below a major level yesterday. It could really from here, but at some point the money I’d going to run out like it always has.

  30. danielharan

    Doesn’t this open things up for momentum investors and front-running? If a message goes to a large number of investors all holding the same equity, slippage should start affecting returns?

    1. Bhargav Shivarthy

      Good question and a valid concern Daniel.We address this risk with our real-time suitability filters (a part of the Portfolio Sync technology we have built) that scrub every trade through a host of filters before we shoot it across to our underlying client brokerage accounts. If any trade does not meet the suitability requirements (eg. very illiquid, low market-cap, etc – i.e. trades where slippage would/could be an issue) it gets rejected.I will also say that we are constantly working on improving our Portfolio Sync technology and slippage has reduced over time.In addition to this, we reserve the right to cap strategies based on capacity. This enables us to close a strategy for new clients when we believe an additional allocation comes at the detriment of existing allocations.

    2. Guest

      At Covestor we scrub all trades against certain filters before replicating them in our clients’ accounts. One of the filters blocks trades that would risk front-running.

  31. Adrian Bye

    seems to me a fred wilson startup might be brewing.. i guess raising capital won’t be too hard πŸ™‚

    1. CJ

      Fred’s already running a startup…except I don’t think it qualifies as a startup anymore.

      1. Donna Brewington White

        hasn’t exited…

        1. CJ

          No exit strategy, it’s just, to quote Jay-Z, a business… man. Lol

          1. Donna Brewington White


  32. Jerome Camblain

    Fred, keeping custody of your funds has always been around: managed accounts (for hedge funds) or management mandate for third parties.The only 2 reasons you wanted to deposit your money with the manager is 1) to get the holy leverage (and the shorts) that hedge funds work with (only leverage brings the kind of return there after and 2) because you need a certain portfolio size to get a decoupling between management & custody.Technology is taking this second reason away and permits just that.Your croisade on this business model (decoupling) is very close to your approach of IP and patent troll: unnecessary barriers/protections prevent you from working hard for your clients on innovation, service and performance. This is a common theme through your blog: competition, not safety nets, helps you stay at the top.

    1. fredwilson

      correct!how are you doing Jerome?

      1. Jerome Camblain

        Salut Fred, Sunny London keeps me “upbeat”… Any European summer tour this year?

        1. fredwilson

          i will be in london in mid Julyi could meet you for lunch if dates/times work out

          1. Jerome Camblain

            I’d love that. I leave London on July the 11th. Not sure you ‘ll be already in town.

          2. fredwilson

            I get there on the 16th

  33. Raul Moreno

    Hi Fred, I would argue that there are lots of other and more efficient ways of decoupling using ETFs and Mutual Funds. For example, a retail investor has an eTrade account (custody) and invests in an index that follows the SP500-SPY (Advisory). Isn’t that better?Given that very few almost none beat the indeces, aren’t ETF’s the best advisory you can get separated from the custody.

  34. Raj

    I’ve been thinking about a concept that’s similar as it relates to content. I keep custody of my content in Dropbox, but use Flickr for advisory services. I get more control and the advisory service has less.

  35. Donna Brewington White

    I watch your portfolio from a distance and not sure how I missed CircleUp. Love, love, love this!!!I thiink that companies like this — and the trend you are describing in this post, et al — contribute to creating an investment culture where people identity with being an investor rather than (merely) a consumer — which I believe is part of the solution to long-term economic health as a nation… even world. Investing in itself does not necessarily generate an investment mentality. Even some investment is more consumeristic in nature. For some time I’ve been thinking that to truly have a robust entrepreneurial culture, this must be supported by an investment culture — where entrepreneurship and investment are an inherent part of how people think and operate.

  36. Donna Brewington White

    One of the things I enjoy most about these posts that mention your portfolio companies is when the founder or other team members from those companies jump into the discussion. It’s a great way to showcase the team. I love the passion that comes through.

  37. Andrew Vassallo

    Fred – What does this changing landscape mean for VCs today and how do you see them adapting?

  38. TyDanco

    While everyone is focusing on retail trading of securities, watch for a big overhaul of custodian bank processes–which are all the old, closed-garden, zero API to other custodians’ offerings’ world. Like Clay Christensen says, when something is a mature commodity (institutional custody), disruption is coming from the bottom. The first entity to build a platform, a la Android, that will allow for choices between the various offerings (from securities lending to foreign exchange to fund accounting) between smaller boutique specialists and perhaps the second tier custodians will be able to really disrupt that industry. Think virtual custody. Best blogger on this part of the woods: Matt Harris’s blog,

  39. Capitalistic

    It’s quite similar to the fundless sponsor model. There’s a slight shift from committed capital to a per deal scenario. This disciplines sponsors to pursue logical deals versus a cowboy or double down strategy.