The greatest advantage that 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 Fund Selectors work in silos to a more centralized approach in which their views are shared on a dedicated platform.
This change can be compared to the traditional encyclopedias that were created through costly, complex, 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.
On Wikipedia a range of blocking and protection systems are only offered to users who have earned special privileges through the general consensus of the community. Similarly, in the calculation of the SharingAlpha fund ratings we provide a higher weighting to fund ratings that have been provided by users that have a high ranking on our platform.
Naturally, most members of the SharingAlpha community have joined to enjoy the insights that come from the fund ratings while a much smaller user base actually participates in the rating itself. Similarly, on Twitter, the vast majority of people read, while a minority tweet or on question-and-answer networks like Quora, the vast majority ask questions, while a minority answers them.
The platforms are valuable due to the communities that participate in them. The reason WhatsApp or Instagram were sold for $19 and $1 billion is not their 50 and 13 employees, respectively, but the network effect they managed to create.
Many platform 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 close to 12k 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 raters with a free option in which they have nothing to loss by starting out and building their proven track record in terms of fund selection.
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, Asset Managers 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 $1.2 million in 2013 to less than $300k today) should serve as a warning sign to firms and individuals that make their living from selecting funds. Unless they will be able to hold proof of their actual added value then their chances of keeping their current 'valuations' is rather questionable.
Oren Kaplan will be discussing innovation in fund rating at the upcoming FundForum NextGen Distribution in Boston.