UPDATE 1-Start-up takes on mutual fund industry

Mon Oct 19, 2009 1:22am EDT

* Targets investors with worth under $1 million

* Runs on Yahoo, iPhone, Facebook, Web (Adds initial investments)

By David Lawsky

SAN FRANCISCO, Oct 18 (Reuters) - Start-up investment advisory firm kaChing opened its website to paying customers with advice for investors leery of Wall Street in the wake of the financial crisis.

Backed by venture capitalist Marc Andreessen and OpenTable OPEN.O CEO Jeff Jordan among others, kaChing is a registered financial adviser that hopes to entice investors with lower fees, a fully open investment model and an Internet- or mobile-based platform.

It says its selling point is that it operates on the same principle as open-source software, at a time of growing sentiment that professional funds charge too much and can be opaque about their internal workings.

"This is a $10 trillion industry with no innovation in 25 years," said Andy Rachleff, CEO and co-founder of kaChing. "There are a lot of consumers that are upset and frustrated with their mutual funds. But how do you decide if your mutual fund manager is doing a good job? No one is quite sure."

KaChing is designed for consumers with a net worth of less than $1 million, who, Rachleff estimates, have collectively invested $3.7 trillion in mutual funds.

Targeting the Web-savvy, the product runs on its own website, as well as on the Apple Inc (AAPL.O) iPhone, Yahoo Inc (YHOO.O) and social network site Facebook.

Soon after the Website opened for business, the investing began, the company said. Even before the Website opened to the public, the angel investors in the company itself had put in $1.7 million, the company said.

KaChing, which registered as a financial adviser with the Securities and Exchange Commission at the end of 2008, considers itself the financial equivalent of open-source software.

Its model is similar to that of companies like operating system company Red Hat, which gives away software but charges for services.

Independent advisers, such as mutual or pension funds, pool money from investors and make transactions on their behalf through a broker. But kaChing says it will also allow its customers to follow every trade on their behalf online, and offer access to a wealth of other information.

That includes the picks and strategies of its experts, whom it calls "geniuses." Starting on Monday, kaChing is offering its customers a service to buy and sell stocks that mirror the "geniuses'" choices.

KaChing also argued that its pay structure -- how much the company and its advisers get paid -- is more transparent than the average mutual fund, which may not disclose salaries. It charges its clients an average of roughly 1 percent of the invested amount per year, of which three-quarters goes to the "genius" and the rest to the company. The minimum investment amount is $3,000.

That compares with as high as 3 percent, or more, for mutual funds.

"Information wants to be free; you only pay for convenience," said co-founder Dan Carroll.

Choosing the "geniuses" was a huge project. KaChing held a selection process among 400,000 candidates, using its own algorithms to crunch results. A dozen were picked, based on risk-adjusted returns, consistency in strategy and quality of investing rationale. The results of the process will be made available to potential investors.

"The geniuses range from amateurs to investment managers to a $400 million fund, Fairview Capital," said Carroll, adding that kaChing expects to add more investment managers.

Geniuses will continue to be judged on performance. If they vary their investing strategy from what's disclosed, kaChing's algorithm will trigger an email warning to investors.

KaChing is backed by $3 million from Andreessen and others, including Rachleff, himself a retired venture capitalist who now teaches at Stanford's business school.

John Powers, who manages Stanford's endowment, said investors "stand to benefit from kaChing's objective and analytical approach, rather than a false reliance on past performance, which we all know is not indicative of future returns." (Editing by Gunna Dickson and Muralikumar Anantharaman)