If anything, upstart motif Investing offers a fun, fresh––if not cool––way to invest. And according to its CEO, the four-year-old company represents a disruptive force within the financial services industry, thanks to its thousands of motifs that make it cheap and easy to build and/or buy a basket of stocks or ETFs with one click. The degree of Motif Investing’s disruption factor is debatable, but the fun factor of its product isn’t.
What’s Motif Investing? Better yet, what’s a motif? As defined on the company’s Web site, a motif is a collection of stocks or ETFs that reflect a specific idea or trend. Users can invest in a basket of up to 30 securities built around a concept––from Caffeine Fix and Cash Flow Kings to Online Video and Obamacare. These are just four of the 145 off-the-shelf motifs created by the investment team at Motif Investing, a San Mateo, Calif.-based online broker.
Beyond that, Motif’s rapidly expanding customer base has created more than 35,000 additional motifs that have their own particular investing themes and portfolio holdings. For an initial investment of as little as $250 or as much as you want to invest, you can buy an existing motif as is, buy an existing motif and customize it or build one from scratch for a total commission cost of $9.95. It also costs $9.95 to sell a motif.
After you own a motif, you can buy or sell individual stocks or ETFs within that portfolio for $4.95 per security. Motifs don’t have any management fees or expense ratios.
Jaime Harpst, president and investment manager at Infresh Financial Network in Findlay, Ohio, has created seven of his own motif strategies that he uses for clients at his small, fee-only RIA firm. “Motif saves clients money regarding transaction costs,” he says. “If you bought 30 individual stocks at a Fidelity or Scottrade, you’d pay more than $200 to be invested in them.”
Another thing he likes about Motif is that it’s a cost-effective way to serve clients with small accounts and provide them with sophisticated equity portfolios typically reserved for wealthier clients at larger firms.
Earlier this year, Harpst was one of roughly 100 financial advisors who participated in the beta launch of Motif’s new platform aimed specifically at financial advisors. That platform had its coming out party in early May, and Motif sees the financial advisor community as another growth market beyond its original retail audience.
“Super Easy”
“We’re an online broker with a bit of a twist in that we don’t want people to buy individual stocks because it’s expensive,” says Hardeep Walia, Motif’s CEO and co-founder. Motif’s twist is that it enables investors to find their own inner portfolio manager by turning their ideas into investment products for just $10. In a sense, it lets people combine the best of legendary Fidelity portfolio manager Peter Lynch (buy what you know) and Vanguard’s equally legendary founder John Bogle (put it in low-cost product and buy it on the cheap).
Walia, 41, comes from Microsoft, where he was general manager of the company’s $2 billion enterprise-services business. He also served as director of corporate development and strategy. He speaks with a boyish enthusiasm about his company’s product, describing it as “super easy” and “super efficient” to use. And it’s hard to argue with those assessments.
You can essentially build a motif based on any concept that tickles your fancy. And chances are there’s already an available motif for that. If you’re into organic foods, type “organic foods” in the search bar on Motif’s Web site and the “Healthy and Tasty” motif appears. This motif was designed by Motif and contains 20 holdings in the food producer, grocery and nutritional supplements segments that have an organic––or at least a health-foods––bent.
The page displaying this motif delineates the holdings by segments, along with market cap, dividend yield and one-month and one-year returns for each stock. A more detailed table provides additional data on the weighting and p/e ratio of each holding listed in sortable columns. And there’s a “What Others Think” tab where the Motif community can discuss this particular motif (as of early May, 65% of reviewers gave it a thumbs up versus 35 giving it a thumbs down).
This particular motif had a one-year return of 3.6% as of May 9 despite the huge hit taken by Whole Foods––the largest holding at nearly 18%––after its disappointing first quarter earnings report. If you feel you can improve this motif, click on the “customize motif” box and use a slide bar to adjust the weightings either by segment or individual stocks, or click a box to add stocks to the portfolio.
You can buy this motif as is or buy the version you’ve tweaked. Or, if you prefer, buy the “Junk Foods” motif that’s listed as a related motif. That portfolio sported a one-year return of 11.7% as of May 9. Or just build your own portfolio––investors who create their own motifs can make them open to all or can keep them private.
As part of Motif’s creator royalty program, people who put their self-created motif into the community catalog get $1 every time someone buys or rebalances the motif they made.
The Motif site is intuitive, fast and easy to use. Walia says Motif’s technology and product development were done in-house. Along with hiring talented people to help on the back end, Motif has attracted notice from some heavyweights in the financial services industry such as former SEC Chairman Arthur Levitt and former Wall Street executive Sallie Krawcheck, both of whom sit on the company’s board.
Other members of Motif’s leadership team include former executives from E*Trade, Wells Fargo Securities and Ronin Capital. The company’s early financial backers included Goldman Sachs, and Motif last month announced a $35 million fund raising from JPMorgan Chase & Co., Wicklow Capital and Balderton Capital. Balderton, a U.K.-based fund, said it will help Motif expand operations into Europe.
Advisor Platform
Also last month, Motif unveiled a flat-fee wealth management platform focused on financial advisors that’s designed to streamline how advisors build, monitor and rebalance model portfolios. The platform came about because Motif noticed a number of advisors were using its product. “This [Motif’s retail-focused] product isn’t designed for financial advisors who want to manage a large book of business because they’d have to log into each account to do this,” Walia says.
Instead, Motif’s advisor platform enables advisors to create or assign an existing model portfolio of up to 30 stocks for just one client––or as many clients as he or she wants to put into that motif––in just one mouse click. And the same goes for rebalancing the holdings for all clients invested in a particular portfolio. “We’ve taken all of that overhead activity and turned it into the art of pressing a button,” Walia says.
Depending on the amount of assets involved, advisors pay a flat monthly rate of $20 to $50 that covers onboarding clients and all trading and rebalancing costs.
Advisors can also license their model portfolios to other advisors, which may or may not be a hit with advisors. “The only way I’d make my motifs public is if I could charge a management fee for any individual who invests in them,” says Jaime Harpst, the Ohio advisor who has created seven motifs he uses for clients. “I don’t think it’s fair for me to not charge people to use my strategies when I have a client base that’s paying me a yearly 1% fee to use them.”
Walia says Motif took to heart the feedback gleaned from users during the beta launch of the advisor platform, and it’s trying to incorporate some of their suggestions, which Harpst says is encouraging.
“What they have is great, but it’s still a little raw, Harpst says. “But I think a year from now the finished product will be amazing.”
Motif recently introduced its Horizon motifs, which provide self-directed retail investors with commission-free asset allocation-based models (conservative, moderate and aggressive) and rebalancing capability that Motif says gives investors more flexibility than static robo-allocator models.
And Walia says Motif in the second quarter plans to launch more sophisticated smart beta asset allocation models available only to financial advisors, who will then make them available to clients.
Competitor To ETFs
Indeed, Motif makes building your own portfolio a snap. But depending on how an investor uses these motifs, that can be a problem at tax time for people who do a lot of trading.
As mentioned in Motif’s online FAQ section, when you buy a motif, you own each stock it contains individually, so Motif places a separate trade for each stock. For each of those individual stock trades, Motif’s clearing partner, Apex Clearing Corp., provides investors with cost basis and proceeds documentation.
“It definitely becomes an issue for active traders on our retail site,” Walia says. “Active day traders have brought up their concerns and we’re working on it.” He adds he doesn’t see that as a problem with the advisor platform because the majority of assets there are focused on asset allocation models meant to be rebalanced quarterly or annually and aren’t generating a lot of transactions.
At first blush, Motif’s portfolios appear to be uber-tactical versions of exchange-traded funds. “We like to think of us as ETFs 2.0, but we’re not a fund, even though we satisfy the same need as a fund,” Walia says. “We’re disruptive to the whole concept of ETFs, which are themselves doing a good job of challenging mutual funds. The need we’re fulfilling is similar to ETFs, but we’re doing it differently, and it’s not an apples-to-apples comparison.”
As fresh as Motif Investing’s product appears to be, it’s not totally groundbreaking. Folio Investing rolled out its first customizable portfolios in 2000, and now offers more than 100 such products ranging from traditional allocation themes to tactical strategies such as analyst upgrades; military procurement; and wine, beer and spirits. The unlimited plan is $29 a month or $290 annually, while the basic plan is pay-as-you-go at a $4 commission per security transaction. Folio portfolios can hold as many as 100 securities.
“Motif is disruptive, but it fits into the broader trend of downward pressure on commission costs,” says Grant Easterbrook, an analyst at Corporate Insight, a New York City-based financial services research company.
And down the road, Easterbrook posits that online discount brokers such as E*Trade, Scottrade and TD Ameritrade that don’t have their own fund families (unlike rivals Fidelity and Charles Schwab) could someday become competitors to Motif and Folio. “It’s possible to imagine them rolling out a similar service of customizable funds,” he says.
For now, though, Motif Investing is creating a buzz with its fun, cost-effective way for investors to bring their own investing ideas to life. So if you’ve ever wanted to create a portfolio focused on doughnuts, now’s your chance (as of early May, that idea still didn’t have its own motif).