Each of us has areas of expertise, or even of personal curiosity, that may offer insights into the way the stock market will behave in the future. For some, it’s realizing that consumer brands that have the strongest followings on Facebook may outperform other stocks in their category. For others, it could be insights into a particular category of medical research, or the notion to invest in stocks related to rebuilding after a natural disaster. Regardless of the theme, one startup is allowing everyday people to create their own custom exchange traded funds (ETF) based on these themes, or “motifs.”
Motif Investing is a San Mateo startup that is looking to turn Wall Street on its head. Since launching in 2010, the company has offered its own motif based investment ideas and allowed regular Joes and Janes to view data on the performance of these ideas, and then make actual investments. Consider it one part E*TRADE-esque online brokerage, one part think tank, one part tech startup.
Today, the company is introducing a “build your own” (BYO) motif option that will allow individuals, organizations, and brands to construct and share their own collections of stocks online. In approximately one month, these fund creators will be able to make money through royalties when other investors buy their funds. Community BYO motifs will soon be featured in the equivalent of an investment marketplace where others can search, discover, and purchase based on these ideas, or use them as a starting point to make personalized modifications. Users can also share the motifs they create via Facebook and Twitter, should the wish.
“The ability to build your own motifs gives entrepreneurial investors, advisers, and others a new, highly visible platform from which they can market their own investment ideas and strategies to a wide audience,” says Motif co-founder and CEO Hardeep Walia.
Motifs can be more than just collections of stocks. They can be weighted algorithmically toward their adherence to the underlying theme. For example, in a collection of 10 retailer stocks with the strongest Facebook presence, the percentage of the fund’s allocation toward each stock can be weighted proportionate to their number of likes. As a result, Walmart which has 27.1 million likes would be slightly more heavily featured than Target which has 21.7 million likes. When a new motif is created, the platform delivers historical performance data on that collection of stocks relative to the S&P 500.
Beta users of the BYO product have already built and shared several motifs. One, called “Socially Responsible,” includes shares of companies that are advocates of the environment, consumer protection, human rights, and diversity. Another, called “Asian Fusion,” includes shares of companies which are based in and which derive 75 percent of their revenue from China, Japan, India, South Korea, Indonesia, Taiwan, and the Philippines.
Beyond simply offering the ultimate investment flexibility and the ability to align investing decisions with one’s personal worldviews, Motif offers an extremely cost effective investment option. Users can invest anywhere between $250 to $100,000 per motif, and pay only $9.95 per transaction, with no ongoing management fees. Many Motifs are “rebalanced” quarterly or annually to reflect the changing landscape of companies that fit within their particular investment thesis. At this time, investors will have the option to follow suit within their own portfolio, paying another $9.95 transaction fee, or to maintain their current allocation. Regardless, the cost of owning a motif is orders of magnitude cheaper than owning a tradition mutual fund or ETF.
The natural question to ask when hearing this concept for the first time is, “Why would anyone want to share their best investment ideas?” The answer is twofold, and there are private sharing options for those who feel differently. First, the stock market is driven by supply and demand. If an investor can create demand for the stocks in their Motif, they’re likely to increase in value. Secondly, if a motif becomes popular, the individual or organization that created it could make material royalty income from others’ investments.
For those individuals less inclined to share their ideas, Motif offers a variety private sharing option. For example, motifs can be shared only among family or friends, or they can be shared publicly with only limited information, such that the explicit weighting among the stocks included, or the size of the investment made by its creator can be excluded.
As a result, Motif offers one of the first social investment sites to enter the market. Users can see how many people bought motif as is, including how many of their Facebook friends, as well as how many people modified the existing theme and how. In addition to this data, users can access financial data through Google Finance and Yahoo Finance, and the company plans to provide additional research tools in the near future.
As a brokerage, Motif is subject to regulation by FINRA, NASD, and the SEC, among other regulatory organizations. The company is well aware of the regulations around investment advisory and solicitation activities. However, because they are a fully “self-directed” platform and never take discretion over anyone’s money, they’re confident that their model does not run afoul of any laws. Walia, who is a member of FINRA’s advisory board, likens the social sharing aspects to an individual tweeting that they recently purchased a particular Vanguard mutual fund. And the royalty compensation, as currently constructed, is considered an “IP licensing” fee rather than a commission. Nonetheless, any financial services company maintains significant risk of lawsuits and changing regulations which can be difficult to predict and which can adversely affect their business.
Motif Investing has a 40 person team comprised the expert engineers and product designers, as well as investment research and securities compliance staff. The company’s senior team include founding members and former executives of E*TRADE, Mint, Amazon, Microsoft, Intel, Intuit, Barclays, and Wells Fargo, among other notable companies. The company has raised $26 million across two rounds of venture financing from Ignition Partners, Norwest Venture Partners, and Foundation Capital, with the most recent round closing in July 2011.
Walia has heard his idea described by users and reviewers as “the iPhone meets institutional class investing,” and “as easy as shopping at Amazon.” Motif is certainly changing the level of control and social data that everyday consumers have access to before making investment decisions.
“You can only change behavior if you push people toward something natural and intuitive,” Walia says. “People think contextually and thematically, and Motif allows them to translate this into investment ideas.”