The "do it yourself" investor crowd is not exactly new. But now it has a newfound source of power. A new tool on the market from Motif Investing makes it easier than ever for individual investors to create their own ETF-like investment funds.
The timing is what makes this tool potentially troubling for established mutual fundand ETF companies. Combined with an overall mistrust of the financial industry and a general populist empowerment (social media, anyone?), it could become the next disruptive change.
Consider the market reception it's received. In the five months since Motif launched Build Your Own Motif, 15,000 customer portfolios have been created, double the number of open-end, U.S. mutual funds. The assets are miniscule compared to mutual funds, of course, but it still indicates a strong desire for investors to handle their own investments.
It's not just the everyman investor who's drawn to this idea, though. The company has support from some big name investors as well. A recent $25 million round of financing included Goldman Sachs. And board members include Arthur Levitt, former SEC chairman, and Sallie Krawcheck, former wealth management honcho at Bank of America and Citigroup.
While the premise--a do-it-yourself approach to portfolio construction--has resonated with many people, it's the ability to personalize one's finances that's the main draw for investors. So far, some of the investment themes range from recycled steel to democracy in the Middle East. Others include corporations run by female executives (dubbed "No Glass Ceilings") to following the strategy of David Swensen, chief investment officer at Yale University ("Ivy League").
To be sure, there are critics. Joshua Brown, who writes the Reformed Broker blog and is a financial advisor based in New York, argues that it is "nonsense" to encourage investors to allocate around such specific themes and will result in users of the site buying into fads at a peak. According to Brown, "there's no reason for anyone to be doing this kind of trend-chasing with brokerage transactions unless it's their hobby."
Social and demographic trends, however, are in Motif's favor. In addition to the general mistrust of Wall Street and a wariness of high fees, Gen Y investors are often fiercely independent and want to handle their finances. Moreover, social media, which Motif incorporates, is gaining in popularity. Given all this, will advisors and mutual fund providers alike view the product as a threat?
Many financial professionals say that the fear of competition among ETF providers with Motif's emergence on the scene is both too soon to tell, and largely unjustified at such an early stage.
But that's not to say that ETF providers shouldn't be aware of Motif's potential to be disruptive in the future, said Robert Goldsborough, an ETF analyst at Morningstar. "ETFs took market share away from mutual funds, and Motif could be disruptive to ETFs down the line," he notes.
Meanwhile, Craig Israelsen, an associate professor at Utah Valley University and the developer of the 7Twelve portfolio, said that mutual funds, which he calls the spine of the financial world, are used and will always be used heavily among long-term, institutional investors. He is currently working with Motif Investing to develop his portfolio as a product for the firm's users. "Motifs empower people to create their own ETF-like product, and if they encourage people to invest who haven't invested before, it's a great outcome," he said.
In other words, according to Israelsen, ETFs, mutual funds, and motifs can sit and thrive at the same table. "Even if Motif is able to capture a small portion of the retail market, the company can be very successful." According to Israelsen, Motif will be most successful among investors who care about specific causes, spurred by the firm's incorporation of social media, such as Twitter and Facebook.
Motif does offer investment options it calls "investing classics" that have model asset allocation portfolios, but Israelsen notes that specialized and exotic motifs should be combined with core investment products, such as mutual funds or ETFs that invest in broad-based U.S. stocks, non-U.S. stocks, REITs, resources/commodities, bonds and cash, to create a well-diversified portfolio. "Motifs could also be used as a substitute to stock investing for investors who don't have the capacity or lack access to single stock research," according to Jeff Tjornehoj, head of Lipper Americas Research."
The gist: While some critics are calling the whole idea a dangerous fad, others say the problems aren't inherent, but in how they will be used.
Fees are another aspect of Motif that catches the eye of many retail investors along with ETF and mutual fund providers, according to Motif's founder.
In 2008, around $8 trillion in net worth was lost among U.S. investors, yet there was about $376 billion in fees. Motif founder Hardeep Walia said that the financial crisis caused him to reassess and challenge traditional mutual fund firms, particularly in their concept of management fees.
After meeting a minimum investment of $250, Motif Investing charges a $9.95 fee to buy a single motif of up to 30 stocks. That may sound like a very low number at first glance, but according to Israelsen, that number could easily become expensive depending on how active Motif users choose to be. For $4.95, a Motif customer can purchase additional shares of an individual stock or ETF within a motif. Unlike mutual funds and ETFs, there are no ongoing investment management fees (unless the Motif you build utilizes underlying mutual funds or ETFs).
"If you're trading and rebalancing monthly, a Motif user could easily spend $130 per year. But if you use a Vanguard fund with a 10 basis point expense ratio, you'd have to have a lot of money in your fund to spend $130 in fees per year," Israelsen said. "The key is to use the Motif platform wisely."
For a buy and hold investor who wants broad exposure to a variety of asset classes who knows their own risk tolerance, mutual funds or ETFs are their best bet, Israelsen said. For investors who want to trade in and out of positions across a broad range of specialized asset classes, ETFs are ideal. And for people in the middle, who want more oversight over their portfolio and who want to invest in a social cause they care about, still being active but not changing their positions as frequently, motifs could be a very useful option.
The growth of ETFs during the past 10 years, now a trillion-dollar industry, reflects the extent to which investors want to have direct control over their portfolios. The rise is partly due to the growing discontentment among many investors with mutual funds, which are more expensive and less transparent than their ETF counterparts.
ETFs and mutual funds are not going away, industry sources say. Motif may serve to encourage investors to feel comfortable investing without the additional expenses of ongoing management fees.
"Fears about Motif taking away business from ETF and mutual funds is similar to a restaurant being scared that because of supermarkets, people will go to the store and make their own dinner--when in reality both can peacefully co-exist," Israelsen concluded.