The two big moves Motif is making as Goldman Sachs and J.P. Morgan invest part of new $35-million raise

Brooke’s note: Remember “Wall Street Week”? The appeal of the public television show hosted by Louis Rukeyser that ran for decades on Friday nights lay in its surprising grasp on what interests an investor. The show also fielded questions from investors about how they could invest in stocks that would benefit from trends they noticed in their lives. The panelists, typically, Wall Street stiffs, twisted themselves in knots to offer stock choices that fit the viewer-generated trends. Now an online company loaded to the teeth with branded endorsements in the form of Sallie Krawcheck-level board members, Microsoft managers, Goldman Sachs and J.P. Morgan investors is trying to do better than the old Rukeyser mailbag response. Now they are bringing in the smart beta, tackle-Europe angle. After helping press Motif and its gold-leaf entourage for weeks for why exactly they believe this effort will work, I came away with the belief that they themselves are having fun — a good thing — but it puts return on investment way, way into the future.

After last month’s investment of another $35 million of venture capital by players as esteemed as J.P. Morgan and Goldman Sachs, there is now a more than an $80 million bet on the table that investors will be motivated to invest in Motif Investing’s “motifs” either directly or through a budding RIA channel the company is building. See: A Microsoft alum stomps into the RIA business with $26 million in VC money, Sallie Krawcheck and a 'new’ approach that looks old to skeptics.

The first thing that investors and principals in San Mateo, Calif.-based company Motif (not an RIA but rather a broker-dealer overseen by FINRA) will tell you about what has inspired more than $86 million in venture capital are the “motifs” that allow an advisor or investor to opt into thematic bundles of stocks, ETFs, and mutual funds. Initially, each indexed portfolio is centered on a theme like natural gas or biotechnology. Those themes have expanded to include categories like high-end dividends. Because each off-the-shelf motif is customizable, advisors can build their own portfolios for their clients by adding or subtracting stocks.

But Motif’s approach to products all comes down to doing for investing what Apple did, for instance, to computing — adding an elements of the fun and intuition, according to Charles Moldow, partner at Foundation Capital, a major investor in Motif.

“With its sophisticated, yet intuitive platform, Motif Investing is reinvigorating investing by making it fun and easy to invest. Motif is the only online broker than enables consumers and advisors to easily spot trends and ideas like robotics or 3D printing and turn them immediately into investments.”

Since Motif was founded four years ago and the motifs were launched in 2012, this approach has attracted about a dollar of managed assets for every dollar of venture capital invested — not a good long-term plan but perhaps good in the world of online investing companies. See: A Microsoft alum stomps into the RIA business with $26 million in VC money, Sallie Krawcheck and a 'new’ approach that looks old to skeptics. Last year, the firm launched a retail platform aimed at end-clients.

Open-ended vision

Despite the fun factor associated with the motifs and the low cost investing, it is still hard to understand where all the billions of AUM will come from and why VCs are so enamored of this firm.

Based on our latest interview with founder and chief executive Hardeep Walia and with input from some industry experts, the answer seems to be its willingness to go after arguably the industry’s two greenest pastures — financial advisors looking for an alternative to the behemoth that is Dimensional Fund Advisors and a planet of non-U.S. investors looking for a good online investing forum. See: Online RIAs will mostly fail — and here are 10 reasons why.

“Our vision for our advisor platform is an open architecture DFA,” says Walia. DFA is “closed architecture” in the sense that its products are homegrown and advisors need to be approved by the Austin, Texas-based company if they want to invest in its portfolios. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.

Going after DFA

Alex Potts: I think the Motif
idea is sexy, however the implementation
will be tricky at best.

Walia laid out Motif Advisor’s latest vision in a splashy announcement at Finovate a couple of weeks ago, including his plan to let advisors offer its signature bundles of 20 to 30 stocks, called “motifs,” to their clients for $20 to $50 per month per account.

He also revealed his plans for the platform, including rolling out “smart beta” models next month exclusively for advisors using Motif and not for the company’s retail clients.

The aim is to compete directly with Dimensional Fund Advisors, says Walia, a firm that has long dominated the market of smart beta. The smart beta models will have 23 asset classes and utilize smart beta methodology, which combines passive and active strategies to attempt to beat the market in very small and specific ways, says Walia. See: Dimensional Fund Advisors gives its globe-trotting co-CEO some relief by elevating another literal rocket scientist.

The initial models will be designed by Motif’s team, but users can design their own or customize motifs — which will be true for the smart beta line as well.

“Our vision for our advisor platform is an open architecture DFA,” says Walia. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.

Sexy but tricky

All of the motifs have always been smart beta and weighted the assets in each portfolio, says Walia, but the new line will be more advanced (and marketed specifically with the smart beta label) with a greater number of asset classes and weighted by asset class.

It’s an innovative idea, but it may be hard to compete in that market, according to one heavy DFA investor.

“I think the Motif idea is sexy, however the implementation will be tricky at best,” says Alex Potts, the president of Loring Ward, a TAMP that build portfolios using DFA funds. “With an average asset class portfolio, let’s say, comprised of DFA funds, you could own over 10,000 stocks in 40-plus countries and 35 currencies. Why wouldn’t you want the added diversification for about the same price?”

His concern is that Motif doesn’t offer as much diversification as other fund options and may lead to style drift, where what the motifs deliver isn’t the same as what was promised or approved.

“Introducing style drift unnecessarily doesn’t seem prudent,” says Potts. “For my money, I’d pick a DFA, Vanguard, or other low cost asset class provider that mitigates the risk to the overall portfolio construct.”

David Connelly, co-founder and principal of Glastonbury, Conn.-based Symmetry Partners, a DFA TAMP, describes how his firm uses DFA and DFA-alternatives in concert and gets a monthly account charge in this “article: After a brief mini-Schwab era, Trust Company of America gets back to non-conformity and success.

Big VC bucks

Bill Doyle: They don’t have to
do all that; they just have
to figure out what works best
and do a lot of that.

DFA isn’t the only company that Walia is painting a target on — he’s also going after the so-called “robo-advisors.” His announcement highlighted a new line of motifs that won’t charge an advisory or commission fee. See: How one 'robo-advisor’ got $25 billion on its platform with a Mint.com mindset, 401(k) friendliness, a merger and 16 years of work.

There’s more cash on the way to make all this happen. Motif has raised additional $35 million from J.P. Morgan, Wicklow Capital, and Balderton Capital, as well as from some previous investors, bringing the grand total of money raised to more than $80 million in capital, though hasn’t seen a profit yet. See: The 19 ways private equity has juiced up the RIA business and how it’s working out.

One sticky idea

After being referred by Motif’s press person to Justin Perras, the executive director of media relations at J.P. Morgan, for more illumination into why the company would invest in this particular start-up, we were told by Perras that he wasn’t the best person to speak about the deal and he would have to reach out to colleagues for more details. Without any additional information forthcoming, J.P. Morgan said they had nothing to add beyond their quote in the press release, which was:

“We are pleased to be an investor in Motif Investing, a company which is driving powerful innovations in the wealth management segment,” said Phil Di Iorio, CEO of J.P. Morgan Global Wealth Management.

The attraction for these investors appears to be that Motif is throwing so much against the wall that one idea is bound to stick. See: The 19 ways private equity has juiced up the RIA business and how it’s working out.

“They don’t have to do all that; they just have to figure out what works best and do a lot of that,” writes Bill Doyle, vice president of Forrester Research, in an e-mail.

He says that venture capital firms are betting that Motif’s bid to beat DFA or the play to compete against other robo-advisors will pay off.

“Venture capital is pouring into a lot of upstarts who have the potential to disrupt this high-margin industry. In the end, many of the start-ups will fail. But we’re convinced that some of them will gain a foothold as them engage customers in new ways,” writes Doyle.

Horizon line

Motif could be one of the few that succeeds with at least some part of its plan.

“We’ve always intended to get into the advisor space,” says Walia. He argues that the company shouldn’t be put in the category of other robo-advisors — even though its fee-free retail motifs, to be called “Horizon” motifs, are directly targeted at attracting the DIY investor. He says these motifs are in direct competition with online RIAs like Betterment and Wealthfront. See: Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market.

“This is in contrast to 'robo-advisors,’ which can be accompanied by management fees ranging from 0.15% to 0.35% of total assets per year,” reads the press release of the announcement.

Whether management fees or transaction fees are lower can depend on the client. Motif plans to make back any deficits from loss leaders by charging fees of up to $50 per month per account managed by advisors that use its platform. It also charges $9.95 per trade for retail customers — outside the Horizon line.

Neither Jon Stein, head of Betterment, nor Wealthfront chairman Andy Rachleff chose to comment on Motif or its pricing.

No so 'robo’

A system that allows investors to pick portfolios organized around certain themes sounds a lot like the original model of Wealthfront, which pivoted away from that strategy failed to attract users. If Wealthfront couldn’t find an audience for a similar idea that allowed end investors to pick money managers, then Motif may eventually face the same problem.

“We scratched our heads,” said Rachleff a year ago when Motif launched it’s build-your-own platform. “Maybe they’re smarter than we were.” See: A Microsoft alum stomps into the RIA business with $26 million in VC money, Sallie Krawcheck and a 'new’ approach that looks old to skeptics.

According to Doyle, Motif could experience an evolution similar to Wealthfront’s. “Wealthfront evolved until they hit on the model that’s now going gangbusters,” he writes.

But, Walia says “robo-advisors” isn’t even really the right term for what Motif offers, because advisors add value and advice beyond the technology that Motif or Betterment or Wealthfront can provide. When DIY investors using Motif’s retail offering end up having more complicated needs, Walia says the company can now refer them to one of the advisors on its platform. see: Why I find the term 'robo-advisor’ objectionable and unhelpful.

“We now have an offering for both,” he says.

Doyle says that may be just what separates Motif from other robo-advisors, since the majority of people, according Forrester Research surveys, want a combination of advice from a professional and the ability to make their own decisions.

“I think the success lies in the synthesis of the advisory and retail components.”

Thinking young

Charles Moldow: Motif is reinvigorating investing
by making it fun and easy
to invest.

Motif currently has 50 advisors in beta who tested the platform in a pilot and are now moving larger amounts of their assets onto Motif, says Walia. While retail advisors pay Motif $9.95 for each trade or transaction, there is no transaction fee for advisors. RIAs will pay $20 to $50 per customer account per month. That gives them unlimited trading and rebalancing, as well as access to all the motifs.

The advisor platform allows advisors to onboard clients to the system digitally, assign a motif allocation to one or to all of their clients, and rebalance with one click. Advisors can build their own motifs or portfolios, or use and customize existing ones. The platform is also connected to social media to let the advisor communicate with their clients.

Walia says the idea of theme-based investing appears to appeal to younger clients who want to put their assets in things they care about or believe in, and that younger clientele likes getting updates via the social media networks they’re accustomed to. See: A more liquid alternative to alternative investments catches on.

“Motif is reinvigorating investing by making it fun and easy to invest. Motif is the only online broker than enables consumers and advisors to easily spot trends and ideas like robotics or 3-D printing and turn them immediately into investments,” writes Charles Moldow, partner at Foundation Capital, in an e-mail.

'Must have’ service

According to Walia, those 50 advisors include both small and large RIAs, which are all in the process of moving over the majority of their assets. He did not say how many assets the advisor platform currently has on it or how many additional advisors are in the pipeline to come onto the platform.

Ross Almlie, an advisor with Jamieson Capital Advisors in West Fargo, ND, which has more then $26 million in assets, contacted Motif last year, attracted by its promise of investing clients in their investments. Almlie signed on as a pilot advisor on the platform, so he could stop finagling the retail platform to meet his needs. Now that it’s fully rolled-out, Almlie says it’s a key part of his advisory business.

“On the most basic level, it saves me a staggering amount of time, and it’s very simple to use. Then you dig in and look at the level of sophistication and the associated costs savings. I view this as a 'must have’ service,” he says in the press release.

Portfolio royalties

Ross Almlie: It saves me a
staggering amount of time, and it’s
very simple to use.

Walia launched Motif in June 2012 as a retail product that allows people to opt into thematic bundles of stocks, ETFs, and mutual funds. Initially, each indexed portfolio was centered on a theme like natural gas or biotechnology. Those themes have expanded to include categories like high-end dividends. Because each off-the-shelf motif is customizable, says Walia, advisors could build their own portfolios for their clients by adding or subtracting stocks.

Then, Motif added a build-your-own capability, which allows advisors and investors to easily change the makeup of a motif by moving a sliding scale diagram on the computer and clicking a few buttons.

In addition, for every person who purchases a motif built by an advisor or an investor, the creator of that motif receives $1. In six months, customers built 35,000 motifs. See: A Microsoft alum stomps into the RIA business with $26 million in VC money, Sallie Krawcheck and a 'new’ approach that looks old to skeptics.

It was only a matter of a time before Motif expanded to target a market in plain sight: the RIAs going out of their way to use Motif’s retail products. “We responded to that demand,” says Walia.

Abroad with $80 million-plus

There’s a enough demand for the Motif business model that the firm is looking at overseas interest, even though the idea hasn’t fully caught fire stateside.

Walia says most of the more than $80 million in the firm’s kitty will go toward adding employees and infrastructure to expand overseas. The company currently has 57 employees.

“There is a huge demand in European markets for more accessible and transparent financial services like Motif Investing, and we are delighted to use our expertise to introduce Motif to an entirely new set investors and customers, and to help the company scale globally,” said Tim Bunting, general partner of Balderton Capital and Motif board advisor, in the press release.

Bunting will join Motif board members Sallie Krawcheck and former SEC chairman Arthur Levitt on the board. See: What comments by Krawcheck and Gorman about improving wirehouse attrition leave out.