Cost Effective Investing With Motif

It’s hard to get excited about a brokerage firm.  In fact, I like boring brokerage firms.  Other than low costs and fees, an excellent web interface, and great customer service, there’s not a lot I want from my broker.  Check out my recommendations page, and you’ll see Vanguard and Fidelity as my top choices.

But there’s another brokerage firm that piqued my interest recently: Motif Investing.  They offer something that I haven’t seen at any other brokerage firm.  The ability to trade a basket of stocks with one click and for only one low $9.95 brokerage commission.

 

What’s a “Motif”?

A motif is a basket of stocks or ETFs centered around a common theme.  You can find a motif to cover just about any idea imaginable.  And if you don’t find it, create a new motif yourself and earn a royalty every time someone else completes a trade using your custom motif.

Motif Investing offers over 150 professionally created motifs while the clients of Motif have created another 75,000 motifs.  A few motifs that caught my eye:

  • “Permanent Strategy” – Harry Browne’s classic asset allocation to equal parts short term bonds, long term bonds, equities, and gold.
  • “Seven Deadly Sins” – Cigarettes, fast food, porn, and other social no-no’s.
  • “Socially Responsible” – The opposite of the previous motif.
  • “For-Profit Colleges” – Might be worse than “Seven Deadly Sins”
  • “Rising Food Prices” – Stop complaining about prices at the grocery store and buy this instead
  • “Ivy League” – Invest like Yale’s David Swensen (he runs a megabillion dollar endowment fund)

For those that want to skip certain kinds of companies for religious or personal reasons, Motif has a lot to offer.  If you’re big on the environment and not so much on Big Oil, you can find or craft a motif to skip the oil and gas companies altogether.  There’s even Jewish, Christian, Mormon, and Islamic/halal motifs (for those concerned that God is closely scrutinizing their 1099’s).

 

Trading with Motif

They are a real, legitimate brokerage firm just like Vanguard, Fidelity, Schwab, or TD Ameritrade.  A few more details:

  • You get instant order execution (and not pricing as of close of business like mutual funds).
  • Trading up to 30 stocks is only $9.95 (almost as much as most discount brokerages charge for one stock trade).
  • The minimum order size is $250 (which means you’ll get some fractional shares of stocks).
  • Commission free trades with their “Horizon” asset allocation motifs (which look awesome!)

For those that have seen my asset allocation, it is moderately complex with eleven different asset classes.  Motif’s platform would make implementing this asset allocation pretty straight forward and easy to manage while saving a lot of money on trading commissions for all those ETF purchases.

If you want to avoid potentially high management fees on some ETFs, you can create your own ETF by picking one of the available motifs.  Let’s consider a $5,000 true ETF purchase that comes with a 0.25% expense ratio.  That works out to $12.50 in management fees every year that come right out of the ETF’s investment returns.  You could skip the management fees altogether if you can find an appropriate motif with holdings that parallel the ETF.  After one year, you’ll save enough to pay the $9.95 commission at Motif and then some.  And in year two, there are zero management fees on your motif (and no account inactivity fees at Motif, either).  Change $5,000 to $50,000 in this example and you’re starting to talk real savings year after year.

 

Dividend Portfolios

I mentioned a few ETF options for dividend plays in this article.  There are dozens of motifs centered around different variations of the dividend theme.  Or you can craft your own 30 stock dividend portfolio and execute it with one click for $9.95.

As far as I can tell, there’s no maximum dollar limit for trades at Motif, so you could potentially invest $100,000 or more into a dividend portfolio this way and have an instant source of $3,000 to $5,000 income per year (depending on your choice of dividend strategy).

 

Possible Pitfalls

The two downsides I see with Motif are:

  1. Playing at investing instead of actually investing, and
  2. Tax reporting

First and foremost, I don’t think anyone should browse the listing of popular motifs and shop only for what’s trendy and cool when it comes time to invest for the long term.  That’s what a proper asset allocation is for (and Motif actually has a great selection of asset allocation models as off-the-shelf motifs).

But lots of investors, including me, want to take a gamble on a hunch on occasion.  As long as you aren’t putting a large chunk of your portfolio at risk, I say it’s okay to try to outsmart the market.  In small doses.  Motif looks like a good tool to spread your crazy guesses across many stocks centered around one idea instead of selecting only one or two stocks.  You won’t be as likely to make 1000% on a long shot, but you also won’t lose everything if you’re invested in a basket of a couple dozen stocks.

The second potential pitfall of Motif comes down to tax reporting.  If you buy and sell a lot of motifs throughout the year then you’re going to have a very long Schedule D listing all of those transactions.  I use pen and paper to prepare my taxes (and do a pretty good job at dodging those taxes), so this would be a paperwork nightmare for me if I traded a lot of motifs.  For long term buy and holders or those that use tax software like Turbotax, this tax reporting issue isn’t a big concern.  Those trading within an IRA don’t have to worry about keeping track of purchases and sales and tax lots.

 

Summary

This service looks very promising for different types of investors.  The buy and hold type can pick one motif for their whole portfolio and pay a single fee of $9.95 (or $0 for fee free Horizon asset allocation motifs) and take care of setting up all the investments in their account.

Those wanting to “play the market” with a small percentage of their investment account can get easy and cheap access to a basket of stocks to implement a particular finely targeted strategy (gold bug?  oil bull?  solar power/green energy?).

The platform looks innovative and I’m impressed with the flexibility to choose from thousands of off the shelf pre-made motifs or to craft your own motif to fit your particular strategy or asset allocation.

Investment management fees are one of the killers of long term returns.  Motif offers a middle ground of off the shelf asset allocation models that are free or cheap to implement in your portfolio.  It’s another great tool to help you skip a high fee financial adviser and keep more of your investment dollars in your own account and out of the hands of a greedy money manager.

 

 

Note: I may receive a commission if you sign up for a Motif account through the links on this page, however I only recommend services I personally believe in.

// photo credit: Eric Kilby @ flickr  //

12 comments

  • Like Motif, Folio Investing allows me to trade at bargain rates. It’s a little different in its particulars, though. With Folio, I pay a $30 a month fee. For that fee, I can trade as much as I like during that month, as long as I do it during 2 market day “time windows” (11am and 2pm) and at the market. If I want to trade at other times, or using a set price limit, then I pay $3 per trade. I’ve used Folio for years, and still do, but the size of my brokerage accounts has now made another even less costly trading “deal” available to me.

    At Merrill Edge, an account balance of $25,000 or more entitles one to 30 totally commission-free trades a month. And, what works wonderfully for me, is that those trades can be done at any time of the market day, and on a limit or stop/limit basis if that is what I want to do.

    I figure that having those 2 trading options saves me over $1000 a year over the $8.95-commission trading I used to do before I really got serious about being frugal about my expenses. 🙂

    • I think Wells Fargo has a similar deal if you hold $25k+. You get 100 free trades per year or something. Definitely worth shopping brokerage firms if you trade a lot (or a very little!) or really want limit orders. Vanguard even offers free trades once you get over $1 million in the account (or $2 trades between $0.5 and 1.0 million).

  • ROG,

    I have been using Sharebuilder for the past year and I got into a pretty good program. I get 12 purchases a month for $12 a month. The only drawback is the trades only take place on Tuesday and my picks have to be made on the Monday before during trading hours. I do like the idea of the $150 though. Sharebuilder also has similar promos during the year and I received $300 last year. This essential eliminates my fees for over two years. 🙂

    MDP

    • Sounds like a good deal, too! I trade so infrequently that I wouldn’t benefit much from a large number or unlimited amount of trading. But saving $5-10 every time you buy or sell sounds appealing if you do it a lot! I especially like motif if I ever do a dividend strategy and want to pick 10 megacap div payers that aren’t very volatile.

  • Nice rundown. I definitely plan to open an account soon.

  • I’m doing some very preliminary research on socially responsible investing versus blind total market indexing (yes I know I’d probably take significant hits on returns) so maybe I’ll check them out. Thanks for sharing – it’s an interesting idea. Creating my own de facto ETF would avoid a lot of the higher ERs common in limited/boutique index funds.

    • Motif is a really great tool if you want to screen out certain types of investments, or focus on certain areas to encourage their growth by voting with your dollars. Call it corporate charitable activism or whatever. 🙂 And the fact that they have these pre-made motifs that you can use as is or steal and custom craft to your needs is pretty cool, too.

  • I’ve considered Motif investing, but the tax reporting scares me. But that is only if you re-balance, or buy and sell. I’m a buy and hold type, so that wouldn’t be a problem for me, and any re-balancing I’d want to do would just be done by the new capital I fund this account with. I need to fund my 2015 Roth IRA first, and then if there is enough left over at the end, I might give it a shot! Thanks for the research.

  • This is one of the best overviews I’ve read of the idea, thanks for the clear post.

    This actually sounds neat, but I’d bet it tends to create more speculation in people as they jump from motif to motif based on their whim of the day (such as oil, today). It’s a good test for me though though; I have to have the discipline to avoid this shiny object and stick with my AA. 🙂

    I hope they don’t become the next Betterment w/ the referral thing and we start seeing blog posts for them all over the PF blogs; that gets old quick.

    • Thanks for the kind words. I tried to highlight those legitimate uses of motif that fill a niche that other brokers don’t quite satisfy or areas where it could be a good alternative to holding funds directly at Vanguard or similar.

      I hesitated to write about motif because I think it could trick some unwary users into daytrading or something approaching that frequency of jumping in and out of trends. I don’t think that’s any way to run the great majority of your portfolio. Throwing a few percent into a motif (or similar) account as “play money” to satiate your need to beat the market might not be a bad thing (if you have that desire). It’ll let you play while leaving the other 97-99% of your portfolio chugging away at something very likely to produce solid long term returns.

      Funny you mention oil – I jumped into USO as an oil play about a month ago. It’s been up and down and is only slightly up from where I bought it now. Compared to the index fund I sold, I’m probably down sightly. But hey, it seemed like a grossly undervalued commodity that will remain in demand long term, so I bought it on a whim. I figured there was underlying paper selling and hedge funds getting caught with their pants down and getting called to sell so the price was artificially depressed. I read as much in the economist AFTER I made the trade so I feel even smarter (but not any richer yet).

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