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.
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).
The two downsides I see with Motif are:
- Playing at investing instead of actually investing, and
- 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.
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 //