This content is from: Wealth Management

The Market Collapse Didn’t Kill Motif. It Was Troubled Before Then.

Competitors caught up to the fintech company and ultimately won.

Friday evening, Motif surprised its customers with an email. The company that enabled retail investors and financial advisors to invest in thematic portfolios was ceasing operations.

All of Motif’s accounts will transfer to Folio Financial, a self-clearing broker-dealer and technology company, after the market closes Wednesday, May 20. The accounts will be ready to trade the next day and Motif negotiated a reduced monthly rate for the transplants. “We’ve selected Folio to give you access to leading investment tools in a similar experience to what you’ve enjoyed at Motif,” Friday’s letter said.

The letter didn’t explain why the company was suddenly closing. But since Motif was founded in 2012, the field of companies helping self-directed investors has changed dramatically.

For years, Motif was doing things other investment firms weren’t, helping it attract clients and investors in the company. 

It had more than $868 million in assets, according to a March 27 regulatory filing. Motif founder and CEO Hardeep Walia said his company had more than 300,000 retail customers at the Global Responsible Investing Forum in New York in December.

Motif raised a total of $126 million from investors that include Goldman Sachs, J.P. Morgan, and a handful of venture capital firms. The company raised a $40 million Series E round of funding in January of 2015, putting the company's pre-money valuation at $396 million, according to PitchBook.

Unlike Charles Schwab and other discount brokerages, Motif’s investors didn’t have to build their portfolios from scratch; selecting individual stocks, bonds, funds and securities. Investors could fund accounts then search for and choose to invest in certain thematic portfolios. For example, some portfolios might only include companies with well-regarded corporate governance or a small carbon footprint.

“The big ‘ah ha’ that led me to create Motif was a very simple observation. We are all creatures of concepts. We think conceptually about investing. Humans are expression engines. The hard part is actually acting on that expression,” Walia said at the Global Responsible Investing Forum.

Instead of forcing investors to choose thematic portfolios and stick with them, Motif also enabled investors to customize their portfolios by including or excluding specific stocks. (Investors can’t do this with other automated investment managers, or robo advisors, such as Betterment and Wealthfront).

For years, Motif has also traded fractional shares, meaning clients could invest the minimum $250 and still choose and create the portfolios they wanted. Fidelity Investments didn’t offer fractional-share trading until January of this year.

There was no annual fee to invest in Motif’s own New Wave Portfolio or its Motif 500 Portfolio. The Motif Impact Portfolios had an annual fee of 25 basis points and the Motif Thematic Portfolios charged an annual fee of 50 basis points. Like almost all others, Motif supported individual and joint taxable, retirement, and trust accounts.

But the company also charged commissions to trade stocks in custom portfolios and steep fees to trade in real-time, as high as $19.95 per trade — A dramatic price considering it’s now free to trade stocks, exchange-traded funds, and other securities at other brokerages.

“When I saw the news story, the first thing that came to mind is that they've surely struggled recently due to the large brokerage firms. Investors have cheaper options, compared to Motif, going to a large brokerage firm and I think my guess is what happened is their growth totally slowed down,” Eric Sandrib, a research associate at Aite Group, told RIA Intel.

Sandrib, who previously worked for ICE Data Services, focuses on researching digital wealth management and RIAs, among other areas of financial services.

Motif could not be reached to comment. Carl Stern, a member of Motif’s board of directors, declined to comment.

Larger incumbents in financial services are criticized for being slow-moving but they partly might just be waiting to see how different business models of upstart fintech companies fare. They also have the size and scale to pursue new offers to investors knowing it might not be as profitable (or at all) in the near future. They can afford to play the long game. “These large brands are really the firms where we see the most growth into the future,” Sandrib said.

There is an assumption that all technology companies are fast-growing but that’s not always the case. Over the next five years, Aite group expects startups to lose about two-thirds of their 16% market share as “competition, acquisition of the current solutions by incumbents, and growth challenges accelerate,” according to a report published in the fourth quarter of 2019.

It was either a good time or a “necessary” time for Motif to be acquired and Folio should be a good fit for its clients, according to Sandrib.

Folio has absorbed retail clients from numerous other firms over the years, including Loyal3, BuyandHold, MyStockFund, OBS (Online Brokerage Services), FBR Direct, and EX24. In all of those cases, it successfully retained a high percentage of them, Paula Delaurentis, the Chief Retail Officer at Folio, told RIA Intel.

“We have all the capabilities and more than what Motif currently has so I think they’re going to be pleasantly surprised,” Delaurentis said.

Folio also expects to continue to work — and potentially expand its relationship — with the RIAs coming from Motif. Folio Institutional is currently a custodian to more than 450 RIAs. The company declined to share the total value of the assets under custody.

Motif approached Folio about the transaction before the recent market downturn. Folio declined to share any further details about the transaction or its timing.

The focus on impact investing was probably not what harmed Motif since the market for those investments continues to grow, Sandrib said.

PitchBook highlighted Motif in its fourth-quarter report on financial technology companies last year. Although, alongside it, was mentioned another company focused on impact investments that had already gone out of business.

“While such investment strategies have not necessarily proven to be more successful than traditional investing, impact investing could still prove a viable business strategy given growing consumer demand. Startups focusing on this opportunity include Motif, which has raised over $125 million in VC. On the other hand, Swell was not able to deliver positive investment returns for customers (mainly due to very high fees) and went out of business.”

Goldman Sachs Asset Management, or GSAM, said in a statement Monday that it was notified that Motif will cease to serve as index provider for five Goldman Sachs Motif exchange-traded funds on May 15.

"GSAM is in discussions with Motif to assume the role of index provider, subject to approval by the ETFs’ Board of Trustees of the change to the ETFs’ underlying indices," the bank said in a press release Monday.

"We do not expect any interruption to the management of the ETFs at the present time, and the ETFs continue to trade on NYSE Arca."

If you're a Motif employee willing to speak to a journalist in confidence about the company suddenly ceasing operations, contact Michael Thrasher at michael.thrasher@institutionalinvestor.com ; Signal: 330-962-6441

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