Motif Investing, a digital brokerage
that provides thematic investing and automated advice, will soon offer direct indexing directly to retail investors.
With Motif 500, investors can open and fund a new account that will automatically be allocated to each of the stocks in the S&P 500. Investors can then customize the portfolios by removing individual stocks or tweaking the allocation weightings as they see fit.
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Thanks to capabilities of
BNY Mellon Pershing's custody platform and Motif's proprietary technology for fractional sharing, which together allow investors to buy just a piece of an equity rather than an entire share, Motif is able to offer its Direct Indexing product for accounts with a minimum of $10,000.
That's far lower than most other digital investing firms that offer direct indexing. For example,
Wealthfront reserves the strategy for clients with at least $100,000.
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With no trading fees on the platform, Motif is offering Motif 500 completely free to investors.
To generate revenue, Motif founder and CEO Hardeep Walia said the company plans to charge a premium for tax optimization and add automated environmental, social and governance (
ESG) tilts to portfolios.
OpenInvest, a competing digital platform, offers impact investing portfolios built using direct indexing for a minimum of $100. Mr. Walia said the difference is that Motif 500 is free and allocates assets to 500 different stocks to let users customize for themselves.
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"It's important to us that investors are fully invested in all 500 securities for a better, optimized investor experience, which is why our minimum is $10,000," Mr. Walia said in an email. "Our index offers broad market exposure but will also give the option to apply tilts like SRI."
Josh Levin, co-founder and chief strategy officer of OpenInvest, said that his firm does charge retail investors a 50-basis-point management fee, but that investors can purchase all 500 stocks and self-customize if they like. But he said OpenInvest is much more focused on the adviser market rather than do-it-yourself investors, citing his firm's recent
deals with Bank of the West and
Legal & General Investment Management.
"There is a post-fund world emerging," Mr. Levin said. "It's no longer why you would switch to direct indexing, it's why would you stay in funds?"
While direct indexing is still new for many financial advisers and may overwhelm most retail investors, Mr. Walia said users of the Motif platform tend to be savvier investors and early adopters.
"We're trying to be on the cutting edge of where we think markets are going," he said. "We're not looking for newbie investors."
Motif 500 is initially only available on Motif's consumer-facing platform, but the company plans to make it available to financial advisers in the future.
Advocates of direct indexing say that in addition to the opportunities for customization, the strategy offers superior tax optimization to index-tracking mutual funds or ETFs. Rather than a single chance to harvest tax losses, direct ownership of an index's underlying securities provides hundreds of opportunities.
Traditionally, the strategy has only been available to the super-wealthy, but technology and the elimination of trading fees are making direct indexing more affordable.
"Ultimately, you have a situation where the direct indexing, when it's combined with no trading costs, will equate to some very significant tax alpha for the investor," said
Eric Clarke, CEO of Orion Advisor Services, which makes
direct indexing available to advisers on its Eclipse trading platform. "Generally speaking, technology seems to be disintermediating the mutual fund and ETF providers, and this is a perfect example."
Though Mr. Clarke thinks it's great to make direct indexing more accessible to investors, smaller digital brokerages like Motif and
Robinhood may start feeling the pinch as custodians slash trading fees to zero. Fidelity is already giving
advisers ESG portfolios built with direct indexing, and Schwab's
support of fractional shares may open the door for its own direct indexing.
