Equities • Tech firms offer online platforms for new breed of investor.
This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
San Jose, Calif. • For a place that's made its bones inventing chips and routers, Silicon Valley has carved out a neat little niche bringing financial services to the masses. Intuit, E-Trade and Mint.com are among those who've pioneered ways to give people more control over their money via the Internet.
Now a pair of startups is getting into the action with platforms they hope will make it less intimidating to buy stocks.
San Mateo-based Motif Investing was launched publicly in June to let small investors buy baskets of up to 30 stocks organized by theme for $9.95 a pop.
A month earlier, Loyal3 of San Francisco emerged to let people buy stock in their favorite companies via Facebook for as little as $10.
Both companies say they can give small investors more control and lower fees and commissions than mutual funds.
"This is empowering people," said Motif CEO Hardeep Walia, who formerly helped manage Microsoft's massive investment portfolio.
His startup offers an online marketplace that aggregates companies into "motifs," or ideas. You can, for instance, buy into a motif having to do with senior care, or pets, or mobile technology, or even vices (fast-food companies, gun makers, etc.).
Users can put as little as $250 into each motif, and the site offers tools to weigh how risky each is and how its returns compare to the S&P 500's. For instance, a motif called "Lots of Likes" which includes the most-liked companies on Facebook, such as Coca-Cola, Walt Disney and Google has beaten the S&P by 40 points since its inception in 2010, Walia said.
He notes that while sophisticated investors have access to all manner of research in deciding where to put their money, the little guy isn't so lucky.
"I sort of can see trends like, cloud computing's going to be big but I don't have time to look at how each company in the industry is doing," said Motif customer Dhruv Mehrotra, a business development manager at Google. He likes the startup's ability to let him invest in underfunded areas such as cancer research.
Although he said it lacks some of the advanced functionality of stockbrokerage sites such as E-Trade, Mehrotra has transferred about $15,000 from his individual retirement account into Motif. And although the broader market's up-and-down nature this year has made it hard to tell whether the approach has netted him better returns, he's bullish on the site in the long run.
Former Securities and Exchange Commission Chairman Arthur Levitt, who is advising the company, says it gives users more transparency than index funds without the risk of buying and selling individual stocks.
"I'm kind of intrigued by the ability to see every security in the account and what it's worth every day , or every minute, if I choose to," said Levitt from his home in Connecticut. If users want to add or delete a given stock from a motif, that trade costs $4.95. Try that with your mutual fund.
Levitt said the idea appeals to a new breed of tech-savvy investors. "These are kids who grew up with iPhones and BlackBerrys and might be very comfortable with making investments and sharing them on social media," he said.
He and Walia hope Motif's social aspect, which lets users invite friends to weigh in on their portfolios, will help produce better-educated investors.
Motif is in the same self-empowerment vein as other new valley companies such as Wealthfront and Personal Capital, both of which offer Main Street investors low-cost financial advice online. Another pioneer in the advisory space is Financial Engines, which was launched in 1996 by two Stanford professors.
Financial Engines co-founder Joe Grundfest, a former SEC commissioner, said he doesn't quite get the appeal of Motif. He questions whether the approach will perform better than index funds over the long haul and whether the costs and risks prove to be lower.
But MIT finance professor Andrew Lo loves Walia's idea of using technology to democratize and simplify investment information.
Although he agreed with Grundfest that investors should approach any new online platform with caution before shipping their financial activity into cyberspace, Lo predicted more startups will get into the act as consumer dissatisfaction with big financial institutions increases. "I think this is the beginning of the wave of the future."
That's certainly what Loyal3 CEO Barry Schneider thinks. After selling a previous company to DuPont, Schneider was living the life of an investor in Hillsborough, Calif., when he ran across Loyal3, known then as StockLINC, in 2009. The startup's "customer stock ownership plan" is similar to the employee stock ownership plans that let the average worker buy into the companies they work for in small bites.
"I fell in love with it," Schneider said. "The idea of allowing people to connect with the companies they love sounded so strong."
Although co-founder Greg Allio is no longer with Loyal3, having left amid some acrimony, Schneider spent three years lining up technologists to bring the product to market. The company employs close to 60; its backers include former Facebook general counsel Chris Kelly.
Fifth & Pacific, the parent corporation of such trendy retailers as Lucky Brand, Juicy Couture and Kate Spade New York, last month became the first to sell stock using Loyal3. Visitors to those brands' Facebook pages see an "Ownership" button, similar to the more recognizable "Like" button, that walks them through Loyal3's stock-buying program.
Schneider won't specify how many trades he has handled so far, but he notes that more than 80 percent of Americans don't own individual stocks, in part because they're scared off by brokerage fees. By processing large numbers of small transactions effectively, he said, his company can eliminate the costs that help drive those fees.
"Our platform seeks to democratize the markets," he said.
Schneider also is rolling out plans to let individual investors buy initial public offering shares at the same time and price as big institutions. Loyal3 has consulted with staffers at the SEC, which regulates the sale of stocks, although the agency does not endorse products.
Sabrina Pourmand, a humanitarian aid worker in San Francisco, said she noticed the Ownership button while visiting the Lucky Brand page on Facebook and gave it a shot. "I don't really have the skills or the time to do a lot of investing," she said. "But I love the idea of investing in companies I believe in."
Pourmand said she also enjoys the ability to dabble in the markets without risking a lot of money, and she's looking forward to more companies coming on board with Loyal3.
Investing, she said, "would be overwhelming for me if I were to do it the old-fashioned way."