Individuals are taking control of their own investments and care who they support. Retail investors are now empowered to invest themselves, no longer reliant on financial advisors or mutual funds to create the portfolios they want. As individuals increasingly start their own portfolios, many are critical of who and what companies they support financially, aligning with firms that share their personal views. This is where Pebble Finance comes in.
Pebble Finance is an investment and indexing fintech application that allows investors to support sustainable companies and divest from those that aren’t. In this episode, we chatted with Justin Whitehead, the Co-Founder and CEO of Pebble Finance, about the role that Pebble serves in ESG investing. Justin informs us about the rise of the retail investor, trends he’s seeing in the marketplace, and how technology innovation is making it easier to invest in what matters. Tune in to learn about self-guided investing and conscious divestment.
JJ (host of The Understory Podcast): Hello everybody. Welcome to another episode of The Understory Podcast. Understory is a global community of innovators and startups that are working toward a sustainable world. We have featured a lot of guests in the area of sustainability. Today we're excited to have Justin Whitehead, the Co-Founder and CEO of Pebble Finance, join us.
Justin, thank you for making the time and joining The Understory Podcast.
Justin Whitehead: Thanks JJ. Thank you very much for having me.
JJ: Let's talk about Pebble Finance and why you started the company. What's the vision? What do you want to achieve with Pebble Finance?
Justin: I met my co-founders of Pebble Finance a few years ago working at a prior tech startup called Kensho, which was a fintech in the AI and data science space. The group of us after leaving Kensho at various times got together. We said, hey, you know, we've spent about 40-50 years working in the finance industry. We spent a lot of that time building tools and technologies for asset managers, for sales and trading organizations, for analysts, for the professionals that work on Wall Street. Can we take any of that insight and actually bring it over to the retail audience, the actual individual investor?
Very early on in the Pebble story we said, we know how to understand a portfolio, we can explain a portfolio and how it's performing and the characteristics about that portfolio to an asset manager. Can I explain this to my next door neighbor and other neighbors and people more in general? So we clobbered together some technology, pulled some data sources. One of the key things that we were looking into was ESG.
For those who are not aware - ESG is a values driven sustainable focus on investing. There are lots of ESG funds and data providers out there that score different companies based on their environmental impact and how good or bad they are for society. We took individual retail portfolios and combined it with some of the ESG data and we showed end users: how green is your portfolio? How is it performing? How do you compare to your neighbors? and so on and so forth.
A couple things stood out. First, nobody agrees on what ESG means. You talk to people, especially up here in the Northeast, the conversation very quickly focuses on fossil fuels. You go to the Pacific Northwest and for whatever reason a lot of the conversations centered around human rights issues and holding on to public prison companies. You go down South and the conversation was very centered on 1st Amendment rights and that sort of thing. Everybody discovered something new about their portfolio. Most people are invested in ETF's mutual funds and had no idea what was underneath the seams. When you had someone that you're talking to specifically about climate, you'd see utter shock when you tell them their portfolio is browner than their neighbor because they own a lot of fossil fuel companies. They say, “Hey, I drive a Tesla, I've got solar panels on my roof. I didn't know that I had these companies underneath the hood”.
While everybody's opinions were vastly different and unique, which is wildly interesting, one common thread across all of them was that A) people were not that aware of what they actually own in their 401Ks and their brokerage accounts and B) once they found out about what they were owning, the next question always was, “What can I do about it?”. That common theme ends up being the seed to what we see as Pebble today.
Pebble, in a nutshell, is giving back control to individual investors, people that have their own 401Ks and joint brokerage accounts and allowing them to invest in the mutual funds, and ETFs that they like but actually control to whatever degree they want, what is actually being held underneath the scenes. If you focus on fossil fuels, you can edit out fossil fuels from your investments. If you think Facebook is a terrible company and bad for the world, you can edit Facebook out of your investments as well. We leave it all the way up to the individual.
JJ: That's so fascinating, and I think just to step back for some of our audience, I'm assuming that a lot of people understand index funds, mutual funds, but perhaps before we talk more about the differentiation and the product and why this is mission aligned with individual retail investors. What is an index fund? And what is a mutual fund Justin?
And to a point there is also lots of discussion about investment firms, the BlackRocks of the world, the State Streets of the world, building similarly focused mutual funds or ETFs. How does Pebble fit into the overall picture?
Justin: My early career was all focused on portfolios. It was mutual fund managers who were trying to beat the Ultimate Index. If we think about our parents collectively, or any of the listeners of this podcast, if you look back and think about how your parents were introduced to investing at that point in time. The world was a very very different place. You didn't have blogs, you didn't have podcasts where you could learn about financial markets. The Internet was barely a thing for the longest time. If you wanted to be involved in investing, it usually meant finding a local branch office of a brokerage firm in your town, talking to a stockbroker which has now been rebranded a financial advisor and they would help you invest your money in the markets. If you wanted to be diversified, they would find for you a mutual fund to invest in. There would be some active management team that is pulling a bunch of money together, and then making discretionary investing decisions for that pool of money. The goal of the mutual fund depends. There's lots of different flavors and varieties, but generally their goal was to outperform the index along the way, and a lot of the credit goes to Jack Bogle, who is the founder of Vanguard. In observation of this actively managed money, people that are investing in mutual funds are not really beating the index, and most of them underperformed.
I had this thesis. You should just be able to cheaply and easily buy the index alone no active decision making, no portfolio manager picking what stock he or she thinks is going to be the next big win, so on and so forth. Just buy the entire index as is. For the S&P 500, which is the most popular index in the fund, there are 500 companies in it which translates to about 504 stocks beside the index. In this mindset the fees could be driven way down and these index funds then started reaching broader markets by way of passive mutual funds, passive index mutual funds, and then eventually, what most people are probably working with right now are index ETFs. This is where BlackRock and others come in. State Street runs SPY which is the S&P 500 ETF, Vanguard runs DLL, which is the same thing, BlackRock runs IBB, which is also the same thing, and there's this big concentration, there's a whole whole separate thing with respect to a concentration of share ownership amongst a few asset managers, but that's the general landscape of mutual funds and index funds.
Where Pebble is set apart is instead of you investing money, giving it to an asset manager like BlackRock or State Street or Vanguard and having them invested in one of their mutual funds, or one of their index funds you actually own the stocks yourself, you're your own asset manager and Pebble has a machine that works on your behalf and keeps all the individual stocks in line with whatever your target objective is. So if it is the S&P 500 and you just want to copy it, we can just copy it. If you want the S&P 500 with some sort of personalized ESG spin, and maybe you want to get rid of a couple other companies for whatever reason, it takes your expression, your ideas and will automatically run that portfolio for you in your account.
In addition, and this is actually just coming up on TikTok and Twitter, is whipping through this past week. When you do this the Pebble way, you are the share owner, and that means you have the vote. Each and every share that's in your Pebble account is owned under your name and you get to vote those shares for the Board of Directors, other things that come on the proxy statement as well. You don't have that ability if you are going through an asset manager and it's a very interesting twist that people are discovering.
JJ: I think you laid that out very nicely Justin. In fact, I think on your Twitter account you actually call it a divesting app, right? Because you allow people to choose, add or subtract, and a lot of times is if people want to buy the index but they don't like certain companies because of their practices in Environment Protection, what have you, then they can essentially divest or subtract that company from their overall holdings.
Justin: Right now today you can go in and copy an ETF or copy the S&P 500 which happens to be the most popular thing and you can clip out whatever companies for whatever reasons you want. If you want to clip out five companies, congratulations, you've now got your own personal flavor of the S&P 495. We also go the other way. People that enter the app start to divest if they want to, right now we have people that come even further and they join our Pebble slack channel and they'll come up with different ideas of different types of portfolios they want to create. It's not purely just divesting, but that is what most people understand. You can actually come and create new baskets and new types of portfolios on the fly as well. For example, I don't know where you live right now, but we met someone months ago who joined Pebble and said, “Hey, I live in San Diego, I love San Diego, I saw on TV a year or two ago how San Diego companies are doing great. I just want to invest in San Diego companies” and there's no ETF, no mutual fund, nothing out there that you can buy that could build that for you. Pebble was able to go ahead and build that that basket for him.
JJ: What about the business model? Is Pebble charging a fee that's similar to the actively managed funds or similar to the index funds and mutual funds?
Justin: At the moment, we don't charge any fees and right now we are spinning up formally our federal recovered advisory practice. So with that we will A) Be in a direct fiduciary relationship with every Pebble client that will also allow us to do some more management of the portfolios behind the scenes, which is good, and we will be able to start collecting fees at that point. Our plan is to always make the S&P 500 and make any modification to that index, which is the world’s most popular index free. We want people to be able to express themselves, try it on, that's the whole let 1000 flowers bloom and bloom differently and it's just interesting to see what people will create from that. If you wanted to copy a mutual fund or an actively managed ETF where you'd be paying fees, we'll be charging a fee for that as well. You can copy people, you can edit what you copy. Maybe it's an ESG ETF that you want, there's a lot of ESG ETFs out there ironically, that still actually have oil companies and coal powered utilities inside them. If you want to make deeper cuts into one of those, that’s a different type of ETF, we'll go ahead and charge a small fee for those, but well under what you would expect to be paying an actively managed mutual fund or or anything like that.
JJ: Inside your product, do you provide research to the user to educate them on what are the companies that have, for example, met the ESG standards? Or the companies that have more transparency? Do you give them certain data points or research from the industry to allow them to make the decision as to buy and/or divest?
Justin: We try to stay as neutral on that topic as possible. With ESG as an example, I swear every week there is a brand new ESG company coming to market and everyone is different. We don't want to go ahead and say one company has a better scoring system than another company because at the end of the day ESG ends up being a bit subjective anyway.
We do provide some research, but this is more on the macro side. If you sign up for Pebble right now, you'll get added to a newsletter independently. You can also join the newsletter if you're interested in that, where we go over a lot of the topics that are going on in the world with financial markets and that type of stuff. We do give that type of context, but we steer clear of trying to say, “everybody should be divesting from one company or another”. What we end up seeing is people are forming those opinions organically and already out there in social media, on Reddit, on Twitter and that sort of thing.
People are part of communities right now that are voicing their opinions and voicing their ideas when it comes to certain themes or certain companies, we are just helping you take that voice and actually do something with it, actually materialize it and apply it to your investment portfolio. Does that make sense?
JJ: Yes. Thank you for that. Very helpful. Given the team’s background Justin, working at Kensho and other companies in the fintech space, and now with Pebble Finance, how do you see the retail investing market evolve. There was talk about the meme stocks there as you say, lots of talks around ESG investing, you have the Robinhoods of the world, you have the incumbents that are also trying to get more investors to put their money into their their funds.
What would you say to retail investors as they think about either coming into the investing space beyond putting their cash in a 401K or with more experienced retail investors as the market continues to shift?
Justin: It's funny if you walk the halls in Wall Street you'll hear the term ‘the great wealth transfer’ come up a bit. It's actually getting talked about quite a bit on Wall Street. If you think of the the generations that are alive and active investors, you've got the boomers, Gen X, millennial and Gen Z getting into the market. There's a stark difference between how the boomer generation invests and their millennial children, likewise, Gen X and their Gen Z children. That type of change was never ever such, it became very evident right around the pandemic. The pandemic was an activation function and all of a sudden you had a lot of millennials that were sitting on the sidelines ever since the global financial crisis, entering the market in droves. You had Gen Z getting in there. There's been a lot of experimentation in crypto. GME went for a wild ride just over a year ago and AMC in the meme stocks.
It is a different environment as investors now again compared to our collective parents. We have more information at our fingertips than ever before because information is easier to get to. Our generations are staying more and more self directed. I spend quite a bit of time on Reddit observing the questions that come up and the answers that are given. Wallstreetbets might not be the best subreddit to get financial advice, but there's some fantastic subreddits where people are asking legitimately nuanced questions and getting really, really thoughtful answers. Because of that, people are more independent. Because of all this information, people are increasingly aware of what they own.
Now we're here trying to fill that last mile by giving people that have an increased amount of information and an increased awareness of of what they own and a respective increased amount of agency to express themselves in those portfolios. Just like we can control almost any other aspect of our lives these days through digital means.
JJ: Thank you for that perspective. I love the experience of Pebble and it's a different way of getting retail investors to think thoughtfully about what they're investing into and investing based on information they know about companies.
Justin, how can people download the app? How can they find more information about Pebble? Tell us that.
Justin: The app is available in both the Android and iOS app stores, just search for Pebble Finance and you'll see us there. You can come to our website as well https://pebble.finance, there will be links for downloading the app off of that as well. From the website, if you're interested in just paying attention to the Pebble newsletter, there are links at the bottom of the website to go ahead and sign up for the newsletter and you'll get to hear James, one of the co-founders who's brilliant in the economic space, share some of his insights and wisdom and observations each and every week. If you download the app or jump onto the newsletter, there will also be ways to jump into the Pebble Slack community where you'll have access to the Pebble team and other members who are discussing fairly actively: ideas, topics about investing and divesting, and all sorts of things.
JJ: Excellent! Justin thank you so much for joining us today and talking about Pebble Finance. We learned a lot, and we're excited to see what's to come for the team.
Justin Whitehead, CEO and Founder of Pebble Finance.
Justin: Thank you so much.