I first heard about Acorns a few weeks ago. Acorns is a micro-investing mobile app designed to make it incredibly easy to invest small amounts in the stock market. As if designed perfectly for the Millennial generation, there’s no need to actually know anything about investing to get started; Acorn’s advisers simply designed a portfolio (based on “Modern Portfolio Theory”) that works for all investors using the app.
The creators of Acorn have found a way to solve major problems with the financial industry’s typical path to investing, and the biggest is the barrier to entry. Acorns lowers this barrier considerably. This is the continuation of a trend that stared centuries ago. Investing in equities was once the realm of the wealthy, not the middle class. Discount brokerages were the previous generation’s introduction to investing, allowing investing amounts as low as $100, and now Millennials are coming of age in an industry that allows them to invest with as little as $5.
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Millennials (and everyone who owns a mobile phone today, but Millennials are the population most likely to bank and invest using a mobile device) are the beneficiaries of technological advancements that have greatly reduced the cost of investing. The cost of a trade to a brokerage is virtually nothing, and it has been the trend for brokerages to pass that savings onto the customers.
In the 1990s, it might have cost $35 per trade to buy and sell stocks with your full-service broker over the phone. Discount brokerages brought that cost down to $4 to $7 for certain types of trades, or about $20 for others, with some discount brokerages offering free trades for a limited time or in return for a small monthly fee.
And that’s how Acorns fits into this picture. It has moved the discount brokerage model to the mobile phone, has taken investment choice out of the equation for investors, and charges customers nothing to buy and sell. Instead, Acorns has a monthly account maintenance fee, which in the industry is called a “wrap fee.” This is a pricing model employed by Betterment, as well.
Acorns charges users/investors $1 per month plus a percentage of their assets. The fee percentage is an annual 0.25% to 0.5% based on the account’s average daily balance. The first $5,000 in an account receives the 0.5% rate, and all dollars above that $5,000 are charged at a rate of 0.25%. Acorns says, “The more you invest, the more you save,” which is a nice catchphrase, but just like most so-called savings wherein a rate gets lower the more money you have, the more you invest, the more you pay (as a total percentage of your assets).
If your account balance is $500, your monthly fee is $1.21 per month. If your account balance is $100,000, your monthly fee is $22.88 per month. That’s on top of any fees that may be embedded within the investments chosen by Acorns. Compare this to Betterment’s current fee structure, where investors are charged either 0.15%, 0.25%, or 0.35% annually, with the best rate reserved for accounts with a $100,000 minimum balance. But with Betterment, the lower rate is in effect for your entire balance.
With my Vanguard account, I choose my own funds (though other people may simply invest in one, such as the Total Stock Market Index Fund), and there is no wrap fee. VTSMX has an “expense ratio” (internal management fee) of 0.17%, but that’s different than a wrap fee. That’s because the exchange-traded funds that make up the Acorns portfolio each have their own fees, from 0.05% to 0.20%. These fund fees are akin to the VTSMX expense ratio, so Acorns charges a wrap fee on top of the fees of the underlying investments.
Acorns warns potential customers in an agreement when signing up via mobile phone — an agreement that most customers will never read:
Clients should be aware that Acorns is designed with frequent investing in mind. This fee structure may not be appropriate for individuals looking to make few or infrequent small-dollar investments.
Wait a second. The beauty of Acorns is the ability to make small-dollar investments. Let’s say you open an account and make just a few $5 trades. If you deposit a total of $20 to test the account and leave your money there for a year, you’ll pay an annual fee of $12.12. The stock market might improve, but it’s unlikely to grow so much that the gains cover the fees. It may be “just $12.12” a year, but that could be an unacceptable percentage of your balance!
If you’re not going to invest frequently, such as catching your remainders when you spend money on a daily basis or throwing five dollars into the account when someone expresses market frustration as Carl Richards is doing, this isn’t the right type of investing for you.
The fees may hardly be the point, though. There’s quite the possibility that Acorns represent a new way to invest thanks to the convenience of mobile technology. It has the potential to introduce a new generation to investing, and the long-term benefits for the individual outweigh the fees, if that individual is unlikely to invest in the stock market otherwise.
And given time, just like in the world of online banking, traditional brokerages will eventually follow. If there’s money to be made with innovative enhancements spearheaded by financial start-ups, the financial industry establishment will implement it, by either copying or acquiring the technology.
As a relatively young member of Generation X, I was an early adopter of technology that made the web the primary way for doing business. I started my own personal website out of a computer in my dorm room twenty years ago. A few years later, online-only banks started business. These Web-only banks inspired traditional brick-and-mortar banks to create ways to bank online rather then over the phone or in person.
Twenty years later, mobile technology is in that same position. The services offered may not be perfect today, but they will mature as mobile technology continues to reach an increasing portion of American consumers and investors.
I was planning to give Acorns a try by opening a personal account, but after taking the time to think about it, and after reading the Terms and Conditions, I’ve determined it’s really not for me. I will stick with my Vanguard account for now, though it’s been suggested to me that I should look into “private client” banking; once again, those with more assets receive preferential treatment — like free checks, lower mortgage rates, and access to personal loans. I haven’t made any decisions yet.
Acorns is available for iPhone and Android. Search for it at the applicable app store, or visit the website. Will you give the app a try? Is this type of investing beneficial to you?
Updated October 15, 2015 and originally published November 5, 2014.