By Kelly Robinson, Spring 2016 Student Intern
In previous blog posts, we discussed the risks inherent to automated investing with a particular focus on websites. Now, as people have moved from browsing the web on their computers to browsing it on their phones, so too have investment companies, moving from the big screen to the little screen. This move is a great way to appeal to millennials who tend to be constantly connected to their phones. While this move to the small screen is a great way to get younger people interested in investing, this technique inadvertently targets those who have very little experience with investing.
Apps like Acorns and Stash both follow similar models. The idea is that with a small amount of money ($5 or less), anyone can start investing. Both Acorns and Stash have a series of questions for the new investor to answer to determine their risk profile and the investor is placed in one of five categories, ranging from conservative to aggressive. Both also have similar fees structures, where if the account has a value under $5,000, the charge is only $1.00/month; and if the account is over $5,000, the charge is about 0.25% of the balance per year.
Acorns and Stash also both invest in exchange traded funds (ETFs). Using the investor risk profile (either determined by the app’s preliminary questions or selected by the investor herself), Acorns will place the investor in a more conservative or more aggressive mix of six ETFs. The more conservative profile lending itself to about 40% of funds in government bonds, with the most aggressive profile placing about 30% of funds in real estate stocks. Stash, also based on the profile, will recommend a certain mix of funds from a pool of about 30 funds that Stash invests in.
The main difference between the two apps (besides the actual investments) is how each is structured to pull the investors funds and make the investment. Acorns is connected to the user’s bank account and tracks the investor’s purchases, rounding up to the next dollar and investing the difference. For instance, if a coffee is purchased for $2.75, then the purchase is rounded up to $3.00 and the $0.25 is invested. On the other hand, Stash relies on small lump sum investing. They advertise as only needing $5.00 to start with the idea to continue depositing $5.00-$20.00 (or some lump sum) per month.
Many of the concerns that come along with automated investing also follow through to automated investing apps. The suitability questions tend to be no more than questions about age, investment time-horizon, and goals, which then put the investor in one of five (or with Stash, only one of three) risk profiles. Furthermore, there is a very limited number of funds to invest in and because of the small principal, the investor owns a very small fraction of the ETF. As with any investment, it is always important to do your research. You may find that your money is better spent when you speak to someone who can analyze your financial goals more than just trying to fit you into predetermined box.