A recent article appeared in the well-established Money Magazine on four ways to invest $100: http://moneymag.com.au/invest-100-4-ways/.
One of the methods suggested is to use Acorns, a micro-investing robo-advisor, whose tagline is “Invest spare change automatically from everyday purchases into a diversified portfolio.” You might say this is a modern day high-tech piggy bank.
At first glance this idea might appeal to parents for their younger kids or to the younger tech-savvy population. Beware, there is a huge catch.
For account balances of less than $5,000, Acorns charges a monthly fee of $1.25. This may sound low but being a micro-investing company Acorns will accept investments of as low as $5. Unless you intend rapidly increasing your investments with Acorns, be careful NOT to invest small amounts with them as the monthly $1.25 fees could eat away your entire account balance.
For example, on a piggy bank account balance of $100, $1.25 per month is 15% per year in fees. Nice for Acorns but not for the micro-investor who over time will definitely not achieve sufficient growth on that $100 to cover the fees, meaning that over time your entire $100 savings and all its growth will be paid to Acorns purely in fees. Meaning that, for small account balances, it is a mathematical certainty that micro-investors will merely be donating their money to Acorns.
Now imagine ten thousand investors each with $100 invested with Acorns, a total of $1,000,000. On the combined pooled money Acorns will receive fees of 15% per year, or $150,000 in fees! This is a piggy bank with a big hole in it that will eventually transfer the entire $1,000,000 and any interim growth to Acorns.
Micro-investors really want to get their account balances above $1,000 otherwise they will be paying fees that are way too high relative to their potential returns. Below $1,000 it would probably be wiser to open an online savings account that charges $0 in fees.
Acorns fees for account balances of greater than $5,000 are 0.275% per year. This is in addition to the annual ETF management fees – Acorns uses ETFs for all their investing themes. While relatively low compared to industry and retail Super funds, 401(k)s and just about all other mutual/managed funds, these fees are still higher than investing directly into ETFs yourself with larger account balances.
While on the subject of robo-advisers, the highest profile robo-advisor in Australia appears to be Stockspot. They also use ETFs for all their investing themes. Whilst they make a big deal about fees, their fees are still a lot more expensive than investing directly with ETFs or even via an industry Superannuation fund, depending on the amount of capital that is invested.
The Stockspot fees picture is not so rosy compared to doing it yourself directly with ETFs. Although their business model compares well to using a financial advisor or financial planner who charges an annual percent of FuM (Funds under Management), it compares poorly to doing it yourself. Especially for Self-Managed Super Funds with account balances of greater than $50,000 that invest directly with ETFs.
Stockspot recently reduced their fees. Their fees previously favored balances of less than $10,000 now they incentivise investors with less than around $8,000 not to invest with them.
For account balances of less than $10,000 that have been open for greater than six months, annual fees range from 7.92% for $1000 to 0.792% with $9,999, excluding ETF annual management fees. So don’t use Stockspot for micro-investing either.
For account balances of greater than $10,000 and less than $50,000, annual fees are 0.792%, excluding ETF annual management fees.
For account balances of greater than $50,000 and less than $500,000, annual fees range from 0.77% down to 0.671%, excluding ETF annual management fees.
For account balances of greater than $500,000, annual fees range from 0.539% to 0.53%, excluding ETF annual management fees.
Investing through Stockspot or Acorns is basically the same as investing via a balanced mutual/managed fund. Balanced fund managers mostly invest directly into stocks and bonds whereas robo-advisors use ETFs to achieve the similar asset class mixes because ETFs are far easier to manage than direct positions.
My messages in this blog are:
• you can invest directly with ETFs yourself and be tens, potentially hundreds, of thousands of dollars ahead through not paying unnecessary additional fees, and
• beware of micro-investing with robo-advisers.