Acorns is a wildly popular app in the States that automatically invests ‘loose change’ and allows people to invest with small amounts. It has now arrived in Australia, so it’s time to have a good look at what it offers, how it works and what the pros and cons are.
Acorns is an app that was developed in California and launched in 2014. The app’s primary purpose is to makes stock investing easy for the average Joe. You don’t have to deal with stock market bank accounts, you don’t need to know much (if anything) about economics and you also don’t need a large pile of cash to get in. Indeed, one of the app’s most important features is the fact that it allows you to invest with as little as $5.
Overall look and feel
Acorns have absolutely nailed the concept of mobile-first user experience design. The app is just as good, if not better, than the website. It starts with the handy password guide at signup and continues through to adding accounts, setting up round-ups and checking account value. Menus are intuitive and the app tries to predict what impact a setting may have on your future investments, including a margin of uncertainty.
The home screen shows the value of your investments
Where the money comes from
One of the hallmark features of Acorns is the clever way in which it ‘finds’ money to invest. The service hooks into your major bank accounts and credit cards and rounds up all your transactions. The difference is then taken away for investing.
For example, if you spend $3.70 on your soy latte (just don’t), Acorns rounds this up to $4. The remaining $0.30 is added to your investment pool, labelled as ‘pending roundups’ in your dashboard. Once the investment pool reaches $5, the money is taken from your funding account (usually your standard checking account) invested in a mixture of funds and bonds (see “where your money goes”).
The round-up screen allows to see and customise your round-ups
What I really like about this, is that you barely notice the money leaving your account. A few cents here, a few cents there… It all adds up, but it makes no psychological difference in the day to day, as you sort of adjust to the new reality and just end up not needing those pennies Acorns stashes away. You can also determine what happens when you hit a round number; the default behaviour is to add one dollar, but if that’s too much for you, you can always tell Acorns to leave it at 0.
Where the money goes
Acorns has five funds which are made up so-called ETF investments. ETFs give you broad exposure and are generally the preferred way to invest for those with limited knowledge of the markets. The five funds Acorns have built mainly differ in their risk tolerance; the conservative fund guarantees more stable returns but won’t grow as fast, whereas the aggressive fund has more growth potential at a higher risk.
Switching funds is easy
The conservative fund is an income focused fund for the elderly (who need to minimise short term risk) or the really risk averse. Investments: 25% cash, 30% government bonds, 23% corporate bonds, 13% AU large cap stocks, 3% US large cap stocks, 3% European large cap stocks and 3% Asian large cap stocks.
The moderately conservative fund is for those pushing retirement age, who need to limit short term risk without avoiding capital growth altogether. Investments: 30% government bonds, 25% corporate bonds, 22% AU large cap stocks, 9% cash, 8% US large cap stocks, 3% European large cap stocks and 3% Asian large cap stocks.
If you’re new to investing and still a few years away from retirement, this is your place to go. This fund balances capital growth with income and contains the following investments: 32% AU large cap, 25% corporate bonds, 19% government bonds, 9% US large cap stocks, 8% Asian large cap stocks, 4% European large caps and 3% cash.
This is my favourite. If you’re reasonably comfortable with investing and are looking for more growth at the expense of some increased risk, this fund will do the job. It consists of 32% AU large cap stocks, 25% corporate bonds, 19% government bonds, 9% US large cap stocks, 8% Asia large cap stocks, 4% European large cap stocks, 3% cash.
So far I’ve gained a whopping 11 cents
The roller coaster of the three. High risk, but high potential reward. If you can tolerate deep lows to achieve high highs, this is for you. Mostly capital growth with limited fixed income. 54% AU large cap stocks, 24% Asian large cap stocks, 7% European large cap stocks, 5% US large cap stocks, 4% corporate bonds, 3% government bonds, 3% cash.
What it’s going to cost you
On their website, Acorns claims to have a simple fee structure: $1.25 per month if your account is smaller than $5,000 and 0.275% per year if your account goes above that. Let’s start with the good news: there’s no transaction fees. That’s right: moving money in and out is free of charge.
However, there’s also bad news. If you actually read the Product Disclosure Statement, you’ll find out that Acorn’s fee structure really consists of thee parts: an account fee, a maintenance fee and a so-called underlying issuer fee I’d like to draw your attention to.
The full fee schedule. Source: Acorns’ Product Disclosure Statement.
Allow me to explain:
- Account fee: 0% for accounts smaller than $5,000. 0.275% of the average yearly account balance for accounts larger than $5,000.
- Maintenance fee: $1.25 per month for accounts smaller than $5,000. For larger accounts this drops to $0.
- Underlying issuer fee: all fees charged by the issuers of the ETFs (usually Vanguard or Ishares) are not absorbed by Acorns and are actually charged through to you. What this means, is that when the value of your ETF position grows, say 5% over a year, its underlying asset value may have actually grown by 5.2%. The difference is skimmed off by the issuer.
What bugs me about the above, is that Acorns does not communicate the underlying issuer fees clearly enough on the website. I understand that these fees also exist if you buy an ETF on the ‘open market’, but it’s still value that’s taken out of your account, so it should be mentioned.
So is Acorns worthwhile?
Absolutely yes. Despite the hidden fee, Acorns is very reasonable in terms of costs. The $1.25 per month may seem steep when you’re just starting out and adding $50 to your account (2.5%, come on!), but once your account starts growing in value from both your deposits and your investment returns, that percentage will shrink. Let’s model out my example of $75 per month in collected round-ups, assuming a 5% annual portfolio growth:
|Year||Annual deposit||Account value||Annual fee ($)||Annual fee (%)|
From the above I can deduce one strategy: once my account grows to $5,000, Acorns’ annual fee will rise above the cost of a transaction on the open market. It would therefore be cost effective to pull all my money from Acorns at this point and directly invest it in an ETF.
All in all, Acorns is very easy to use and it finds money that you’d normally spend. Although its fee structure doesn’t make Acorns suitable as a primary investment option, the way it ‘finds’ money makes it a brilliant sidekick to help give your investment portfolio that little boost. If you use it for that, Acorns is great and more than worth the reasonable fees.