The Acorns app is getting huge accolades from all circles in Australia. But it infuriates me that the people plugging this tech haven't got out their calculators and done the maths. Â
A simple division to calculate the fees being charged would emphasise how badly young Australians are potentially getting ripped off by Acorns. Micro-investing might look great at first glance, but more than 50,000 micro-investors using Acorns are paying annual fees of over 6.2 per cent a year on their micro-investments.
Acorns has reportedly hit $100 million in funds under management and registered users of 300,000. Downloading the app is free, meaning people with a zero balance do not get charged. But once you start using the app, the fees are a flat $1.25 a month – or $15 a year – to access the platform.
It might not sound like much, but compared with the alternatives, it's daylight robbery!
Users with a non-zero account balance have reportedly reached 111,570. On average, that's $896.30 per micro-investor.
More importantly, the median account balance is reportedly $241.13. Meaning that half of the non-zero account users, or 55,785, have an account balance of less than that amount.
Get out your calculator and do the division! That miserly $1.25 per month in fees is $15 in a year. Divide $15 by $241.13 and, voila, you get 6.22 per cent a year.
And those with balances less than $241.13 are paying an even higher percentage in fees.
These 55,785 micro-investors reportedly achieved between an average of 10.5 per cent annualised return since February 2016, before the $1.25 per month was deducted. After fees that return will have dwindled to 4.28 per cent for those with an account balance close to the median of $241.13.
Anyone with an account balance of more than zero but less than $142.86 would have gone backwards, with the 10.5 per cent return not making up for the fees they were charged.
Furthermore, the long-term average annualised return in a balanced investment of the exchange-traded funds in which Acorns invests is closer to 7.5 per cent. Meaning that over the long-term there is a high probability that account balances of less than $200 will have all their gains eaten up in fees.
For these low-balance accounts, using Acorns is more like donating than investing. And such donations to Acorns would amount to many hundreds of thousands of dollars every year.
Like termites hidden from sight, that gnaw away at the structure of your savings, until you discover the effect when it is too late.
What is the solution?
This exercise is a great opportunity for young investors and those who battle to save to learn about the magic power of compounding and the tyranny of paying away small amounts in fees.
As a rule of thumb, investors should learn to keep their investment fees to less than 1 per cent a year, but aim for 0.2 per cent as savings grow.
To invest with Acorns, if you like the idea of its app for saving, then as a minimum, perhaps you should start with $200 and try to grow that to $1500 as soon as possible with round-ups. This way you can quickly get to keep your annual fees to less than 1 per cent a year.
Until then, a simple online savings bank account that pays interest with no fees would be a better option for saving your pennies. Even a piggy bank at home would be better for the first $200.
If you don't trust yourself with a piggy bank, then think of it this way. You are outsourcing your self-discipline to Acorns and initially donating more to them than they deliver in returns. A few dollars spent in fees now can be thousands of dollars lost through compounding decades from now.
An alternative to Acorns that would also teach you far better how to invest for the long-term is to invest directly into an ETF all by yourself. Once your savings reach $950, you can invest in exactly the same ETFs in which Acorns invests, without paying any additional annual fees whatsoever, and which should achieve better long-term returns.
You can sign up with a broker that charges $9.50, a 1 per cent one-off fee, to invest the $950. And then buy a mainstream index ETF, such as STW, VAS, SFY or ILC and reinvest the quarterly dividends at $0 cost, forever, by completing a one-page form. Rinse and repeat for every $950 you save.
If you want the highest probability of growing your savings then you just have to minimise fees and maximise growth.
Small amounts of fees, even $1.25 a month, can eat up massive chunks of savings. Like termites hidden from sight, that gnaw away at the structure of your savings, until you discover the effect when it is too late.
Gary Stone is the author of Blueprint to Wealth: Financial Freedom in 15 Minutes a Week and CEO of Share Wealth Systems.
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