on September 16, 2016 Trading & Investing Fintech Innovation

How Acorns 'invest your loose change' app works

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My 19 year old son has a beer can next to his bed into which he lobs his loose change. Last week he took it to the bank and excitedly told me it was nearly $100 (I refrained from telling him it could have been more, but makes for handy coffee money in the mornings). The point is, loose change can add up quickly.

My first reaction when reviewing Acorns was “wow I wish I had thought of that” – in other words, what a brilliant concept. In this cashless, card-waving society, a means to sweep the virtual loose change from bank accounts and credit cards into an electronic jar…but rather than just having it sit there, awaiting raids by the caffeine deprived, investing it. Watching it grow.

Not surprisingly, since its Australian launch in February more than 120,000 users have signed up, with over 50,000 active investors. The majority are tech-savvy Gen Y and Millennials, with 70% aged between 25 and 44.

The idea was conceived in the United States by a father and son team, and Australia is its first foray outside the US. Acorns Grow Australia Limited is a 50/50 joint venture between Acorns Grow Inc. of the US and Instreet Investment Limited.  

How Acorns works

It’s an app-based solution, a free download on both Apple and Android. It is simple to use (even for a non-millennial). It takes 5-10 minutes to set up, walking you through a number of screens to:

  • Set up the Acorns account
  • Answer a few personal questions
  • Fund the Acorns account – a minimum of $20 as a starting point
  • Set up your ‘round-up’ accounts
  • Select an investment portfolio
  • Get hooked!

Figure 1: The home screen

Acorns_app_home.png

The home screen provides an overview – the total value of your account, the most recent investment amount, dividend income or ‘found’ money and a snapshot of the past 30 days of investing.

The app is highly interactive – most charts are responsive and information can be accessed or views changed with the slide of a finger.

The most exciting thing about Acorns is the round-ups functionality. This is what Acorns calls micro investing – or, investing the loose change. Investors have $30 million invested – so far – and more than 80% use the app’s round-up facility.

When you register for an Acorns account, automatic round-ups is the default option; the app will monitor your spending and automatically invest your loose change by rounding up purchases made with a credit or debit card to the nearest dollar.

For example, your morning coffee and muffin costs $7.50 – the app rounds this to the next whole dollar ($8.00) and invests the 50 cents. It might not sound a lot, however as more people eschew cash for card, that loose change that once filled your pockets and countless jars around the country can become a tidy investment.

The monetary difference between the cost of the item and the nearest dollar is then invested into a portfolio of shares, in $5 amounts.

Figure 2: Round-ups

Acorns_round_ups.png

Acorns doesn’t just invest your loose change. You can set a recurring investment amount, or add to it periodically when you have the spare cash – and reap the benefits of dollar cost averaging. It’s a virtual piggy bank with the potential for capital growth.

According to Acorns, their analysis shows there are three types of users:

  1. Those using all three investment options – round-ups, lump sums and recurring investments – needless to say, they have the largest account balances
  2. Those using it as a savings tool – accumulating loose change, with the occasional investment, then withdrawing when it reaches the desired balance. These investors generally start again once they’ve spend the proceeds.
  3. The lump sum investor.

Investing

There are five portfolios available:

  • Conservative
  • Moderately conservative
  • Moderate
  • Moderately aggressive
  • Aggressive

Each portfolio is comprised of the same seven ASX-listed ETFs with different weightings appropriate to the portfolio; the conservative portfolio has a heavier allocation toward cash and bonds, the aggressive has an 80-85 per cent exposure to equities. The ETFs are traded at low cost through OpenMarkets Australia.

The portfolios screen is interactive – change your estimated monthly investment, or prospective time horizon, and the app will give you a projected value for those parameters – with, of course, a reminder that markets are not guaranteed and the requisite health warning that past performance is not a reliable indicator of future performance.

This is the screen that engaged my millennial – a regular investment over the next 10 years looked a much more attractive proposition than throwing his coins in a can!

Figure 3: portfolios screen

Acorns_portfolio.png

Portfolios can be changed at any time – exposure to the underlying ETFs will be adjusted accordingly. Users can drill down into the portfolio and see their exposure to each.

The cost

As with all good things, there is a cost, albeit a small one. While the app is free, portfolios under $5,000 are charged an annual fee of $15, and 0.275% for those over $5,000. There are no other costs – no brokerage, no fees to make deposits or withdrawals.

The only downside I encountered resulted from my internet banking being safeguarded by a security token – the app doesn’t allow for that, and, as a result, it can take longer for the account to be verified and established. This will vary from bank to bank.

In conclusion...

It’s easy to see why so many have signed up:

  • It’s easy to get started, there’s not a pile of paperwork to complete – all you need is a smartphone and five minutes of time
  • No prior investment knowledge is required
  • The low pricing – easy to enter and leave as required, it’s not a big decision to try it out.

The folk at Acorns are always looking for ways to improve the app. Acorns will shortly introduce a functionality that will enable investors to contribute to their super fund. It’s also developing personal finance monitoring tools and a loyalty program through partnership with a range of brands.

Acorns epitomises all that is exciting about the Fintech revolution. Vive la revolution!

Disclaimer: the author is now an avid user of Acorns.

Tracey Franks (OM blogger)

Tracey Franks is an experienced freelance writer, communicator and marketer. She has worked in financial services for over 20 years, for businesses spanning stockbroking, funds management, research and consulting, as well as financial planning. When not writing about finance-related topics, Tracey is working on her first novel.