by Erin Lowry
At this point, you should be wondering how Robinhood makes money. According to its website,1 it does charge $6 per month for members who opt into Robinhood Gold. The company also earns revenue by collecting interest on the cash and securities held in Robinhood accounts.
Stash
Stash is a good fit for a beginner who wants to be a little more hands-on about picking investments or has specific preferences on the type of companies he or she invests in. Of Stash’s customers, 86 percent are first-time or beginner investors, according to Brandon Krieg, CEO and cofounder.
What It Offers
“We started with education and rolled out investing in a taxable account, and then we rolled out retire, and then we rolled out custodial, and now we[’ve] announced we’re building banking services,” says Krieg. “We’re really just trying to holistically give advice and education to better the lives of our customers.”
Investments: You can build your own portfolio by selecting ETFs and/or stocks aligned with your goals. Stash does offer a coach to help with your selection if you need. There is also a gamification aspect in which you earn points, which are kind of like gold stars, for achieving certain steps, like making a deposit, setting up Auto-Stash (automatic deposits into your investments), and then for selecting certain stocks, bonds, and ETFs that align with creating a diversified portfolio.
Stash Retire: You can invest in a traditional or Roth IRA for a minimum of $5. The requirements are the same as investing in an IRA through a brokerage, as specified by IRS income restrictions and contribution limits.
StashLearn: Stash’s education component is free to all on the app’s website. You can find articles on topics varying from basic personal finance to more technical investing advice.
Banking: Stash also moved into the banking business with Stash Checking, a checking account powered by Green Dot.
Custodial: Custodial accounts allow parents to open investing accounts for children under the age of eighteen.
Available Investments
Stash offers access to more than one hundred investments, including ETFs and individual stocks. ETFs have been categorized with “Stash-ified” names to make it easier for you to understand what you’d be investing in. For example, “Social Media Mania” provides holdings in social media companies. Stash also offers information about the fund manager and the risk tolerance. For example, the “Blue Chip” fund is made up of some of the biggest companies in the United States (e.g., Apple, Facebook, Microsoft); it’s a conservative fund that’s managed by Vanguard. You can also invest in fractional shares of individual stocks. (Fractional shares are explained in chapter 7.)
Costs
$1 per month with no commission on accounts under $5,000 for Stash Invest and $2 per month for Stash Retire.
0.25 percent per year of the portfolio for accounts of $5,000 or more. (Example: a $10,000 account would be charged $25 annually.)
Stockpile
Similar to Robinhood, Stockpile is for investors who want to add individual stocks to their portfolio or to gift stocks to others.
What It Offers
Investments: You can purchase or gift (with gift cards) fractional stocks and you can also purchase ETFs. You can also set up a recurring deposit into your investments to buy more shares and reinvest dividends when applicable.
Custodial accounts: Parents can gift their kids fractional shares in their favorite companies.
Available Investments
There are more than 1,000 stocks and ETFs in which you can invest, but the entire market is not at your disposal. If there’s a small, niche company in which you want to invest, then you may need to go through a larger brokerage.
Cost
It costs $0.99 to buy a stock and the same price to sell if you purchased it with cash from your account. There is a 3 percent fee if you use a credit or debit card.
No monthly fees or minimums.
Purchasing a gift card is more expensive because you’re covering the trading commission and fees for the recipient: $2.99 for the first stock + $0.99 for each additional stock + 3 percent for credit or debit card fees (so the recipient doesn’t have to pay anything when redeeming the gift card).
AN IMPORTANT POINT ABOUT COST
It’s really easy to look at a fee like $1 per month and think, “Pshh, that’s nothing!” In the scheme of what $1 can normally buy you, yeah, it sounds like a great value. However, you still need to consider how fees can eat away at your returns. If you’re only investing a tiny bit of money each month, then $1 can represent a significant portion of your portfolio and diminish or completely negate your actual returns.
For example, if you only invest $5 per month, that’s $60 per year before any compound interest. Even if an 8 percent return is compounded monthly, you would at best add about $2 to your investments. The $12 (i.e., $1 per month) you paid in fees just ate away all your returns. Now, if you put something like $25 into your account per month, you’re going to come out ahead. It doesn’t take a huge chunk of change to reap the rewards, but it needs to be more than just a few bucks a month. Krieg noted that the average person using Auto-Stash puts away $25 a week. That’s $100 a month!
There may not be additional trading fees or commissions, but you’ll still have to pay an expense ratio* on any fund in your portfolio. Your app doesn’t usually cover that cost for you. It’s often already reflected in the price you see when you make the purchase, but it’s important for you to know that you are still paying an expense ratio. Using an app to invest isn’t a way to bypass an expense ratio on an ETF.
COMMON MISCONCEPTIONS ABOUT MICRO-INVESTING
As with any relatively new technology, there are always going to be misconceptions about capabilities. Acorns, for instance, was launched in August 2014, and Stash was founded about six months later, in February 2015. Barrett of Acorns and Stash’s Krieg hope to correct some of the misinformation.
Addressing the claim that Acorns is “a starter app,” Barrett concedes that “it’s a very simple interface, but the machinery behind it is quite complex. So, we have five portfolios to keep it simple, but we invest across seven exchange-traded funds that have more than seven thousand stocks and bonds. And we’re always recalibrating based on market movements. It’s based on modern portfolio theory; it’s actually pretty complex. I’ve been investing for a while now, and [I] invest in a lot of different things, and I have a good chunk of change in Acorns because it’s just a smart portfolio, and it’s fractional investing. You’re spreading the risk. We’re not the only app that does fractional investing, and we’re not the only one that rebalances your portfolio or reinvests your dividends, but I think the combination of those three things and the roundups and making it so effortless to continue to put a little more in each month is an unusual combination.”
“I hear people say, ‘Well, if you don’t have a lot of money, you shouldn’t be investing,’” says Stash’s Krieg. “That’s fine for wealthy people to think, but it’s not true. If you consistently make a habit of saving and investing and you do it on a regular basis, over the long run, it works. There are so many people missing out on an opportunity by not doing it. Small amounts of money do add up, and some people just don’t see it. They think you have to be rich to start. The other thing I think about a lot is the data on how the Millennial generation is missing out on such a huge opportunity because they’re afraid of the stock market and afraid of investing. There’s a lot of data on how many millions of dollars they’ll be missing out on in retirement by not saving. You can start when you’re really young.”
JUST BECAUSE YOU CAN, DOES THAT MEAN YOU SHOULD?
We rely on apps for a lot these days. Much of our lives has been streamlined with the use of technology. Everything from transportation to ordering food to documenting our thoughts is all d
one via our smartphones. But should such a critical piece of your financial life be something you’re doing with the touch of a button?
“I think it’s dope,” says Ashley Fox, financial education specialist and founder of Empify. “People are coming up with a million unique ways to get people to invest, but they’re using the emotional way. Let’s consider the 401(k). People don’t think about the 401(k) because they never [see] the money. They’re still investing, but because they didn’t see the money first, they don’t feel like someone is taking it from them. [Apps] are dope because it unconsciously allows people to build wealth gradually.
“I talked to someone the other day, and he said, ‘I only have a couple dollars, I can’t invest because it won’t make a difference.’ I said, ‘Okay, if I [gave] you a dollar a week, for the next twenty years, would you take it?’ and they say, ‘Yeah!’ I ask why. He said, ‘Because it’s money, and over time, I’ll have a lot of money.’ I said, ‘Okay, but you just told me a dollar was pointless, so now you’re telling me a dollar actually matters to you.’
“We have to remove the ‘Oh, this is only a little bit or it’s not enough.’ Because it’s not as simple as ‘Hey, you need to invest, go do it.’ Sometimes we need to do these emotional things that trick us into unconsciously building wealth, and I think that’s a great way to do it.”
Jill Schlesinger would prefer you to consider investing as just a part of life, like health—and we gamify health with tools like step trackers. “Anything that gets you going, do it! Anything,” she says.
Schlesinger does point out that you need to do more than just opting in to options like rounding up, but acknowledges it can be a helpful first step.
LITTLE BITS HELP, BUT YOU NEED TO DO MORE
I engage in a really quirky savings strategy: I save $5 bills. Each time I pay for an item in cash and get a $5 bill with my change, I go home and put that bill in a jar. It’s a silly savings strategy I read about once and decided to try. Within a year, I’d saved about $1,000 I probably wouldn’t have had otherwise. Now, this isn’t my main means of saving, of course. It’s just an additional challenge I use to level up my savings goal. All the $5 bills I saved went right into my honeymoon fund.
Just putting a few dollars into a micro-investing app is the same thing as my $5-bill-saving gimmick. It’s a nice addition, but not enough to be your core strategy.
Getting started is important, but eventually you also must put in the effort to level up, which isn’t hard to do with these apps. You could be building genuine wealth using a micro-investing app because most of these apps make it possible for you to do so right in the app with automatic contributions, but you have to take the initiative. Investing your spare change alone or putting aside five to ten dollars a month alone is not going to accomplish your wealth goals.
Now, if an app is something you’re using for that little bit of extra edge, in addition to contributing to your 401(k) and putting automatic contributions into a taxable account at a brokerage—then, by all means, you do you. But if you’re using an investing app as your main means of building your portfolio, then it’s on you to contribute more than a few dollars a week, especially as your financial health gets stronger and stronger. Just like how you’d need to proactively contribute each week or month to a regular brokerage or robo-advisor account.
CHECKLIST FOR MICRO-INVESTING
☐ Research the different app options available and decide which one is the right fit for both your style and your current investing needs.
☐ Take advantage of all the education platforms and tools available to you within the app.
☐ Do the math on costs. If you’re only investing minute amounts of money, then you’ll see even a small fee of $1 can quickly eat away at your returns.
☐ Don’t just rely on gimmicks and gamifications within the apps. Set up recurring deposits to make sure you’re actually starting to build wealth.
☐ Password-protect your smartphone and the app! You have sensitive personal and financial information on your smartphone. Make it at least a little bit more difficult for others to gain access by password-protecting both your phone and the app (using fingerprint identification or whatever new technology allows you to level up protection).
Chapter 9
Robo-Advisor or Human Advisor—Which Is Better?
A BATTLE IS BREWING in the investing industry, and it all centers around the answer to a key question: which is better, a robo-advisor or a human advisor?
The answer: it depends.
“It depends” is the infuriating but correct way to look at most things on your financial journey. There are so many factors at play, and each person must be evaluated according to his or her individual needs. A robo-advisor could be a perfect fit for you, but I might need a long-term relationship with a human advisor.
To be honest, I was highly skeptical of robo-advisors when they first started to gain traction. I admittedly have a dash of Luddite in me, but something just felt so off about the idea of being able to automate every aspect of a person’s investing life. I had no faith that an algorithm could be taught the nuance necessary to build a person’s portfolio for medium- and long-term financial goals. I feared it would just spit out the same answer for most people. But I was also giving many human advisors far too much credit, since some of them don’t spend quality time with each individual client.
Besides, the anti-robo-investor mentality feels rooted in the archaic idea that investing is really complicated and that only super-smart Wall Street bros can understand what’s going on. Blech.
I have no shame in admitting that I grossly misjudged robo-advisors, and they’ve significantly evolved in the last decade to better provide the nuance needed. In this chapter we’ll figure out if a robo-advisor is a good fit for your investing journey.
Before we get started, here’s the first thing you need to understand: a robo-advisor isn’t just some algorithm making your investing decisions while you live your life. People are involved the entire way. And in some cases, you can even add in a human financial advisor when you have questions or after major life events unfold. It’s not entirely dissimilar to using a discount brokerage firm where you can move from being a DIY investor to working with a professional. The underlying technology and the level of micromanaging on your end (think rebalancing and tax-loss harvesting) will be less with a robo-advisor than DIY-ing at a discount brokerage.
WHAT IS A ROBO-ADVISOR?
“The easiest way to get started,” jokes Dave Nugent, head of investments for Wealthsimple. “A robo-advisor simplifies the way in which people save and invest for their futures and typically provides clean and easy experiences that help clients understand what they own and why they own it. It also allows anyone to automate a lot of the operational and administrative tasks that cost a lot of money in the traditional world.”
“The term robo-advisor started meaning technology could manage your portfolio,” says Alex Benke, CFP®, vice president of financial advice and planning for Betterment. “There are many people that misunderstand how the technology is being used. For example, we see the market will go down, and their account goes down, and they ask, ‘How come your algorithms aren’t dealing with this?’ We don’t have any algorithms that deal with that aside from tax-loss harvesting and things; there’s no market-timing algorithm that’s in there trying to make sure you don’t lose money. I think terms like robo-advisor imply to uninformed people that there is some kind of bot doing things like that.” He continues to explain that robo-advisors are actually “taking super-boring investing principles and enabling us to do that at scale with technology.”
“Robo-advisor is a very generic term for all types of models,” he adds. “There’s [building a] portfolio, there’s adding financial planning on top of that. There’s the fact you can also get an actual advisor. We’re one of a whole bunch of other firms that have
all kinds of capabilities in terms of sophistication of financial planning. Some just have a calculator and some have very personalized financial planning advice. We all rebalance differently. We do tax-loss harvesting differently. Some have dedicated planners, and some have teams of planners.”
IS ROBO-ADVISOR EVEN THE BEST TERM?
For simplicity’s sake, I’ll continue to use the word robo-advisor throughout this chapter. It’s currently a widely used term, so I’m not going to fight against the vernacular you’re used to hearing. However, Benke raised a fair point during our interview that the term robo-advisor gives investors a false impression of what many of the platforms do.
“I think the term is too narrow,” says Benke. “People think of Betterment as a robo-advisor, and yet we have an offering that involves people [financial advisors] too. Of course, there are lots of people behind the [robo] offering as well. We think online financial advisor is a little more correct. Because it implies use of technology, but it doesn’t pigeonhole in terms of how you’re getting that advice. The same person who wants to do it themselves without an advisor initially should be able to change their mind at different phases in their life.”
WHAT EXACTLY WOULD I BE SIGNING UP FOR?
Each robo-advisor is different in both offerings and pricing models. Many robo-advisors handle IRAs and 401(k)s, so even if you’re only investing for retirement right now and not ready to put money into taxable accounts, you still could use a robo-advisor.