Around the Brokerage Industry: Acorns

by on Feb 23, 2015

acornsAcorns is an innovative investment app that allows users to invest their spare change in a diversified portfolio. There is currently no web-based platform (though a website with background and help information is provided) and all investments are made solely through the free smartphone app, which is available for iOS 7 and 8, and on any Android device running 4.1 and higher. After connecting a debit card or credit card and checking account and completing a questionnaire, Acorns automatically recommends a stock portfolio that takes into account users’ age, time horizon, investment goals and risk tolerance. There are currently no account minimums or commissions associated with the app, though any account balance under $5,000 incurs a monthly fee of $1.00, and account balances over $5,000 incur a 0.25% yearly fee.

How it Works

After downloading the app, clients create a username, password and PIN, and then enter their online banking credentials. Clients are then prompted to enter their contact information, and are subsequently asked to fill out a questionnaire about employment, wealth planning and income. Using clients’ spending habits and goals, the app presents a recommended portfolio composed of six index ETFs. Unlike other non-traditional investment firms (such as LOYAL3), which offer only one type of security, Acorns offers portfolios diversified across multiple asset classes (e.g., large or small company stocks, emerging market or real estate stocks, and government or corporate bonds, etc.). The firm emphasizes its usage of Modern Portfolio Theory to construct its recommendations, with the goal of improving return on risk.

 

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 Bank Account Selection       Portfolio Recommendation

Clients can adjust the portfolio to their liking at any time (more or less aggressive) instead of accepting the firm’s recommendation. There are three main ways to fund or withdraw from an account once a desired portfolio is selected. First, users can add or withdraw money in lump sums. Second, they can set up automatic investments by recurring deposits applied on a daily, weekly or monthly basis. The final method of funding, and the means by which the firm establishes its unique business model, is known as “round-ups.”

The “round-up” funding method requires users to link a checking account to the app and then choose to manually or automatically round up the virtual change from every transaction made. For example, if users spend $4.64 on a cup of coffee, $0.36 will be considered the “round-up” and can be invested at their discretion once the $5.00 lump sum minimum is met. Every time funds are withdrawn or deposited, portfolios are automatically rebalanced to adjust the proportions of ETFs purchased.

Round_up_Screen_Instructions_Acorns_Website

“Round-Up” Screen Instructions – Acorns Website

Emphasis on Security

Due to the obvious security concerns that accompany sharing bank account information on a mobile app, both the Acorns website and app provide a wealth of content about the measures it takes to keep its clients’ information safe. Specifically, it insures every account up to $500,000 for fraud, secures its website and app with 256-bit encryption, contacts clients about any unusual account activity and provides multi-factor authentication. Owing to the frequent security breaches that have occurred at both banks and brokerage firms over the past year, placing an emphasis on security is a smart move.

An effective method?

While micro-investing firms and apps are not a new concept, Acorns’ “round-up” methodology represents a unique and amusing way to view the investing potential in everyday transactions. Furthermore, the low-cost and automatic portfolio rebalancing features allow it to tap into an increasingly popular discount brokerage market. While the app would most likely not interest high net-worth investors, the “under-invested” will no doubt find it in line with their wealth planning and practical needs, as it is as easy to set up an account as it is to fund it. Investing becomes much less intimidating when it is thought of as simply putting spare change to good use.