I have been hearing a lot lately about Acorns. It’s a savings app which automatically rounds your card purchases up to the nearest dollar and invests that spare change into a diversified set of ETFs. It’s a fun concept and an interesting way to get early-stage investors accustomed to saving for retirement. And it’s nice that it’s a lightweight app so the barrier to entry is very low.
The problem is that Acorns cannot possibly help you save any useful amount. The system of rounding up is totally inadequate for retirement savings. And even more importantly, Acorns is extremely expensive.
You have to save more than pocket change
The lightweight appeal of Acorns is actually a big flaw in its philosophy. It feels too easy to use because it is too easy to use. Saving for retirement is kind of hard, because you actually have to save a lot. As a rule of thumb, early stage investors should be aiming to save 15% of their pre-tax income annually.
How much do you actually save with Acorns
To see how much I would have saved with Acorns, I checked my card purchase for last month and found 65 purchases. So if the prices of my purchases are distributed randomly, I will be saving an even mix ranging from $0.01 to $0.99 for each of the 65 purchases, so I will save:
$latex 65 \times \$0.50 = \$32.50$
per month. That’s not enough!! Young savers need to be attempting to max out their tax-advantaged investment options, so Acorns is mayyyybe helping you save ten percent of what you should be saving. And I’d say for most young professionals that are in their target market, you need to be saving 20 to 30 times what Acorns will help you save. It just doesn’t push you enough.
Is there a valid use case?
Maybe Acorns is for savers that are already saving the maximum in tax-advantaged 401ks and IRAs, and need a gateway into a taxable investing account for the rest. Are there that many people already saving $19,500 annually in a 401k that need to download a whole app just to raise their annual savings up to $19,900? And if so, you immediately run into my second problem with Acorns, which is pricing.
In your first year of saving with Acorns, Acorns itself takes away about half of your gains!
Acorns pricing is dramatically higher than traditional brokerage
The base level subscription, which allows only taxable accounts, costs $1.00 per month. You can upgrade to $3.00 per month if you want an account that can deposit into an IRA. Let’s go back to the example of my card spending to see what I would be paying for Acorns, and how it compares to a traditional brokerage account, or financial adviser professional.
When I use Acorns, I will save:
$latex \$32.50 \times 12 = \$390.00$
in my first year. At the end of the year, I will have $390.00 and will have paid Acorns $12.00. Let’s compare that to a typical financial adviser. Financial advisers charge 1% to 2% of assets under management (AUM) per year. So in financial adviser terms, Acorns charges an AUM fee of:
$latex \frac{\$12.00}{\$390.00} = 3.1\%$
Like many financial advisers, Acorns cleverly hides its expensiveness
A 3.1% fee still sounds pretty low. That’s how they get you. Consider why you’re investing. You’re hoping to get your money working for you. You’re hoping your savings earn a market-level pretax return of 7% to 10% per year. But in your first year of saving with Acorns, Acorns itself took away almost half of your gains!
If you look at their user base, the story gets worse
But most people have even less saved in Acorns. According to the Acorns wiki, in 2019 Acorns had over 4.5 million users and $1.2 billion in assets under management. So even if everyone is using the basic plan, their average AUM fee would be:
$latex \frac{ 4,500,000 \times \$12.00}{1,200,000,000} = 4.5\% $
I got into financial advising because I felt the whole industry was overcharging its users for advice that wasn’t very good. I definitely did not expect to find a new app that had a successful strategy of quadrupling standard pricing!
You can do better
You can improve upon Acorns by:
- Going to a traditional financial adviser
- Using a roboadviser like Wealthfront or Betterment
- Luther Wealth Managment!!
Traditional financial advisers charge around 1% to 2% of AUM per year, much lower than Acorns, particularly if you only have a small amount of taxable savings. It’s true that if you had a massive account balance, it’s possible that the AUM would start to look good, but massive account balances are definitely not Acorns’ target market from what I’ve seen.
Or, you could manage things yourself with a roboadviser that would charge 0.25% to 0.5% of AUM per year. This requires a bit more personal effort but the pricing is outstanding.
Best of all, you can give me a call! I offer real life (I am not a robot, I promise) financial advice, at roboadviser pricing.