Published March 22, 2017|14 min read
Updated August 31, 2020: We may not all be Warren Buffett, but most of us have smartphones. And that means that it’s never been easier to become an investor, no matter your experience level.
Whether you want to dip your foot into the stock market or just want to do something with your spare change, there is, as they say, an app for that. Robo-advisors like the Betterment or Wealthfront app are designed to help you make decisions with your money that you might have never understood on your own. They’re looking to replace the traditional (read: human) advisors with AI to automate investments and advice at a lower cost to investors. Spare change investment and online broker services like Acorns and Robinhood, on the other hand, aren’t meant to be a holistic solution for replacing traditional financial advisors altogether, but rather a novel way for less experienced investors to take control of investing their extra disposable income.
But being able to download an app, plug in your bank account information, and head off to the races can be dangerous. Should you even trust a company that’s only been around a few years with your money? (Note that they are SIPC-insured, so you can at least have some peace of mind.) If you don’t at least have an idea of what you’re getting yourself into, even the best robo-advisors might not be able to keep you from doing long-term damage to your finances.
We’re looking at three of the most popular new investment platforms powering our smartphones today: broad robo-investors like Betterment and Wealthfront, online investment brokers like Robinhood and Stash, and spare change investment platforms like Acorns.
Robo-investing: Betterment and Wealthfront
Online brokers: Robinhood and Stash
Spare change investing: Acorns
Should you be looking for big wins with stocks, or long-term stability with ETFs? Small wins with Stash or easy buying with Betterment? Who wins in the battle of Robinhood vs Acorns? Read on to find out.
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There are a few options out there when it comes to robo-investing, but in 2017 it really comes down to two names: Betterment and Wealthfront.
Robo-investing platforms – or robo-advisors – are automated investment tools that let you invest in exchange-traded funds, or ETFs. ETFs are just groups of stocks, commodities, or bonds, and they’re less risky than buying individual assets because the group works to balance itself out; if one stock tanks, it’s offset by other assets in the ETF.
The "robo" part comes from the AI aspects that run the investing. Old-school investing involves actively-managed portfolios, which are just that: actively managed by a human manager. With the help of software and algorithms, Betterment and Wealthfront are able to work faster and more efficiently than humans to make sure your portfolio remains balanced and working toward your goals.
If you want a fairly hands-off approach to investing but with room to grow as you become savvier with your money, robo-advisors are a great start.
People with mild risk toleranceAny sort of investing is inherently risky, and investing with a robo-advisor is no different. However, there are protections in place that help mitigate that risk.
First, when you begin investing with Betterment or Wealthfront, you’ll talk about your risk tolerance. Your portfolio will be adjusted based on that tolerance: if you’re open to a lot of risk with the goal of maximizing your returns, you’ll have different investments than if you want to be more conservative.
These platforms also abide by Modern Portfolio Theory, which basically means they take risk tolerance into account to diversify your investments. That way you’re meeting your financial goals in a way you’re comfortable with.
People who want more robust investment optionsBetterment and Wealthfront take a holistic approach to your finances, allowing you to set up an IRA (Traditional, Roth, SEP, or rollover) or a trust. Wealthfront even offers 529 plan options to save for future college costs. They also offer advanced features like tax-loss harvesting and rebalancing, ensuring that you pay low taxes on your investment and they automatically adjust to changing marketplaces for improved returns.
Other apps are more limited. Robinhood lets you trade stocks, Acorns invests your spare change, but robust robo-investing platforms like Betterment and Wealthfront want to take the place of the traditional platforms of the world in providing comprehensive money management. They don't want the conversation to be Acorns vs Betterment - they want it to be Wealthfront vs Vanguard. If you’re serious about beginning to invest robo-advisors might be right for you.
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Robo-investing platforms are great for beginning investors who want a more robust offering at a lower cost than they might get elsewhere. But there are a few things that you need to keep in mind.
You won’t get the same tailored adviceYou may be happy trading in your human advisor for a robo-advisor, but as smart as these systems are, they don’t have the same capacity to help as a flesh-and-blood advisor.
Betterment and Wealthfront do a pretty good job at picking investments that are right for you, but it’s based primarily on your risk tolerance. A real financial advisor can make sure you’re investing in a way that also works with where you’re at in your life. They can give tailored advice that an AI can’t right now. Robo-investing customer support is not the same as being able to ask an advisor a question about your specific situation.
FeesRobo-advisor platforms offer lower fees than traditional actively-managed accounts, but you still need to watch out because they vary based on your investments.
For example, here are Wealthfront’s fees:
$0 – $9,999: No fee
$10,000+: 0.25%/year for any amount over $10,000
To clarify – if you have $25,000, you’re only charged the fee on $15,000. The first $10,000 is still free of charge.Betterment’s fees are based on the plan level:
Betterment Digital: 0.25%/year, no minimum balance
Betterment Premium: 0.40%/year, $100,000 minimum balance
Betterment also waives all fees for account balances over $2,000,000, and (for accounts opened with at least $10,000) will waive management fees for up to a year depending on the amount of money deposited within 45 days of opening the account.
How does this stack up? If you have an actively-managed fund with $100,000, you’ll be charged something like a 1% fee. That’s $1,000 just to maintain that fund. A Betterment account with the same amount of money is $260 – a much better deal, assuming equal rates of return.
But if there’s a chance that an actively-managed fund can outperform a robo-advisor account, even by about half a percent, that extra fee is worth it. A human advisor might do this by making decisions outside the capabilities of a robo-advisor, like picking up some winning individual stocks to go along with your ETFs.
Warren Buffett advises investors to choose a low-cost index fund that mirrors the S&P; 500, because an actively-managed fund, on average, won’t do better than that. He even famously put a million-dollar bet on that, and so far he’s been right. But there’s still plenty of debate on both sides, and it’s something to take into account when you’re deciding who you want managing your money.
When you think "buying stocks," do you think of a mob of white middle-aged men screaming over each other on the floor of the stock market as numbers whiz by on screens?
You’re not totally off, but apps like Robinhood and Stash want to simplify the process a little bit. And by a little bit, I mean reducing it to a few taps on your phone.
Robinhood and Stash let you buy, sell, and trade stocks and ETFs. "ETFs? The same ETFs that I can get through Betterment and Wealthfront?" you ask. Yes! But, in the case of Robinhood investing, the option to buy individual stocks is a real gamechanger. It makes stock trading accessible to people who would normally shy away from it (in this context, we’re talking mainly #millennials), but the lack of options like a Robinhood Roth IRA or 529 account means that, on their own, Robinhood and Stash aren’t viable options for a full-on investment plan.
The Stash app doesn’t yet offer individual stock purchases, but its approach to ETFs is unique: it groups assets by type, like "The Activist" for renewable energy and "The Techie" for investment in Facebook and Apple. The idea is to allow you to invest in your interests and make it clear what the ETF is comprised of. It’s a little more straightforward than "Emerging Marketing Small-Cap fund." We talk more about the different investing options in our Stash review.
The real difference in the Stash vs. Robinhood battle is individual stocks, but they can still play a similar role in your investing plan.
Ever dreamed of playing stockbroker, with all the risks and rewards involved? Now you can.
People with a higher risk toleranceStocks are risky. There are no two ways around it. Where ETFs balance out your risk with a combination of assets, if you bought stock in Twitter when it went public...well, that’s an investment you have to live with (or sell) without Facebook stock to counterbalance the loss. If you’re buying individual stocks with Robinhood, you probably have a higher tolerance for risk, and if you’ve only ever stayed away from the stock market because of confusion, the simplification that Robinhood provides could be the kickstart you need. You also have a better chance at a big return.
Stash is a little safer by virtue of only offering ETFs, but that’s somewhat offset by the specificity of the funds.. You may not know off the bat what’s in the Vanguard Wellington fund, but it’s probably a little more diversified than Stash’s Globetrotter fund. Tailoring funds around themes allows you to steer your investments in more specific directions, which is always a little more risky, but potentially more rewarding. And that might be exactly what you’re looking for.
People who want a little more controlRobinhood and Stash give you more control over where your money is going than robo-advisors like Betterment and Wealthfront do.
Robinhood allows you to pick up shares of newly-public Snap Inc, while Stash’s Trendsetter fund has a whole host companies you probably want to support if you’re a techie (and it may be more easy to understand than, say, the USAA Science and Technology fund). Robo-advisors can’t do that.
These online brokers walk the fine line of streamlining the investment process while still allowing you to feel like you’re making real choices with your money rather than relying on autopilot, like you might with robo-advisor platforms like Betterment or Wealthfront.
The benefits of Robinhood and Stash come with their own sets of downsides that you’ll have to consider before you choose either of them over a different investment method.
Investing in the unknownWe’ve already talked about the inherent risk of stocks, but there’s also risk in not fully understanding what you’re investing in.
Robo-advisors are meant to basically hold your hand through the investment process. Stash and Robinhood investments don’t give you that same safety net. They may provide recommendations as to what you should do, but you’re in charge. The behind-the-scenes work that Betterment and Wealthfront do, like tax-loss harvesting and rebalancing, aren’t available here. Should you be buying individual shares of a particular stock or focusing on a very narrow field for your ETF? That’s probably something you’ll have to research on your own before going through the buying process.
FeesAs with Betterment and Wealthfront, the fees for Robinhood and Stash can be simple – if you know what to expect.
Robinhood is free for buying stocks, but there are a host of fees and commissions depending on what exactly you’re looking to do. Robinhood recently introduced Robinhood Gold, which includes exclusive features like extended trading hours; this comes with a monthly fee starting at $6, which means you’ll have to pony up extra money if you want the full suite of features.
Stash, on the other hand, has a split fee structure, similar to Betterment and Wealthfront. You pay $1 a month on accounts under $5,000, and 0.25% per year on accounts over $5,000.
If you know anything about spare change investment, it’s probably Acorns. Other services, like Digit and Qapital, help automate savings, and big banks like Bank of America have their "Keep the Change" program, but Acorns was built specifically to round up your credit card purchases, investing cents upon cents in ETFs.
Investing cents at a time? Can that possibly work? If you’re just starting out and are being extremely cautious, Acorns might be a helpful tool.
Beginning investors with low risk toleranceIf you think rounding up to the nearest dollar doesn’t sound like a lot of money, you’re right. And that’s what can make Acorns so attractive to some people.
If you have no idea where to start with investing, Acorns is a logical first step. You shop like normal, and Acorns invests in the background. It’s the most hands-off approach you could take, and even if it isn’t where you want to be right now when it comes to investing it’s better than nothing.
The small transactions also make it appealing. Maybe you don’t have $50 or $100 to invest every month. Dealing with 25, 40, 90 cents at a time can make investing a little more manageable. You’re not scaling a mountain, but you’re at least strolling up a gradual slope.
Plus, one of the most powerful tools you have when it comes to investing is time. You may not be investing much, but it will add up over time. As you add more consistent, small amounts of money, compound interest will help your balance grow, getting you started now and giving you time to build your portfolio even if you don’t have the funds to commit to larger investments right now.
Spare change investing apps like Acorns might have the lowest stakes, but a couple of red flags can trip you up in the long run.
Relying only on spare changeAny kind of saving is good, especially since most Americans can’t cover basic emergencies. But it’s our lack of savings prowess that makes spare change investing a poor choice for your primary savings.
There are a lot of things you need to save up for: retirement, college, a house. Spare change is a good start, but it won’t get you there – at least not in a reasonable time frame. At best, investing your spare change is a supplemental tool that should go alongside larger investments, like an IRA or one of the other platforms we’ve mentioned.
There’s also the argument that spare change apps like Acorn don’t help you learn how to save money. It automates everything for you, and in such small amounts, that it isn’t helping you build financial literacy. The "set it and forget it" approach is fine for small amounts – maybe you’ll save a few hundred which, if you need that help, is great – but it’s hard to see the value, financial or otherwise, in the long term.
FeesYou’re seeing the recurring theme here, right? We’re back to fees.
Acorns fees have the same problem as other platforms – you should actually know the fees you’re paying – but it comes with an additional issue. You’re investing such little money with spare change investment apps that the fees add up quickly.
Acorns charges fees of $1 a month for accounts up to $5,000, and 0.25% annually after that. Not a lot, right? But if you’re averaging 50 credit card transactions a month and saving an average of 50 cents per transaction, that’s $25 a month. A $1-per-month fee is really a 4% fee. That obviously becomes a smaller piece of the pie as you save more. But you still have to hit $5,000 – cents at a time – before you see a comparable rate to other platforms.
We break down the dangers of fees in our Acorns app review, but you get the picture: when you’re working with such small amounts of money, you need to be extra vigilant about your fees.
There’s no shortage of investment options out there, and you don’t have to be an expert in financial markets or technology to make use of any of them. At the end of the day, Acorns vs Betterment only matters as long as you choose the one that works for your comfort level and your financial goals. Know what each platform does, know what fees are involved, and play around with the apps before you commit any money to them.
If there’s one thing these apps have in common, it’s that they show investing doesn’t have to be rocket science. It just requires a little common sense.
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