Fall is officially upon us and the squirrels are fully invested in rounding up acorns for their winter food cache. This practice is similar to the highly advertised round-up feature used on the investing platform, Acorns. You can link all of your cards to your Acorns account, and whenever you make a purchase, they’ll round it up to the nearest dollar and invest the extra change. It’s a super-easy way to ensure money is constantly flowing into your investment accounts.
To make investing with Acorns even simpler, they use a monthly subscription model in lieu of complicated expense ratios, so you never have to guess what you’ll end up spending in fees.
These features make Acorns seem like a simple and hassle-free way to invest in the stock market, but when deciding which brokerage firm to invest with, you should pick the one that will make you the most money. So does Acorns’ subscription model really work in your favor?
Is Acorns’ Subscription Fee Worth It?
Acorns offers two subscription plans. The Personal Plan for a monthly subscription fee of $3, and the Family Plan for $5 per month. Both plans offer investment options in brokerage accounts and retirement accounts, a checking account, and investing education. The Family Plan also offers an option to invest in an account for your kids and gives you access to exclusive offers.
For our analysis, we’re going to focus on the investing portion of the Personal Plan. Since typical checking accounts don’t charge subscription fees, opening an Acorns account for their checking account is, well, really dumb. So let’s take a look at their investing options.
Acorns’ round-up feature is incredibly alluring for new investors. It easily and mindlessly helps you keep upping your investment portfolio, but from a fee perspective, it isn’t great for newbies. Sure, a $3 a month fee doesn’t sound like a lot, but when compared to the expense ratios of the ETFs Acorns invests in, it’s incredibly high unless you have a lot of money invested.
For comparison, robo-advisors typically charge an expense ratio of around .5% to manage your portfolio, so choosing funds with an expense ratio at or below .5% is ideal. Your expense ratio is an annual management fee that charges you as a percentage of the money you have invested. So to compare an annual expense ratio of .5%, we need to annualize Acorns’ subscription model to a total annual fee of $36. To get the same bang for your buck as a .5% expense ratio when spending $36/year with Acorns, you need to have $7,200 invested.
To figure out how long it would take someone to reach $7,200 of investments, I analyzed my monthly spending to determine how much the round-up feature would invest for me each month. I took the average of what my extra change would amount to over the last 6 months and came up with an average of $21.23 invested each month. At that amount, it would take me 340 months, or a little over 28 years, to contribute $7,200. Obviously, this doesn’t take into account any investment growth, but that’s still an incredibly long time to be paying excessive fees.
To make matters worse, many of the funds that Acorns invests in have expense ratios well under .5%. Their preferred stock ETF is Vanguard’s S&P 500 ETF, VOO. This fund has an expense ratio of, wait for it, .03%! To justify the $3/month fee Acorns charges vs investing directly in the VOO ETF, you would need to have $120,000 invested through Acorns.
So it’s safe to say that most young or beginner investors should skip investing through Acorns. Their subscription fee is astronomical when compared to the fees you would pay if you directly invested in the same funds they do. And if you want to do that, Acorns breaks down all of their portfolio structures on their website. You can build the exact same portfolios they offer you at a cheaper price. But here’s why you probably shouldn’t do that.
Are Acorns’ Portfolios Good?
Most of my readers, and probably Acorns’ users although I don’t actually have numbers on that, are millennials or gen z. That means we have 30ish years, give or take, until we reach retirement. If you’re going to be invested for the next 30 years or so, you can handle taking on a lot of risk in your portfolio, so chances are you’d land in one of Acorns’ Moderate to Aggressive portfolios.
While young people can and probably should have riskier portfolios while they’re building wealth, they should also incorporate some less risky assets, like bonds, into their asset mix. Acorns’ aggressive portfolio doesn’t do that. At all. It invests your money solely in the stock market.
So if their aggressive portfolio is too risky, why not just bump it down to their moderately aggressive portfolio? Because that one invests a whopping 20% of your money into bonds. For most 30ish (give or take 5-10 years) year olds, around a 10% bond allocation is plenty. Doubling your bond allocation to 20% will substantially reduce the risk of your portfolio and your wealth-building potential. The moderate portfolio bumps this percentage up to 30%, which is even more conservative.
So while you can build the exact same portfolios Acorns offers at a much cheaper price, you probably don’t want to. That’s because they’re either too risky or not risky enough for most millennial and gen z investors. If you want to transfer your balance from Acorns to another brokerage firm after reading this, I don’t blame you, but you’re going to incur some additional fees.
Watch Out for Acorns’ Transfer Fees
After going through Acorns’ Program Agreement (yes, the fine print none of us read) I uncovered a few more fees that aren’t clearly stated on Acorns’ website.
If you decide to transfer your Acorns investments to another brokerage, which you may now be considering after reading the last two sections of this post, you’re going to get charged a $50 transfer fee per ETF. Here is a breakdown of the total transfer fees by portfolio type.
- 4 ETFs – $200 transfer charge
- Moderately Aggressive
- 6 ETFs – $300 transfer charge
- 6 ETFs – $300 transfer charge
- Moderately Conservative
- 5 ETFs – $250 transfer charge
- 5 ETFs – $250 transfer charge
Acorns also now offers ESG funds. These are funds that exclude companies that aren’t up to many people’s environmental, social, or governance standards. But most of their ESG portfolios contain 10 ETFs, which means you’ll be paying even more in transfer fees if you invest in those and ever decide to move your money.
To try and avoid these fees, you could sell your investments and then take your cash and reinvest it with another brokerage. If you decide to do that, make sure to check with an accountant on the tax implications first. You can also call your new brokerage and see if they will cover the transfer fee for you.
On top of that, if you want to roll over money from other retirement accounts into your Acorns account to help justify your fee, you’re going to be charged a $25 rollover fee for every incoming balance transfer. Then if you decide later to roll that money out, you’ll be charged the transfer fees listed above.
On another note, after you reach $1,000,000 in your Acorns account(s) your fee structure will change to be .01% of assets under management rounded down to the nearest million dollars, which is quite a good deal, but it’ll take you several lifetimes to get there using the round-up feature.
So if you’re still looking at choosing Acorns as your brokerage firm after reading this post, I honestly can’t understand why. Their subscription model is too expensive unless you have a lot of money invested, their portfolio structures aren’t ideal for most millennial and gen z investors, and they make it hard to break off your relationship with them by charging exorbitantly high transfer fees. So after my thorough analysis, I say leave the acorns to the squirrels this fall. They’re not good for humans.