The robo-advisor juggernaut is evolving.
The “original” robo-advisor is an asset management platform (usually a website) that allows users to invest money very simply and intuitively – so much so, that it requires no help from an advisor. These sites were initially attractive to young people, or “digital natives” – those who have grown up with technology. But the audience has become much broader, as more people become comfortable with online trading platforms and crave excellent user interfaces.
The micro-robos have evolved the concept a step further. They’re mobile – focused on the smartphone – and have endeavored to make the process even simpler still. They have also expanded the concept from not just how you should invest your money, but also in encouraging you to put money away in the first place.
The new micro-robos are squarely aimed at digital natives. Missy Pohlig recently identified a new millennial financial segment – those going through the recovery phase of the investor life cycle – young people under so much debt that they are not thinking of investing; they are solely focused on getting their head above financial water. This is the group that the micro-robos will appeal to, as they try to extract every cent from their financial transactions.
Allow me to describe some of the new micro-robos.
Stash is an app that lets you invest in ETFs. You can start for as little as $5 – that’s how micro this robo is! Stash is a true robo. The idea is that you identify an amount of money, which can be small, and then invest it in a straightforward investment model. They are able to do this by allowing you to buy fractional shares. They also (strongly) encourage you to commit to recurring saving. They make money by charging you $1/month for balances under $5,000. This then changes to 25BPs for amounts over $5,000. At this stage, they are at the more expensive side of a pure robo-advisor model.
An interesting aspect of this app (which is common to other micro-robos) is that when you link to your bank account for the deposit, instead of asking for the bank routing code and account number, the app asks for your bank username and password. The intent is clear – this is information that investors will know off of the top of their head, rather than having to look for something “non-millennial,” like a checkbook.
Even as I write this blog post, I see an alert that Stash has just closed its Series A investment round and now have $9.3M in venture capital funding. Clearly, Silicon Valley thinks that this is the next generation of robos, too!
Acorns’ model is this: you have a lot of small financial transactions in your life that have moved online. You round up the amount to a whole number (in dollars) and put the difference into a holding account. When the holding account amount reaches $5, the amount is invested in an ETF model. Once again, the way that Acorns makes money is to charge $1/month, and like Stash, once you cross the $5,000 threshold, you pay 25BPs, instead of a monthly charge.
Acorns has recently added a service where, if you have transactions with a specific retailer, they will also chip in a set percentage of the transaction into your investment account. This service is in its early days and there are currently only a few retailers that have signed up.
Digit is an even more radical model. It is solely focused on making you put aside money in a savings account. It does not invest the money, which has allowed Digit to create a really simple solution – the key way you interact with Digit is through text. Very millennial! You start by downloading the app, but it is very simple and is mainly for setup and reference. Digit looks into your bank account and sees small amounts of money that it deems you can afford. This may vary from a few cents to a few dollars. You can tailor how aggressively Digit sets aside money from your account.
The radical part of the model is that you interact with Digit through text. Digit will send you periodic texts to show how much you’ve saved. You control Digit by text commands such as “pause” (to halt adding to your savings), or “withdraw” (to pull from your savings). In its interactions, Digit is informal and amusing, quoting Lao Tzu and engaging in other social banter. Just like Apple’s Siri, you will inevitably start asking it non-financial humorous questions. (Missy wrote about the Digit app earlier this year.)
Digit is free. They make their money from the idle money sitting in the Digit savings account.
Not your parents’ robo
As you can see from these micro-robos, some follow a typical robo model, albeit from an extremely simple app. Others are intended to encourage putting money away for the future. The micro-robos are clearly aimed at young people. However, just like their predecessors, the robo-advisors, there is much to learn from this new genre. It is inevitable that you will see some of the techniques that micro-robos are pioneering be adopted by other advisor technology companies (and advisors themselves). Therefore, if you have reached a “classic” age like I have (note I didn’t say old), you might benefit from downloading and understanding these applications now.