Micro-investing: Just Don’t do Nothing
DIY Investor is passionate about long-term savings and investment but the fact is it’s deuced difficult for millennials – those initially targeted by automated investment managers – to scrape by, let alone set money aside – by Jemima Reeves
Most would acknowledge the benefits of investing even a little over a long period of time, and the beneficial effects of compounding are well documented; now, hot on the heels of services like Acorns and Stash in the States, there is a new series of apps in the UK helping those with little spare cash to at least dip a toe in the investing pond.
By linking to a debit card, micro-investing apps allow the user to sweep ‘virtual change’ following a purchase directly into an investment portfolio in a way that is as painless as it can be.
‘helping those with little spare cash to at least dip a toe in the investing pond’
With some of the robo-advisers requiring a minimum investment of £5,000, however compelling the proposition, they are off limits to very many under-35s; micro-investment apps make it possible to ‘round up’ the £2.80 purchase of a cup of coffee on a contactless bank card to a £3 charge, with 20p swept into an investment fund; this really is ‘look after the pennies….’.
Endorsing sister site Muckle’s mantra, over time regular small investments build up into something larger — 20p a day builds into £6 a month, or £72 per year; better than nothing and, according to advocates of micro-investing the beginning of a savings and investment habit that will grow alongside a millennials’ earnings.
A bit Mickey Mouse? Well, BlackRock, the world’s largest asset manager with $4.5 trillion of assets, is extremely interested in micro-investing.
Research, led by BlackRock, found that more than 80% of the UK population don’t save regularly because they don’t have any disposable income; according to The Money Charity, 9.61m households in the UK have no savings at all and the Money Advice Service has identified 16m people with less than £100 saved.
The challenge for those selling investment products is clear and that is compounded by research from Mintel which found that about a third of UK consumers have virtually no interest in financial management.
‘over time regular small investments build up into something larger’
As a result, TISA, which represents companies involved in making or selling savings and investment products, suggests that micro-investing is the way to increase the amount people save – ‘reigniting the savings culture by making it easy for people to save very small levels of money, frequently’.
It’s a big challenge; investing is rarely seen as ‘for them’ by younger people, and any commitment to even the simplest micro-investing service requires some effort.
Culturally, micro-investment platforms need to overcome obstacles such as minimum investments and the higher cost of multiple small transactions rather than a few big ones; and they need to make things very simple.
However, TISA has concluded that sufficient demand exists and that the target audience for such services would be comfortable to use technology in the way that is proposed in pursuit of a better financial future; evidently 90% of millennials look at their smartphone within 15 minutes of waking up.
BlackRock has set out its solution to the savings problem – admittedly from a fund manager’s perspective – and has suggested that it is for a ‘digital passport for finance’. This would hold information about an investor across banking, insurance and fund products and have all of the information that a fund manager might need to put an investor’s money in a fund — meaning anyone could invest at the tap of a screen with no paperwork needed.
This is seen as a precursor for micro-investing – go to Starbucks, buy a coffee for £1.90 and then add an extra 10p to your savings; investing loose change without even thinking about it.
It is this ‘nudging’ – to ‘not do nothing’ – that is at the heart of the micro-investing ethos; the FCA recently recommended using such a technique to increase savings and investments in its recent FAMR report.
Head of Blackrock’s retail business, Tony Stenning, believes that a digital passport allowing banks, building societies and asset managers to share information with each other will give rise to the kind of app that will see the principles of the nudge movement swing into action:
‘If we get open standards on the digital passport that identifies you and allows you to go across the whole of financial services, then we can get some really smart people who can come in behaviourally and say — ‘right, what do you need? How can I help you get it?’ he said ‘when you’re buying your coffee it could be your third one of the day. The app will know that, and it will say ‘do you really want another one?’ That’s a little Nanny knows best, but you start to get people by nudging.’
In terms of micro-investing the UK has some ground to make up, Acorns in the US and Australia has been around for a while allowing people to round up their spare change and invest it in one of five portfolios built from low-cost ETFs.
Moneybox was the first out of the blocks in the UK with the ambition to ‘find a way to help people put their money aside regularly, but into something better than a savings account’: ‘We’re targeting millennials, 18-35-year-olds.’ Says founder Charlie Mortimer.
‘People are not setting money aside in a structured way because they’re intimidated by investing and they think you’ve got to have loads and loads of money to get started,’ he said; its app offers a choice of three low-cost index funds, run by Vanguard, BlackRock and Henderson.
‘People are not setting money aside in a structured way because they’re intimidated by investing’
Moneybox allows you to sweep rounded up sums into your account, make one off or regular contributions; this is then invested into one of three risk adjusted portfolios – ‘cautious’, ‘balanced’ or ‘adventurous’ and lodged within either a General Investment account or a tax-efficient ISA.
Moneybox charges £1 a month for transaction costs plus an annual management fee of 0.45% of funds invested; the fixed fee may be proportionally onerous on very small pots but the management fee seems competitive, albeit for a very simple investment proposition, and there are no additional dealing fees or withdrawal fees.
True Potential gives savers the chance to invest as little as £1 into a multi-asset fund within a stocks and shares ISA, including those from Goldman Sachs, Schroders, Allianz and 7IM, although according to managing partner David Harrison, the average amount invested is £10 at a time.
According to Mr Harrison the reason there are not more such apps is because they are ‘devilishly difficult to build’ and former chief executive of the Investment Association and adviser to Moneybox, Daniel Godfrey, agrees that it would be difficult for an asset manager to come up with a similar product.
However, micro-investing apps such as Moneybox are ‘encouraging people to save by making it easy and making it fun’, says Mr Godfrey, ‘I think there’s a lot of potential for this to engage people with saving.’
‘Rounding up’ discretionary purchases such as coffee is a core tenet of the micro-investment apps; Lloyds has had an app, called ‘Save the Change’ since 2010, although it only allowed customers to sweep spare change into their current accounts, rather than investment products.
A problem for those trying to build platforms to invest such small amounts of money has been the logistics of making tiny investments into funds, and also making a profit; many low-cost digital investment managers or robo-advisers, build portfolios of exchange traded funds (ETFs) which track indices and are bought and sold as shares.
‘encouraging people to save by making it easy and making it fun’
The problem, until very recently, is that it has always been necessary to invest at least the cost of one whole share; where a share cost a specific monetary amounts – £53.28 – it was tricky if the investor did not have enough money to purchase a whole share or wanted to invest a fixed sum – £100 – and every transaction incurs a transaction cost that nibbled away at the investment.
However, Winterflood Securities has recently found a way around this and offers investors the ability to buy fractions of funds; as a result its client, Nutmeg, lowered its minimum investment from £1,000 to £500 – but still too much for millennial micro-investors.
There is a major industry initiative, backed by big hitters such as Vanguard, Fidelity, JPMorgan, HSBC and Liontrust to push forward the idea of ‘fractional trading’ to bring down the £50 a month cost of entry to some of the robo-platforms to sums closer to £5 or £10 to be compatible with the objective of micro-investing.
It is hoped that by making it as easy to invest in the stock market as it is to purchase something from an online store, many more people will embrace the habit of investing and once their financial situation improves there will be plenty of opportunities for millennials to reassess their financial planning to ensure that their aspirations are achievable; there is no doubt that is what BlackRock et al have in mind when supporting micro-investing with such gusto.
According to research by True Potential since 2013 people in the UK have, on average, saved about £100 per month; by putting this sum in a passive fund tracking the FTSE 100 each month these new investors could have almost doubled their money over the past 20 years; just over £41,000, excluding fees, from a total investment of £24,000.
Those targeted by the micro-investment apps may struggle to afford £100 a month in the early days but anything they do manage to invest will benefit from compounding – time in the market, not timing the market – and once investing becomes a habit, the increasing totals will feature on a mobile phone screen to savour.
It is important to be fully aware of the corrosive effect of fees on your new investing regime as some of the new micro-investing products will have proportionally higher charges than some conventional investments.
However, this is an almost inevitable consequence of the micro-investment platforms trying to make financial sense of administering and investing small amounts of money and maybe something that is ironed out over time – how many pubs still display a ‘minimum card purchase £10’ sign?
When student debts dissipate and millennials start to reap the benefit of their ‘graduate professional premium’, then switching to a more mainstream investment platform may be better value; if the UK follows the US lead, it seems that there will be a plethora of micro-investing platforms in the future – almost certainly becoming more ‘intelligent’ and digitally frowning at the wisdom, or otherwise, of our purchasing habits.