Why You Shouldn’t Use Acorn

“It’s just a quarter, but what about ten quarters? What about a hundred?”

This is the opening line for the Acorn advertisement that you have probably heard before. The premises is simple: spare change adds up, and Acorn is here to help you do that. If you make a $9.75 purchase, the app’s Round-Ups feature automatically rounds it up to $10 and puts the $0.25 away into your savings account.

The cheapest pricing for Acorn starts at $3 per month, allowing the user to save up spare change, automatically deduct from each paycheck to save more, and invest all that money for future growth.

It’s a compelling offer, and given the sorry state of personal finances in the United States, it can sound like a much needed way to help people get their finances back on more solid footing.

As a disciple of Behavioral Economics, when I was first introduced to Acorn I could not help but admire the concept. Tired of wasting mental energy deciding on how much to save and where to invest? The app automates everything. Struggling between the benefits of delayed gratification verses the immediate sweet satisfaction of impulse spending? Acorn simply deducts money from your paycheck so it’s not available to be squandered. Just set it and forget it. Out of sight, out of mind.

Acorn truly appears to be a wonderful product, like a Netflix subscription, one that is a one way ticket to financial wellbeing.

Unfortunately, despite all of its promise, Acorn falls short in one regard: fees.

Suppose you want to prepare for the future by investing into the S&P 500. You could directly go to Vanguard and pay $0.3 in annual fees per $1,000 invested (a 0.03% expense ratio), or you can invest the same $1,000 through Acorn, and pay $36 in annual fees, a 120X difference.

In exchange for the hefty price premium, you get to enjoy four main features:

1. A checking account where the savings are deposited
2. Automatic investment of a portion of each paycheck
3. A wide range of goal-oriented investment options, and
4. The Round-Ups feature which saves the spare change from every purchase

In today’s market, fee free checking accounts are a dime a dozen, offered by multi-national banks to growing fintechs alike. While not all checking accounts are free, there’s more than enough free options out there to leave a customer with an abundance of choice.

Similarly, investment firms today offer a dizzying array of goal-oriented investment options; looking to save up for a house? No problem. Trying to planning for retirement? They’ve got you covered. These offerings are further customized for everyone from the risk loving aggressive investor to the safety first conservative investor and anyone in between. Simply head to Fidelity, Charles Schwab, Vanguard, or Blackrock and their websites will help you pick a portfolio optimal for your risk tolerance and time horizon.

The reality is that given today’s sophisticated financial markets, most of Acorn’s offerings such as automatic savings and goal-oriented investing are already widely available from other providers for extremely low costs.

But Acorn is also not without merits; the one feature unique to Acorn is also its cornerstone selling point: saving spare change.

Now there is a decision to make; is the Round-Ups feature worth the higher fees? How big a pile of spare change is needed to justify Acorn’s pricing verses Vanguard 0.03% expense ratio? Taking Acorn’s lowest annual fee and dividing it by 0.03% we get:

$120,000 in spare change. That’s a big pile.

According to a 2021 review of Acorn, the average user saved $30 per month through the app (the review cited no sources and ended with an Acorn affiliate link, take that how you will). Assuming that $30 came entirely from Round-Ups, would take you over 330 years to reach the $120,000 breakeven point, a rather long time horizon even for the most patient investors.

But we can give Acorn one last chance. What if you turned on 10X Multipliers? Instead of saving $0.25 on the $9.75 purchase, what if Acorn set aside $2.50? That could shorten the 330 years wait to a mere 33 years. By then you would’ve paid over $11,000 in fees to Acorn. How much would you have paid to Vanguard over 33 years instead?

Here we run into the final nail in the coffin for Acorn: it does not manage investments.

When a user invests through the app, it simply takes the money and puts it into one of the existing ETFs being offered by another investment firm. If you want to invest in the S&P 500, Acorn would simply take your money and put it into the Vanguard VOO index fund.

In other words, by investing through Acorn, you will pay Acorn’s fees IN ADDITION to Vanguard’s 0.03% expense ratio. Even the ridiculously high break even point of $120,000 is illusory; Acorn will always be more expensive.

“If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement.” — Warren Buffett

The corrosive effect fees have on investment performance has been proven repeatedly through hundreds of academic studies; it was exactly this realization that drove the proliferation of low-cost index funds over the past decade. By outsourcing its investment management and charging a substantial mark-up on top, Acorn has built a pricing structure that all but guarantees below average performance for its users.

The ability to round up spare change and thus speed up one’s saving or investing schedule is a neat trick, but that’s all it is, a trick. Your spare change do not disappear without Acorn, they simply sit in your bank waiting to be put to use. To realize the $30 per month in additional savings Acorn supposedly enables, one can simply set up an automated investing schedule for $30 per month with any mainstream investment management firms and easily replicate all the benefits of Acorn while avoiding the 120X markup.

Acorn is a middleman charging very lucrative fees for features other companies offer for pennies on the dollar. Despite its noble mission, at the end of the day it is a high-flying startup facing sky-high investor expectations, and while charging $3 per month will definitely keep Acorn’s investors happy, it comes at a very real cost to its users.

After all, spare dollars add up.