Recently, when a good friend of mine, Milo, told me that he needed to sell stock to get a haircut, I was intrigued. Upon asking Milo why, I found out that he had invested almost the entirety of his savings into an app on his iPhone. Although he had kept some money in his bank account, he had not budgeted to get his thirty dollar signature fade from a trendy barbershop in town that Friday. So, Milo pulled out his phone and, in the same causal manner I might check Instagram, sold one share of AIEQ, an AI based exchange-traded fund (ETF).
The app Milo uses is called Robinhood, a start-up founded by two Stanford graduates, Vladimir Tenev and Baiju Bhatt, that recently reached six million users. Robinhood is not alone. Acorns, another popular trading app announced back in July that is has 3.4 million users and manages one billion dollars in investments. Robinhood and Acorns are part of a new breed of financial service companies. Alongside others like Wealthfront, Betterment, Stash, and Stockpile, these apps are changing investing by offering financial services at a low cost and in an easily accessible format. By offering user friendly apps designed for smartphones, low trading fees, and financial resources catered to less experienced investors, these companies are changing investing. Specifically, most offer low to zero commissions (the extra costs a financial service charges for handling the exchange of a security) and many offer financial counseling, that includes designing trading portfolios, budgeting services, and retirement planning.
One of the easiest apps to begin using is Acorns. Acorns puts users’ money into preconfigured portfolios that range from conservative to aggressive investing strategies and are made up of ETFs. The app’s main feature is that it automatically deposits money into your account. After linking a bank account to the app, Acorns rounds up your purchases to the nearest dollar and transfers the extra change into your account. The app automatically invests your money into their tailored ETFs when you have enough money in your account.
Similar to Acorns, Wealthfront, Betterment, and Stash create user portfolios tailored to your financial situation. Wealthfront uses a software designed by academics that recommends where to put your money, focusing on low cost ETFs and investments that avoid taxes. Wealthfront also uses a software to recommend financial investments, but also provides access to real life financial advisors. Stash also uses an interest-based investment software. The app creates portfolios made up of ETFs for users based on their answers to a series of questions. Interestingly, Stash allows users to pick investments based on more personal interests, like green companies or companies that promote workplace equality.
For investors seeking more autonomy, Robinhood and Stockpile allow users to buy and trade their own stocks. Instead of offering tailored financial portfolios, these apps allow users to make their own investments without the myriad of financial barriers common to more traditional investment platforms. Both apps have low portfolio minimums and commissions.
By offering low cost access to financial counseling and low portfolio minimums, this new wave of investment apps is changing the perception and access to investing by increasing access to young and inexperienced investors. These apps are great learning tools as well. Having one’s own money invested highly incentivizes one to follow the stock market. Many of the apps also have financial planning resources, which can teach young investors saving and budgeting skills.
It is important to note that there are risks associated with using these apps. A recession or market crash can have devastating impacts on investments. These impacts can be magnified for users who do not have diverse portfolios or have invested a large portion of their savings, like my friend Milo. The accessibility of these apps on the phone raises concerns over obsessive use as well. In the same way notifications from social media apps can dominant a person’s phone, most of these trading apps have very user-friendly displays and generate a lot of notifications. This may lend itself to obsessive usage, which may cause users to feel anxious.
Robinhood’s mission is to ‘democratize’ the stock market by expanding access to investing and using a software that is approachable and user-friendly. Similarly, the five other apps described in this article all market themselves with this idea in mind: to offer everyone the access to financial services. I argue that while there may be some concerns associated with the potential to lose money when investing, and the obsessive tendencies these apps could foster in their users, the expansion of access financial resources is a good development. Specifically, these apps allow young and new investors to easily begin investing and learn important skills about financial markets, saving, and budgeting.
Are these trading apps a sign of financial nervousness and insecurity for Millennials? Millennials have grown up in an anxious America. The Pew Research Center notes that insecurity is integral to the Millennial generation, based on their comprehension of the 9/11 terrorist attacks and experience of the dramatic polarization of American politics. Millennials, of course, entered the workforce during the 2008 recession, which made it harder for Millennials to find a well paying job and begin saving money. It is interesting to consider that Millennial’s increased financial insecurity may coincide with the rise of these investment apps. The anxiety that characterizes Millennials may be causing them to be increasingly aware of their financial situation. This awareness may be why the investment apps discussed in this article are becoming so popular as Millennials are investing earlier to be more financially secure in the future. The rise of these apps could be sign of Millennials’ distrust of more traditional investing systems: instead of meeting with a financial advisor, Millenials are downloading apps on their smartphone. Regardless of what may be the underlying motivations for the rise of investment apps, these apps are changing the nature of financial services by directly catering to young and inexperienced investors in an untraditional format.