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Are millennials paying too much for digital advice?

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As robo advice platforms pitch themselves as democratizing forces in wealth advice, an industry insider questions whether novice investors understand what they are getting for their money.

The biggest independent digital-only platforms such as Betterment and Wealthfront cost clients less than 40 basis points when management and fund fees are tallied; even the hybrid offerings from Vanguard and Schwab end up costing less than 70 basis points.

But some popular savings apps targeting millennials are charging total fees well in excess of those figures, according to Cambria Investments Chief Investing Officer Meb Faber, who published a report of his findings online.

“Millennials love these investing apps but they must be terrible at math,” Faber says. “These are great businesses but they are kind of predatory because the accounts are, on average, $100 to $200. A dollar-a-month fee is a lot for a $20 account. It’s a fun app with a great user interface but the math doesn't really work out.”

Faber calculates that, with monthly fees of $1 on accounts averaging less than $200, in addition to underlying fund fees, investing app Stash's total cost to clients is 8.34%, while Acorns is 6.34%.

Faber posted his tallies in a chart that examined total costs to clients using such investing and savings apps, in addition to digital-only robos, hybrids and traditional wealth management.

Faber left out Cambria’s own digital offering from the chart to make it clear that it wasn’t a promotional effort for their platform. The information came from Personal Capital’s underlying fee comparison tool, plus other data he located during his research. He notes that Cambria charges no management fee on personal investment accounts.

Betterment’s vice president of communications Joe Ziemer says the report shows information for a variety of offerings and “shouldn't be viewed as an apples-to-apples comparison.” He says deciding between those options has very little to do with just price when you are considering value.

Ed Robinson, co-founder and president of Stash, acknowledges that a dollar a month for a $20 account results in a higher cost to the user, but he adds that the average customer actually puts in $10 to $20 every week.

Stash also is reaching out to investors who may have never invested otherwise, Robinson says.

“If you go through the list of companies that Meb put together, like Betterment or Schwab, they talk about quarterly rebalancing, they talk about intellectual finance. Our users get really afraid of those comments. [Our customers think,] ‘I’ll push it off, I’ll wait until I understand.’ That’s one of the biggest issues that hurts this generation,” he says.

Stash offers education to their mostly first-time user base, Robinson says. The intent is to get the user more comfortable with investing by learning more about financial decisions, like buying a home or retiring. Stash makes financial recommendations, but it’s ultimately up to the user to do the actual investing.

Similarly, Acorns also strives to get young customers through the door. The microinvestment platform requires a dollar a month for users, though college students can sign up for free. Acorns says there are plenty of ways for a user to offset fees, like rewarding customers with $5 for every friend they refer or using the app’s Found Money feature.

Davis Janowski, senior analyst of digital wealth management for Forrester Research, says Acorns is going after a much younger demographic than Betterment and Wealthfront and is addressing a need in the market. The firm's platform has a savings feature, where a client's purchases are rounded up to the nearest dollar, and that change is deposited into the client's account.

“The roundup philosophy is painless. You don’t have to think about making a deposit to an account,” Janowski says.

Janowski notes that fees for Acorns and Stash change from $1 a month to roughly 0.25% when investor accounts reach a $5,000 threshold. He says the microinvesting apps are good for easing a millennial investor into long-term financial goals, like retirement.

“Any of these companies that are trying to get millennials to start saving for retirement is a good thing,” Janowski says.

The industry's evolution may soon leave Faber’s report outdated.

“When you look at what he picked, he’s picking the existing models and not their emerging models,” says Kendra Thompson, managing director and global lead of wealth management at Accenture.

Thompson says the market is moving towards hybrid advice, a model that is erasing divisions between robo and traditional advisers.

As models change, it's worth putting millennial-focused investing services into historical context, says University of Pennsylvania Law School professor Tom Baker.

"The biggest insurance companies — Prudential, Metlife — started out with door-to-door sales, selling dollar life insurance policies," says Baker, who recently published a paper examining the future of robo advice.

"They got people into the mindset of paying for insurance, saving for a future," he adds. "It was expensive to get going, but the business had a long-term plan. And as they got bigger, their fees became smaller."

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