It’s likely you’ve seen more and more new banks talk about offering “automated money”.
This is a new phrase that banks and Fintechs have been using recently to explain the benefits of using their app or banking services. But the truth is that automated can mean a lot of different things, and we can’t be so sure as to whether it’s as useful and sustainable as it seems.
In this article, our goal is to understand whether these banks are offering true automation — and why we’re approaching things differently at Unifimoney.
Automated money means investing in index funds, using roboadvisors and engaging in off-hands money management (such as investing your spare change). It’s a revolutionary concept that allows anyone to make an average 8% stock market return on their money without spending hours learning about the intricacies of the stock market or staying up to date with the latest stock tips.
John Bogle introduced the idea of “automated money” through his invention of index funds back in 1976. He then founded Vanguard, an investment broker that charges low fees and offers a whole range of ETFs and index funds. Rather than running as a publicly-traded company or being managed by a small group of people, Vanguard is currently owned by its investors. This means the company is not strictly for-profit, and is incentivised to run as efficiently as possible.
However, this is not the case for other roboadvisors such as Wealthfront, Betterment, Ellevest, Sofia and others. These are for-profit companies that are trying to build a real, sustainable business. Unfortunately, we are now seeing that passive investing and automated money is not a model that brings in a lot of revenue. This is leading to many Fintechs having to adjust their business models — sometimes without even letting their customers know.
Let’s take Wealthfront as an example. Wealthfront claims to offer “self-driving” money that is passive and will automatically invest your money in the stock market through dollar-cost averaging and index funds. But the truth is that Wealthfront is actually involved in an active trading strategy.
Although their website says that they are involved in passive investing, Wealthfront has now gone down the path of investing 20% of its users’ money into complex derivatives. These derivatives are more expensive for users (with a new fixed fee of 0.50%) and are not at all passive. The reason? More revenue. Wealthfront is pivoting its strategy because they need to make more money. And the worst part is that users are blissfully unaware — the company automatically opts in all users and they need to actively opt out if they don’t want their money invested in derivatives. Read the entire story of how Wealthfront is moving away from passive investing and you’ll understand why automation is no longer their priority.
What about other companies such as Betterment? Betterment does offer passive investing and human advisors. However, it’s not certain that they act in your best interest; for example, right after a large event like Brexit, Betterment stopped trading. They also don’t offer direct index investing, which means you may have some additional taxes to pay if you invest with them.
At the end of the day, all roboadvisors — Ellevest, Sofia and others — will have the same problem. Building a roboadvisor for everyone is not profitable, and soon these companies will need to look for other ways to earn money. This will force them to move away from passive investing and, with it, the idea of automated banking. The truth is that passive investing works for the customer, but not the Fintech that is chasing user signups or the traditional broker who would prefer to charge high fees.
At Unifimoney, we are truly trying to build automated money in a sustainable way. How?
Because first of all, we are not building a bank for everyone. Opening an account with us requires a minimum deposit of $6k and a balance of $35k. For those who do not meet the monthly deposit, we charge a fee. This is because we don’t find it fair that the most invested customers subsidize the least active; we want our best customers to be rewarded, not penalized. In most banks, the inactive accounts cost the bank money, and this is paid for by the active and invested accounts. Every dollar that we spend on an inactive account is one that we cannot give back to our active users — this is why we require a minimum monthly deposit. At Unifimoney, we are not chasing large numbers of users; we want real, quality users.
This is our first step to being a sustainable bank. Here are a few other ways we are creating automated money:
The best way to invest long term is to make small but frequent investments. This helps you time risk and benefit from dollar-cost averaging. It also means you don’t need to make huge monthly contributions — just a few dollars here and there and you won’t even notice that you’re investing. With Unifimoney, the unified account will drip-feed your funds from your main account into a low-cost diversified fund.
Since we don’t subsidize our inactive users with our best users, we can offer real, free trading. With Unifimoney, you’ll be able to trade as much as you want in stocks, funds, and even alternative investments such as gold and cryptocurrencies. There are no hidden fees so you won’t have to worry about getting the short end of the stick.
The main reason banks don’t offer interest on their accounts is that they prefer offering that money to their shareholders. The secondary reason is that a lot of that money goes to subsidizing inactive accounts. Since we don’t have that problem at Unifimoney, we can offer real interest rates to our users. With our unified account, you won’t need to worry about not earning a high enough interest rate or switching bank accounts in order to maximize returns. We offer 0.2% interest rates on all main accounts, no questions asked.
Our objective is to offer Unifimoney users the best return on their money. That’s why we get involved in high-quality partnerships so our customers have access to the best deals. We aim to offer low cost and intuitive international remittances, student loan refinancing, insurance purchases. We’ll also be able to work with partners that can help our users through important life events, such as buying a house, a car, or funding their child’s education.
The main reason automated money does not work is that it’s a strategy that is not sustainable. Banks and roboadvisors are looking elsewhere to increase revenue, which puts into jeopardy the whole premise of passive investing and automated money management. That’s why we’re doing things differently at Unifimoney; passive investing won’t be the bulk of our revenue model — instead, our revenue comes from our active customers. Remember, if something is free, you are the product. With Unifimoney, you are not the product.
Our vision is to create a bank that is both sustainable and keeps its customers at the very heart of its proposition. Our automated banking will help you make the most of your money without having to learn the intricacies of the stock market, or having to trust a financial advisor that charges extravagant fees. With Unifimoney, we do the hard work for you while you get on with what matters most: your life.
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