Novice investors quickly learn that Wall Street doesn't want their money. Well, not until they have a serious pile of it.
Even the so-called discount brokers often have account minimums and trading fees that discourage the very small investor. That includes low-fee Vanguard, otherwise a friend to the little guy, which has a $1,000 minimum for IRAs and a $3,000 minimum for other accounts.
The usual recommended workaround is to use a savings account to build up the necessary stash that you can then take to a discount brokerage. But digital investment advisors, also known as robo-advisors, make it possible to get invested a lot quicker.
One such digital advisor, Wealthfront, made a splash earlier this week by dropping its minimum investment from $5,000 to $500 and calling out rival Betterment for charging too much. The moves prompted trade publication InvestmentNews to proclaim a price war.
Wealthfront doesn't charge fees for accounts under $10,000 and charges just 0.25 percent after that. Betterment doesn't have account minimums, but it charges 0.35 percent for accounts of less than $10,000 and has a minimum fee of $3 a month for those who haven't set up automatic deposits of at least $100 a month. After $10,000, the fee drops to 0.25 percent and after $100,000 to 0.15 percent.
The dust-up has drawn attention to both companies, but the real story is how much cheaper they are than many of the alternatives. Investment management fees typically hover around 1 percent and can go higher -- potentially draining tens of thousands of dollars from a portfolio over an investing lifetime.
Digital advisors keep costs down by using computer algorithms and dirt-cheap exchange-traded funds to invest clients' money. The start-ups' success in winning over investors -- both Wealthfront and Betterment now have over $2 billion in assets -- inspired mainstream investment companies, including Vanguard and Charles Schwab (SCHW), to start offering similar services this year. (The minimum for Schwab Intelligent Portfolios is $5,000, and it's $50,000 for Vanguard Personal Advisory Services.)
By dropping its minimum, Wealthfront is also calling attention to the fact that any investor can try out its services without committing a fat chunk of change. The same is true of Betterment, obviously. Both providers are betting that those who try it will like it.