It's no secret that Australia's young people are struggling financially. In fact, in the decade since 2008, incomes for young people (aged 15–34) declined, while income for other age groups continued to grow.
Some sources estimate that today's young people are in danger of being the first generation in memory to have lower living standards than their parents.
So it's little wonder that for many young Australians, finding the spare funds to invest in their future can be challenging.
Micro-investing apps, such as Raiz, may offer a solution. But how do they work, and are there any risks?
Traditional investing vs micro-investing
Traditional investing usually requires a relatively high lump sum contribution to get started.
But micro-investing apps like Raiz, Spaceship Voyager and Sharesies require only small sums of money to be invested, making investing accessible to people with limited disposable income or savings.
The apps, which you install on your smartphone or other device, are generally easy to use and require no background knowledge of financial markets or trading, with a range of ready-made investment portfolios to choose from.
One of Raiz's selling points is you don't need to know anything about investing to get started.
Aimed at Australians aged 18 to 35, Raiz (previously known as Acorns) was one of the first micro-investing apps to launch in Australia back in February 2016.
It allows users to invest in ready-made investment portfolios, with a minimum investment of just $5.
Raiz is a 'platform' business like Uber and Airbnb. Just as Uber is a platform that connects drivers with people who need a ride, Raiz connects people who have some spare cash with an Exchange Traded Fund (ETF). ETFs invest in a range of shares – and sometimes other assets – and aim to neither underperform nor outperform the market.
Raiz managing director George Lucas describes it as a user-friendly, automated savings and investment tool. "Raiz aims to encourage its customers to be mindful of their spending and to start saving and investing some of their income," he says.
...after a certain point the fees Raiz charges are too high for what amounts to a cute index fund appScott Pape, author, The Barefoot Investor
More than 1.6 million people have signed up to Raiz since it launched in 2016, although only 268,000 of those are currently active users in Australia. Raiz now has more than $640 million under management (excluding its super fund) and the average customer has a balance of $2382.
Raiz has attracted a lot of attention, with finance expert Noel Whittaker giving the app the thumbs up. Author of The Barefoot Investor, Scott Pape, says that Raiz can be a good introduction for novice investors but ultimately "...after a certain point the fees Raiz charges are too high for what amounts to a cute index fund app".
The appeal for young people
Historically, two things have worked against young people investing in the stock market:
- A lack of knowledge about how to start investing.
- Not having enough money available to be of interest to the businesses that facilitate such investments.
For example, if you chose to cut out the middleman and invest directly in the same ETFs as Raiz you'd need hundreds of dollars to buy a single 'unit' in one of these funds.
Likewise, investment funds, financial advisers and stockbrokers are typically only interested in clients who have a substantial sum to invest.
Raiz addresses both of these barriers to entry.
While Raiz does aspire to educate its customers, you don't need to know anything about investing to get started
While Raiz does aspire to educate its customers, you don't need to know anything about investing to get started. You just download the Raiz app to your smartphone then link your Raiz investment account to your bank accounts and credit or debit cards. Raiz then pools the deposits from its customers and buys units in ETFs.
For example, if 100 Raiz users deposit $9.50 each, Raiz will arrange the purchase of a $950 ETF unit and give each of those customers a one percent stake in it. When that ETF pays dividends and distributions, each of those customers receives a one percent share.
Raiz isn't an ETF (or a brokerage, or investment fund). It simply provides the platform that allows its customers to pool their money and invest in the stock market via ETFs.
1. Deposit money
There are three ways Raiz customers can deposit money into their Raiz investment account.
This is the method that has attracted the most attention. Raiz rounds up transactions from your bank account and invests the 'spare change'. For example, if you buy a coffee for $3.50, Raiz can round up the transaction to $4 and put the extra 50 cents into your Raiz investment account.
If you have spare money available you can deposit it into your Raiz investment account.
You can arrange for a set amount of money to be deposited into your Raiz investment account on a daily, weekly or monthly basis.
Raiz has also partnered with over 200 retailers to operate a rewards program called Raiz Rewards. These retailers deposit either a percentage of the purchase price or a fixed sum into the relevant Raiz investment account when a Raiz customer buys something from them.
2. Choose a Raiz investment portfolio
There are five standard Raiz portfolios that are categorised based on their level of risk, ranging from 'Conservative' to 'Aggressive'. Each of these portfolios consists of the same mixture of ETFs, including six large cap stocks, Australian Government Bonds, Australian Corporate Bonds and the Australian Money Market.
The difference between the five risk-based portfolios is the percentage of your funds allocated to each of the ETFs, as some carry a higher risk and some are safer.
Conservative portfolios will have a higher percentage of your funds allocated to bonds and cash, which are safer, while the more aggressive portfolios will have a bigger allocation in Australian and international shares, which can be riskier.
This is the "socially conscious" portfolio which invests in companies that meet ESG (environmental, social, and governance) criteria as well as Australian Government Bonds and the Australian Money Market. The risk level of this portfolio is relatively high, slightly higher than the 'Moderately Aggressive' portfolio.
This portfolio aims to include a target weight of 5% investment in bitcoin, with the rest of the portfolio made up of the same selection of ETFs included in the risk-based portfolios. The risk level of this portfolio is relatively high, almost as high as the 'Aggressive' portfolio.
This option allows you to choose your own target weightings for up to 14 ETFs (pre-selected by Raiz) and bitcoin.
You can change your portfolio at any time without paying any fees.
You can withdraw funds any time you want, without any fees, although keep in mind it will take five days until the funds are available in your account.
Who holds the ETFs?
When you deposit money into your Raiz account, Raiz uses the funds to buy ETFs on your behalf. But those ETF units are not held by you, nor are they held by Raiz. Instead, they're held by an independent custodian: a third party who holds the legal title to the investments on behalf of investors. This means that if Raiz went broke, the assets would still be safely held by the custodian and the value of the ETFs would be returned to the investors, not to Raiz.
Do you pay tax on your Raiz income?
Yes. Any return you make on your Raiz investments will be subject to capital gains tax, which means if you make $2000 from Raiz, the ATO will take the same amount of that money in tax as it would if you got a $2000 pay rise. Raiz investments held for more than a year might be eligible for a discounted capital gains tax rate.
Raiz is free to set up your account, but maintenance fees vary.
It's free to set up your account, but Raiz charges account maintenance fees once you deposit money into your account. If you hold one of the risk-based portfolios or the Emerald portfolio you'll be charged a $3.50 monthly fee if your balance is under $15,000. The Custom portfolio attracts a slightly higher fee of $4.50 per month for account balances under $20,000, while holders of a Sapphire portfolio will pay the $3.50 fee regardless of their account balance and in addition to an account fee.
If you have more than $15,000 in your account (or $20,000 if you have a Custom portfolio), Raiz stops charging the monthly maintenance fee and instead charges an account fee of 0.275% per annum, charged monthly. This means, for example, that if you had $20,000 in your account, you'd pay an account fee of $55 per year.
The same fee applies to all portfolio types, but if you have a Sapphire portfolio you'll pay the 0.275% account fee in addition to the maintenance fee, regardless of your account balance.
ETF management fees
While Raiz is pretty upfront about the maintenance and account fees, you may not be aware that the issuers of the ETFs also charge their own management fees. These fees reduce the value of the ETFs and therefore your Raiz balance, though they aren't directly deducted from your Raiz account so you won't necessarily notice them. The ETF management fees for all seven of the Raiz portfolios are currently estimated at 0.04% per year, which would equate to $20 per year on an account balance of $50,000.
Put simply, Raiz pockets a small amount when it buys and sells ETF units on behalf of customers. (It does this in lieu of charging brokerage fees.)
Raiz charges other businesses to advertise on its platform. Raiz has committed to respect data privacy and only disclose customers' information to the Australian Tax Office, as required by law.
As with any investment, value can go down as well as up. ETFs are one of the safer methods of investing given they buy a large 'basket' of shares meaning risk is diversified.
Over the longer term, investing in shares provides a solid return but there can be short-term setbacks.
Is my money safe with Raiz?
Raiz is a tech start-up with aggressive expansion plans so it's possible that it could go bankrupt or be wound up. However, given deposits are quickly transferred to ETFs (overseen by an independent custodian), it's unlikely Raiz customers will end up out of pocket if anything happens to Raiz. Plus, Raiz also holds an Australian Financial Services licence and is overseen by ASIC.
It's possible cybercriminals could hack into Raiz and help themselves to its customers' money. While no organisation's cybersecurity is impregnable, Raiz is alert to this threat and has implemented a "robust information security program".
The Commonwealth Bank's CommSec Pocket is one of the latest micro-investment apps to hit the Australian market.
Here's how its fees and portfolio options compare to Raiz.
CommSec Pocket: $50
Raiz: You must be over 18 and an Australian resident, and have a bank account with an online login.
CommSec Pocket: You must have a CBA transaction account, and be over 18 and an Australian resident.
CommSec Pocket: $2 for trades up to $1000. Trades over $1000 are charged at 0.20%
Raiz: Standard portfolio: $3.50 per month for accounts less than $15,000 or 0.275% per year for accounts more than $15,000. Custom portfolio: $4.50 per month for accounts less than $20,000 or 0.275% per year for accounts more than $20,000.Sapphire portfolio: $3.50 per month and 0.275% per year.
CommSec Pocket: None (but linked CBA accounts may attract their own fee).
ETF management fees
Raiz: ETF providers may charge management fees in relation to the ETFs and range between 0.04% to 0.59%. These fees are deducted from your RAIZ account.
CommSec Pocket: Each ETF provider charges a management fee which ranges from 0.09% to 0.67% of your investment per year depending on the ETF. It's not an out-of-pocket fee, rather, it's deducted from the ETF's unit price. The fee is shown when you browse the investments.
CommSec Pocket: $2 for selling trades up to $1000. Trades over $1000 are charged at 0.20%
Raiz: In-specie transfer fee (to transfer ETF units into your name on request): Greater of $20 or 0.25% of the value of the relevant ETF or bitcoin.
CommSec Pocket: Late settlement fee: $10. If there are insufficient funds when the debit for your trade occurs, you'll be charged a late settlement fee.
Raiz: There are seven portfolios that are a pre-set mix of up to 7 ETFs depending on the aggressiveness of the portfolio: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, Agressive, Emerald and Sapphire. There's also a DIY option that gives you access to 14 ETFs and bitcoin. The Sapphire portfolio also offers exposure to bitcoin cryptocurrency.
CommSec Pocket: There are seven themed ETFs to directly invest in: Aussie Dividends, Aussie Top 200, Emerging Markets, Global 100, Health Wise, Sustainability Leaders and Tech Savvy.
Available portfolio ETFs
Raiz: SPDR S&P/ASX 200 (STW);iShares Asia 50 (IAA); iShares Europe (IEU); iShares Core S&P 500 (IVV); iShares Core Composite Bond (RCB); BetaShares Australian High Interest Cash (AAA); iShares Composite Bond ETF (IAF); BetaShares NASDAQ 100 (NDQ); iSharesGlobal 100 (IOO); Vanguard FTSE Emerging Market Shares (VGE); iShares Global Healthcare (IXJ); BetaShares Australian Sustainability Leaders (FAIR); Russell Investments Australian Responsible Investment (RARI) and BetaShares Global Sustainability Leaders (ETHI). Bitcoin (not an ETF).
CommSec Pocket: SPDR MSCI Australia Select High Dividend Yield Fund (SYI); iShares Core S&P/ASX 200 (IOZ); IEM iShares MSCI Emerging Markets (IEM); iShares Global 100 (IOO); iShares Global Healthcare (IXJ); BetaShares Global Sustainability Leaders (ETHI); BetaShares NASDAQ 100 (NDQ).
CommSec Pocket: Yes
CommSec Pocket: Yes
CommSec Pocket: Yes
Are dividends paid?
Raiz: No. Any distributions received by Raiz are reinvested into your Raiz Investment Account.
CommSec Pocket: Yes – where companies in your selected ETFs pay dividends, the funds will be deposited back into your settlement account. However, not all companies pay dividends.
Do you hold ETF units?
Raiz: No. The ETF units are pooled and held by a custodian on behalf of investors.
CommSec Pocket: Yes, the ETF units are held in your name.
Lump sum deposits/trades
CommSec Pocket: Yes
CommSec Pocket: No
CommSec Pocket: Yes
CommSec Pocket: Yes