Why This Financial Firm Works For the Middle Class
It’s not often that the middle class gets to put its money down alongside the world’s most rich and famous. In many financial systems, the fees and burdens that come along with investments are just too high for people with only a few thousand dollars to pay. But there’s a new financial startup that’s billing itself as a champion of the middle class, that allows them to pay very little — or even nothing — in fees, even if they only have $500 to invest.
The firm, aptly named Aspiration, says it wants to give investment opportunities to people with almost any size portfolio, and take away the largest obstacle of investment fees that are typically paid to financial advisers. “Wall Street gives the richest Americans access to strategies not found in the portfolios of most everyone else. Aspiration’s mission is to open the doors of opportunity to all,” the firm’s website states.
The firm does two things that sets it apart from most investment agencies. For one, it lets the customer decide what percentage of their portfolio they’re going to reward their adviser with. According to The New York Times that can be as much as 2% of their assets, or as low as zero. Really, the client could choose to have their funds invested through a professional advisor and choose to pay nothing in terms of service fees. Bloomberg reports most firms charge a flat rate, often in the 1.25% range for people with accounts worth more than $100,000. But that can exceed 2% for less-affluent clients.
It’s those less-affluent clients that Aspiration is looking to attract in the first place. The firm accepts clients with at least $500 but no more than $100,000 to put toward investments. The second notable thing the company does is give 10% of its profits to charitable causes that will “help Americans working to climb the ladder of opportunity.”
“There’s room for an investment firm with a conscience, at a time when Wall Street is facing this enormous level of distrust,” Andrei Cherny, Aspiration’s 39-year-old CEO, told the Times. “It should be incumbent on us to prove to our customers we’re doing a good job for them. If we can’t prove that, they shouldn’t pay us.”
Most recently, the firm opened up an option for its Aspiration Summit Accounts, checking accounts that will earn up to 1% annual percentage yield. Those accounts need to keep a balance of at least $2,500 for that rate, Inc. reports, or else the A.P.Y. is a much lower 0.25%. But the accounts otherwise have no minimum balance requirements, no minimum monthly deposits, and no service fees. Plus, there’s no ATM fees regardless of which bank you withdraw from.
The advisory fees might be at the discretion of the client, but other fees for the mutual funds their money is placed into are non-negotiable. The Times reports those expenses will total about 1.72% of assets. Even so, Cherny doesn’t believe a majority of their clients will pay nothing in management fees. Instead, he compared management fees to tipping at a restaurant. Customers tip, sometimes quite well, even though there’s no requirement that they do. “We’re making a bet that the vast majority of people are trustworthy and honest,” Cherny told MarketWatch.
Still, there are plenty of skeptics who aren’t sold on the model. Some advisers told MarketWatch they wouldn’t be surprised if Aspiration eventually had to change its business model. Others thought it devalued the work that advisers actually do for a portfolio. Morningstar analyst Josh Charney told the Times it didn’t seem sustainable. “I can’t imagine this working very well in the financial world unless the fund manager feels it’s necessary to donate his time as a public service,” Charney said.
But with the model, the firm is banking on the importance of altruism among many consumers, especially younger potential clients. The firm calculates the management fee directly with the amount the company will be giving to charity. So as you see your payment rise, you also see the amount donated grow. It’s similar in a lot of ways to apps that emphasize other forms of charitable giving or ethical spending, and are growing in popularity among millennials and younger consumers.
The company raised $4.5 million from other investors before opening its door late in 2014, which means several other people think the idea has potential. Aspiration is the only company that uses the management-fee-as-a-tip model, but there are other investment startups like Robinhood that are also offering investment strategies without the hefty fees that non-Wall Street folk can’t afford. These sorts of things won’t solve many of the issues plaguing the middle class, but at least those who have paltry funds to invest will be able to do so if they choose, instead of leaving it in a low-interest savings account.
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