Investing apps such as Raiz, Spaceship, and CommSec Pocket have become extremely popular in recent years especially for new investors.
The Australian Securities and Investment Commission (ASIC) has shared their concern for increasing numbers of retail investors who may not understand or be aware of the risk they’re being exposed to. While investment apps can be an excellent way to begin micro investing or your first venture into the share market, it’s important to understand any product you invest with.
What are investment apps and how do they work?
Investment apps are online investment platforms that often take fewer than 5 minutes to sign up to and begin investing. Most apps differ in terms of what investments they offer, investment structure, and costs, but they all have a similar aim to facilitate investing for a significantly reduced price. Some apps such as Raiz and Spaceship charge monthly fees with no brokerage to invest. Other platforms such as Stake, CommSec Pocket, and Superhero charge no ongoing fee but do charge a brokerage fee (often between $3 and $5 per trade). Some platforms invest in ETFs only while others offer a selection of ASX listed shares. While this type of investing in the share market can be much cheaper, what’s the catch?
It’s essential to understand the ownership structure of the securities you purchase as platforms differentiate in this area. You may have heard the term CHESS sponsored or Holder Identification Number (HIN) before and they play an important role in investing. Having CHESS sponsored shares means the ASX keeps a record of you personally owning the shares. It records this ownership with your HIN number. You can purchase CHESS sponsored shares through a broker or select apps such as CommSec Pocket and Stake, but not all.
The alternative to CHESS sponsorship is a custodian structure. Apps such as Raiz, Superhero, and Spaceship offer this arrangement to investors. With this structure you don’t technically own the shares; the custodial account holds the securities in their name, on your behalf. This comes with what’s known as ‘Custodian Risk’. It’s the risk of securities loss if the custodian becomes insolvent or losing your custodianship through error or poor administration/record keeping on their end. Securities purchased through a broker such as ourselves, are always CHESS sponsored and eliminate this risk. It’s important to be aware of ownership structure when choosing an investment platform so you can mitigate this risk.
Let’s look at an example of these structures. If Jill uses a broker to buy 10 CBA shares, she is recorded on the share registry and has the right to vote on key issues and attend shareholder meetings. If Jill buys 10 CBA shares under a custodial arrangement however, she has no voting rights, and her shares are held with all other holders of CBA shares using the same app. The shares are legally owned by the app’s custodian.
The service you’re missing
Investing apps are simple to use, quick, and cheap. They require no prior investment knowledge, just the details in your wallet to begin. While this might sound great, the reality is this can be dangerous for new investors and ASIC agrees. ASIC’s executive director of markets, Greg Yanco stresses the importance of ‘learning about trading before you start or getting advice from someone you trust’. At Wakefield Partners we constantly emphasise the importance of focusing on long-term goals and investing, not making decisions based on investment app marketing and social media. It can be easy to get sucked in, with ASIC’s Warren Day saying these platforms are even ‘adding in features to get you addicted to their app. Many of these are copied from the gambling industry’. These tactics such as referral discounts, celebrity endorsements, and app notifications can influence unnecessary and irrational trading that leads to losses. Employing the service of a broker or financial adviser that you trust, can navigate the risk of not understanding what you’re purchasing and the timing of the market. The service and education you miss out on when using these platforms can have major consequences.
How to use Investing Apps Safely:
- Become well informed about the cost and fee structures
- Choose apps that offer CHESS sponsored securities
- Get your financial information and advice from trusted sources
- Research the terms of the apps and compare which one’s best suit you and your circumstances
We love seeing people invest and it’s always pleasing to see new and young investors taking charge of their financial future, regardless of how they choose to do so. We can help you determine the best way to invest for you and if through apps is your preferred option, this is something we can assist you with. We regularly help with selecting investments and education of the entire investment process. Contact one of our advisers today and we’ll help you find what works best for you.