Oct 18, 2022 - Economy

Robo-advisors don't want to be judged on their crypto advice

Illustration of a robot hand holding a digital coin with a bite taken out of it

Illustration: Sarah Grillo/Axios

Robo-advisors are gaining in popularity, offering investors cheaper, customized portfolios — but when it comes to crypto, even they won't take their own advice.

Why it matters: Most of the big traditional shops' robos won't touch crypto just yet, and the ones that do aren't necessarily eating their own cooking. That is — the core portfolios on which their performance is graded don't carry a dose of the crypto wares they offer customers.

Context: The conceit of the robo-advisor is to make investment advice more accessible to the average person.

  • They offer up ready-made portfolios of stocks and bonds — often generated by algorithms — to match a customer's long-term investment goals, like saving for retirement or a house.
  • The choices offered to customers in the area of crypto include the ProShares Bitcoin Strategy ETF, the Grayscale Trusts or workarounds for direct investment in tokens.

State of play: The Robo Report, effectively a quarterly performance review for well-known robo-advisors, tracks dozens of such platforms built by asset management titans like Vanguard, to fintechs like Acorns, Betterment, SoFi and Wealthfront.

  • They are graded on access to advisors, financial planning, transparency and conflicts, features, customer experience, costs as well as performance.
  • But crypto is not incorporated into qualitative scoring, Thomas Leahy, co-author of the Robo Report, tells Axios.
  • That's not great news for someone looking to know which robo reigns crypto supreme.

The big picture: Robo-advisors, in theory, are good — they have lower minimum buy-ins (if any at all), offer low-cost ETFs and mutual funds and services like tax-loss harvesting. Some even offer live human advisors for additional support.

Zoom in: But are they as effective in the realm of crypto?

  • "Betterment and Wealthfront are framing investments in the context of a [diversified] plan," Leahy says.
  • "If you’re holding crypto and it has a large drawdown, I would rather you see that in the platform — to see the negative effect on your future rather than seeing it on Coinbase, where you might not get that context," he says.

Details: Betterment's crypto portfolios try to give customers direct access to the underlying crypto via a separately managed account through Gemini, Leahy says.

  • SoFi offers direct access too, with roughly 30 tokens on the platform, but custodies digital assets through its own subsidiary.

But this comes at a cost. The effort to deliver crypto via a non-packaged product means higher relative fees than investing in stocks.

  • Betterment charges a 1% advisory fee plus transaction fees that result from any rebalancing, while SoFi charges a markup of 1.25% rounded up to the nearest penny on crypto transactions.

Zoom out: What you're not seeing, is funds incorporating crypto into the asset-allocation model, Leahy says. Put another way — funds are still treating crypto as an opt-in, and not in their core portfolios.

  • "That's a big risk [to the robos], to be out-of-benchmark — if that goes the wrong way, that's on your record," he says.

What they're saying: "We don’t have a great way to gauge the long-term expected return of crypto. It’s sort of like gold. You need estimates of expected return," Alex Michalka, Wealthfront's director of investments, tells Axios.

  • Acorns Chief Investment Officer, Seth Wunder, said bitcoin still needs to prove itself.
  • "Bitcoin, through its 10+ year history, has statistically been a diversified asset, but still has time to prove its merit over a longer period," he said in a statement to Axios. "Providing customers the optionality to further diversify with bitcoin is the beginning of how we plan to offer customers the ability to customize a portion of their overall diversified portfolio."
  • Acorns offers the ProShares Bitcoin Strategy ETF, an indirect play using futures. There is no actual bitcoin offered there.

Between the lines: Because there are no fundamentals driving bitcoin — no cash flow expectations to measure and model — it's hard to predict where prices will go.

  • "That’s why you won’t see gold or silver in our portfolio either," Michalka says, explaining why crypto is not included in Wealthfront's core portfolio graded by the Robo Report.
  • "There are investors interested in it and those that weren’t," says Jesse Proudman, vice president of crypto investing at Betterment, explaining why crypto is an "opt-in" offering and not automatically included in their core portfolios.

Crystal's thought bubble: But wouldn't it be interesting to see these crypto products in action in real-world portfolios over the good times and the bad.

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