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

Robo-advisors are growing in popularity, offering investors cheaper, customized portfolios — but when it comes to crypto, the will not take their own advice.

Why it’s important: Most of the big brick-and-mortar stores’ robos won’t touch crypto yet, and those that do don’t necessarily eat their own food. That is – the core portfolios on which their performance is graded do not have a dose of the crypto goods they offer clients.

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

• They offer ready-made portfolios of stocks and bonds – often generated by algorithms – to match a client’s long-term investment goals, such as saving for retirement or a house.
• The choices offered to customers in the crypto space include the ProShares Bitcoin Strategy ETF, Grayscale Trusts or solutions for direct investment in tokens.

Status: 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 advisers, financial planning, transparency and conflicts, features, customer experience, costs and performance.
• But crypto is not incorporated into qualitative scoring, Thomas Leahy, co-author of the Robo report, told Axios.
• It’s not good news for someone who wants to know which robo reigns supreme in crypto.

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 extra support.

Zoom in: But are they equally effective in the crypto space?

• “Betterment and Wealthfront frame investing in the context of a [diversified] plan,” says Leahy.
• “If you’re holding crypto and it has a big drawdown, I’d rather you see it in the platform — to see the negative impact on your future rather than seeing it on Coinbase, where you might not get that context,” says he .

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

• SoFi also offers direct access, with approximately 30 tokens on the platform, but custodians of digital assets through its own subsidiary.

But this has a cost. The stake of delivering crypto via an unpackaged product means higher relative fees than investing in stocks.

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

Zoom out: What you don’t see are funds incorporating crypto into the asset allocation model, says Leahy. Put another way – funds still treat crypto as an opt-in, and not in their core portfolios.

• “It’s a big risk [to the robos]to be off the benchmark – if it goes the wrong way, it’s on your list, he says.

What they say: “We don’t have a good way to measure the long-term expected return of crypto. It’s kind of like gold. You need estimates of expected return,” Alex Michalka, Wealthfront’s chief investment officer, told Axios.

• Acorn’s Chief Investment Officer, Seth Wunder, said bitcoin still has to prove itself.
• “Bitcoin, throughout its 10+ year history, has statistically been a diversified asset, but still has time to prove its merit over a longer period of time,” he said in a statement to Axios. “Giving clients the ability to further diversify with bitcoin is the beginning of how we plan to offer clients the ability to customize a portion of their overall diversified portfolio.”
• Acorns offers the ProShares Bitcoin Strategy ETF, an indirect play that uses 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,” says Michalka, explaining why crypto is not included in Wealthfront’s core portfolio graded by the Robo Report.
• “There are investors who are interested in it and those who 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 portfolios over good times and bad.