- Robo-advisers are increasingly looking at cryptocurrencies as demand from a younger generation of investors grows
- Millennials and Gen Z are keen on cryptocurrencies but challenges remain for robo-advisers to capitalize on the opportunity especially given their existing regulatory scrutiny
“Computer says no.”
At first blush, one would think that the world of robo-advising, where sophisticated software programs recommend investments to clients would pair well with cryptocurrencies, but so far the two have made for uncomfortable bedfellows.
Robo-advising has become more popular of late based on the assumption that algorithms, which are not susceptible to the human emotions of fear and greed, are able to deliver more consistent returns.
Charles Schwab (+0.21%), the U.S. financial services giant has predicted that assets managed by robo-advisers will cross US$460 billion by next year, even as automated choices have come under far more scrutiny from the U.S. Securities and Exchange Commission.
Yet one massive gap for robo-investing has been cryptocurrencies.
While zero-fee digital brokerages like Robinhood and SoFi have made cryptocurrencies available to individual retail traders, so far, they have fallen outside the purview of robo-investing.
Part of the challenge is that licensed robo-advisers have a lot to lose from adding cryptocurrencies into the mix, the biggest of which is their investment management licenses.
Despite big returns this year, cryptocurrencies remain highly volatile and robo-advisers have a duty to act in the best interest of their clients, meaning that the expectation of a high positive return must far outweigh any portfolio risk, which is challenging when it comes to the nascent digital asset class.
Robo-advisors which would appeal most to millennials and Gen Z are also reaching out to the same demographic for whom an overwhelming majority see cryptocurrencies as a legitimate form of payment.
According to a Harris Poll concluded earlier this year, as many as 58% of Gen Z (18 to 24) saw cryptocurrencies as a legitimate form of payment, with the figure soaring to 69% for millennials (25 to 40).
And even as cryptocurrency prices have tumbled, a younger generation of investors have continued to snap up digital assets with a Gemini survey revealing that the average U.S. cryptocurrency investor is a 38-year-old male with a household income of at least US$110,000.
But as fees have dropped across the board and with the robo-advising space becoming more crowded, robo-advisers are understandably looking to cryptocurrencies where they can charge a premium for their expertise.
Whereas a typical robo-adviser could charge around 0.25% as a management fee, equivalent cryptocurrency robo-advisers could levy fees of as high as 2% and in some cases even charge a performance fee on top.
Part of the reason of course is that the cryptocurrency markets can be bewildering, and its speed and complexity can be daunting to the average investor, especially someone who has just barely gotten into stocks, allowing robo-advisers with the wherewithal to venture into the asset class to charge a premium for their service.
And as Gen Z and millennials are starting to have more investable assets, their comfort with digital financial products and cryptocurrencies means that at some stage, even the most conservative robo-advisers will need to look at the nascent asset class.