Three innovative financial offerings – cryptocurrency, fractional stock shares and securities-based lines of credit (SBLOCs) – are going mainstream, with penetrations in the double digits among U.S. households, especially among younger investors.
This is according to a research report recently released by Hearts and Wallets.
Crypto use almost tripled in the past year, with one in four U.S. households now using crypto, jumping from 8% in 2020 to 22% in 2021, the survey said. Trading is driving the nearly three-fold increase, with three in four crypto users saying they use crypto because “high volatility creates opportunities to make money trading.”
Crypto users are nearly three times more likely than non-users to cite fear of missing out (FOMO), or “possibly missing out on investment growth is a bigger worry to me than the risk of losing money in the short term,” as a reason for crypto use. Crypto users are twice as likely as non-users (54% vs. 28%) to "enjoy thinking about money.” Still, only 28% of households that trade crypto for its volatility are “very comfortable” with risk in their investments, the survey said.
Engagement with crypto grew the most among Millennials, increasing from 14% in 2020 to 38% in 2021. Over half (53%) of Millennials with $100,000 to $1 million say they have used crypto in the past year (up from 21% in 2020), and 64% of Millennial millionaires have used crypto to some degree.
Fractional Shares Hold Big Appeal
Nearly half of U.S. retail investing households now use, or are interested in fractional shares. Appeal is highest among younger households, with 65% of Gen Z, 60% of Millennial and 53% of Gen X households currently using or are interested in fractionals.
Nearly 40% of households interested in fractional shares currently have no exposure to equity, with a number expressing discomfort with risk. Over 35% of consumers who are interested in fractional shares say they are “very” or “somewhat uncomfortable” with investment risk.
Nearly 40% of U.S. households have, or have expressed interest in an SBLOC. Half of households with SBLOCs are currently drawing on them. On average, households that have and are drawing on SBLOCs have a strong cash position, indicating that SBLOCs are often used to shore up liquidity stores, the survey said. Younger generations are most likely to be current users of SBLOCs and show the most interest.
Why So Popular?
There are many reasons these financial offerings--cryptocurrency, fractional stock shares and securities-based lines of credit--are going mainstream so quickly, especially among younger consumers, explained Laura Varas, CEO and founder of Hearts & Wallets.
First, younger consumers are often early adopters of many innovations, she said. This openness extends to new types of investments (cryptocurrency), new ways to make investments (fractional stock shares), and new ways to access credit (securities-based lines of credit).
Younger consumers also have had less time to accumulate substantial wealth; so, fractional stock shares offer a lower cost of entry into the markets. Schwab calls its fractional share offering Stock Slices, while Fidelity calls its offering Stocks by the Slice and SoFi calls them Stock Bits.
“Whatever the name, a buck gets the consumer a piece of a big-name company like Tesla, Apple or Amazon,” Varas explained.
In addition, fractional stock shares allow younger consumers to begin their investing journey and benefit from compounding for very little up-front cash. “The caveat is the money invested should be expendable and not needed for necessities,” Varas warned.
An interesting finding of the survey is that crypto use is growing quickly although only 28% of households that trade crypto are very comfortable with risk in their investments. One of the main reasons driving this use is fear of missing out (FOMO), Varas explained.
“Crypto users are nearly three times more likely than non-users to cite FOMO as a reason they use crypto,” she added. “That said, the rapid growth in crypto use is a contradiction, given the stated level of investment risk users desire. We’re not sure these investors really understand the risk that crypto presents.”
Consumers may be motivated to trade crypto out of FOMO, and the numerous celebrities and other influencers who talk up crypto probably heighten FOMO further, added Varas. “But currency trading in general is very risky,” she said. “In the case of crypto, currency trading is probably even riskier since it is not supported by anything of value like actual metals, or the faith and credit of an issuing body.”
Working With Clients
Varas has a few words of advice for financial advisors with clients who are interested in, or are trading in these innovative offerings. For clients interested in, or are trading in crypto, they should consider proactive outbound communications or rep training to help inexperienced customers weigh the risks of crypto trading vs. other investment opportunities, she said.
“This could be especially important for firms with particularly high customer use of crypto,” she added. “Your client might be trading crypto, even if your firm doesn’t offer crypto trading. For example, 46% of clients of E*TRADE from Morgan Stanley say they trade cryptocurrency. A first step should be to start a conversation and ask your clients about their use of these innovations.”
In addition, advisors and their firms may want to consider adding fractional -shares capabilities as a way to attract younger and wealthier investors, Varas added. “Fractional stock shares will be a wave of the future. If these products aren’t available at your firm, younger customers will shop elsewhere.”
Advisors and their firms should also consider how to offer SBLOCs or develop relationships to offer clients easy access, according to Varas. In addition, they should recognize that lower-asset consumers are also interested in SBLOCs.
A key is education, she said. ‘Help your clients understand the risks involved in such innovations, especially ones like cryptocurrency, and that they aren’t over-leveraged. Make sure they understand what’s involved in using fractional stock shares, SBLOCs and cryptocurrency. Help them to fit these products within a balanced portfolio that achieves their long-term investment and life goals.”
The research report, Crypto, Securities Lending & Fractional Shares: Balancing Access vs. Risk in Innovation, was fielded in September 2021 and includes 5,794 participants.
Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]