In Focus: Megatrends  

Advisers need to stop ignoring digital assets

Matt Apkarian

Matt Apkarian

For the past few years your client has listened to you, their financial adviser, telling them that cryptocurrency assets are not suitable for their portfolio. 

Yet this client has watched their friends and colleagues brag about generating returns of 5x-10x over the past five years on a piece of their portfolio.

Now they’re reading headlines of traditional asset managers partnering with digital-asset-enabled companies to expand their offerings to meet the demands of their clients.  

Consider this: your client calls you for a quarterly portfolio review and they ask about what is going on in the digital asset ecosystem.

You continue to tell them that you don’t believe in cryptocurrency, and you don’t have capabilities to provide exposure to digital assets in their portfolios.

The client then starts to require significantly more attention as they question whether you are really considering all available investment options for their portfolio, and you believe they may be warehousing risk assets in an external account they’re not telling you about. 

The probability of this story becoming a reality for financial advisers who choose to ignore digital assets becomes greater by the month.

While the volatility of digital assets may still make them unsuitable for many clients, in the mass market and mass affluent client segments a lack of fundamental understanding of the digital asset ecosystem and the performance characteristics of cryptocurrencies can be seen as a breach of fiduciary duty to clients.  

According to a 2021 survey conducted by Cerulli Associates in the US, 45 per cent of financial advisers believe they will be using cryptocurrency in portfolios by client request at some point in the future.

This serves as a large step above the 10 per cent of US financial advisers who currently use cryptocurrency by client request, and 7 per cent who use cryptocurrency based upon their own recommendation.

Allocations to cryptocurrency are also expected to increase, as are advisers’ expectations of boosting allocations to alternative investments altogether.  

While it is understood that many financial advisers are restricted from using cryptocurrency by their home office or advisory practice as a whole, at least in the US, those who are allowed are seeing capabilities improve to levels that rival the ease of investing in traditional asset classes.

The US now has futures-based cryptocurrency exchange-traded funds available, which can somewhat patch a void that is expected to be filled with a spot-based ETF in the coming years.

For financial advisers who are not happy with the exposure and tracking error provided by futures-based products, platforms exist that allow the discretionary purchase of cryptocurrency for client portfolios, and the integrations the platforms offer are progressing toward a near-seamless experience to which the adviser is accustomed.