Advisers need to stop ignoring digital assets

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Advisers need to stop ignoring digital assets
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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.

Finding ways to meet client needs even without direct control of assets can be a worthwhile undertaking.

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.

A lack of fundamental understanding of the digital asset ecosystem can be seen as a breach of fiduciary duty to clients.

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. 

If you are an adviser who cannot invest in digital assets for your clients due to practice restrictions, finding ways to meet client needs even without direct control of assets can be a worthwhile undertaking.

Ensuring that a client’s outside cryptocurrency exposure is incorporated into their financial planning picture can give them confidence that you are taking time to fully understand their risk exposure.

Alternatively, researching and understanding the myriad ways in which public companies are investing in digital assets and associated technologies can reveal opportunities that may potentially be better than the digital assets themselves.

At the very least, you as an adviser will be more knowledgeable and will be able to provide valuable guidance to your client in a risk-aware manner.

Matt Apkarian is senior analyst in product development at Cerulli Associates