You’d be hard pressed to find an investment that’s generating as much interest among everyday investors as cryptocurrencies like bitcoin or ethereum. The majority of financial planners are less excited. A number of wirehouses – including UBS, Merrill Lynch and Morgan Stanley – have forbidden their advisors from buying and selling bitcoin on behalf of their clients. And they’re not alone. Most smaller wealth management firms have banned these new digital currencies, too.
Advisors' Attitudes Are a Reaction to Volatility
The attitude of the financial services industries towards digital currencies is in part a reaction to the investment’s inherent volatility. After quickly ascending past the $19,000 mark in December of last year, bitcoin has come crashing down to earth this year (on July 12, 2018, the value of one bitcoin was $6,400). Because there’s no intrinsic value to these currencies – and as of now, relatively few places to spend them – there’s no guarantee the price won’t fall even further.
Cryptocurrencies Largely Unregulated
Even RIAs who are more bullish tend to worry about the complicated regulations (or lack of regulation) for cryptocurrencies. The Securities and Exchange Commission (SEC) doesn’t classify two of the biggest digital currencies, bitcoin and ethereum, as securities, meaning they do not fall under the umbrella of the SEC's regulatory control and relevant securities laws. This creates a significant impediment for advisors to get involved. And, given their fiduciary responsibility, it’s hard to justify that such a speculative investment is in the best interest of a client.
Advisors Responsible for Educating
Some financial professionals have come to the realization that sticking their head in the sand when it comes to cryptocurrencies isn’t the answer to this predicament. Eric Jansen, president of Westborough, Mass.-based AspenCross Wealth Management and member of Advisor Insights, is one of them. Because many of his firm’s clients intend to invest in bitcoin or one of its peers regardless of his recommendation, he sees the responsibility to stay up-to-date on what’s happening.
“I think a lot of advisors are hiding behind their fiduciary responsibility,” says Jansen. “Our take is the exact opposite. That’s why you need to understand this.”
While AspenCross doesn’t allow its planners to advise on purchases, per se, he says they do help clients understand where to buy coins and how to store them safely on their own. He also helps them understand the complex tax issues that enmesh some of the newer currencies.
AspenCross has even purchased small amounts of bitcoin and other major cryptocurrencies for his planners so they can become more familiar with them. “That was one of the best things that we did,” says Jansen.
While acknowledging that a lot of the coins being issued may not be around for very long, Jansen believes some of the larger cryptocurrencies are here to stay. Unscoring that belief, his firm now accepts bitcoin as a form of payment for its services. “We feel very strongly that this is not something that’s going away. We know it’s not a fad,” he says.
An ‘Emotional Outlet’ for Clients
Michael Zhuang, principal of the Bethesda, Md.-based advisory firm MZ Capital and member of Advisor Insights, is less sure about the true staying power of these digitally-mined currencies. He says excitement over bitcoin and the like have created a bubble that one day will come crashing down. He won’t advise clients to buy or sell cryptocurrencies, which he sees as too risky for most investors.
Even so, Zhuang says he's prepared when his clients broach the subject, which is happening on a fairly regular basis. He estimates around 10% of them have at least some interest in cryptocurrencies. “Before I give them advice, I have to study the subject myself,” he says.
For those who are dead-set on buying the currencies, he’ll help them set up an account on the exchange Coinbase, a bitcoin broker that provides a platform for traders to buy and sell bitcoin with fiat money. And he makes sure they only put in a modest amount, typically capping it at $10,000.
The result is a compromise of sorts. Clients get the thrill of having skin in the game. But they’re also limiting their potential losses and receiving guidance from someone who’s knowledgeable about the market.
Zhuang says he’s “an emotional outlet” for clients who get swept up in the cryptocurrency hype. Monitoring their transactions helps them maintain a measured approached to a very speculative investment. “If I didn’t do that, they’d make a much bigger investment,” he says.
Investing Indirectly in Digital Money
While betting on the future of individual coin offerings is a dicey proposition, some advisors are more open to investing in digital money indirectly. One way to do this: purchase securities that are tied to blockchain, the distributed ledger technology that empowers digital currencies. So far in 2018, six exchange-traded funds focusing on blockchain have already launched.
AspenCross now offers clients access to its own Blockchain Innovators Portfolio, comprised of companies that either use the ledger system in some way, or develop software applications that enable its use.
For advisors like Jansen, it’s a more responsible approach than investing in the currencies themselves. If digital coins grow in acceptance, these blockchain-focused companies are likely to do well. But the fact that the technology is being used to record transactions across a range of industries means its future isn’t entirely tied to cryptocurrencies.
In addition to its new investment fund, the firm is also developing a website, BlockSocial, that will feature research, blog entries and podcasts related to the emerging technology. “We felt it was important, as an RIA, to have the ability to educate current and prospective customers about blockchain in general,” Jansen says.
The Bottom Line
While advisory firms have largely shied away from cryptocurrencies, in part due to their fiduciary responsibility and the inherent volatility of these investments, many are ignoring these new investments at their own peril. By understanding the market for these currencies, they say they’re better able to serve clients who are going to invest in it anyway.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.