Do Advisers Have a Fiduciary Responsibility to Offer Bitcoin?

Although cryptocurrencies have been in existence for nearly a decade, it is only in the recent past that they have come to dominate conversations among investors. Digital currencies have experienced a boom in interest and value previously unseen in the area.

Now, hundreds of cryptocurrencies have followed in the footsteps of early leaders like Bitcoin (BTC), and there are a similarly staggering number of new applications and projects making use of blockchain technology as well.

While digital currencies are undoubtedly incredibly popular, they remain a mystery in many ways. Of primary concern to many investors, analysts, and advisors, is the extreme volatility that the digital currency world as a whole has already exhibited.

Take Bitcoin as an example, the world's leading digital currency by market cap, which traded at around $17,000 as of December 2022, after briefly trading at record highs above $69,000 earlier in 2021.

With cryptocurrency becoming a bigger part of the investing picture, where the total market value of all cryptocurrencies is around $1 trillion, do financial advisors have a fiduciary duty to consider digital currencies as investable assets?

Some Big Brokerages Shy Away

In the past, many of the major brokerages, such as JPMorgan Chase, Wells Fargo, Morgan Stanley, and Merrill Lynch have asked their advisers to not offer recommendations on cryptocurrencies.

For its part, Wells Fargo has issued research primers on digital currencies, and it also lets its advisers present these documents to their clients. However, it stops there, not allowing advisers to make specific recommendations on account of the complexity and volatility of the space.

The biggest reason why advisers may shun cryptocurrencies is that they remain largely unregulated. The actual infrastructure for holding these assets (custody) is also in the early stages, as is reporting on buying and selling.

Reasons for Recommending

The lack of regulation hasn’t stopped investors from asking their advisers about crypto. This comes as many large institutions are also looking for ways to embrace Bitcoin. Fidelity Investments allows customers to post bitcoin as collateral for loans, while PayPal allows customers to buy and sell this digital asset.

An adviser’s fiduciary duty means they cannot act negligently, make unnecessary trades, or misrepresent a transaction. Other than that, many advisers have a lot of discretion about what is and is not in the best interest of their clients. 

That said, some advisers are embracing crypto for more risk-tolerant clients. A Bitwise Asset Management and ETF Trends survey from 2020 found that 6% of advisers were allocating a portion of assets to cryptocurrency. The majority of those investing in digital assets are doing so for the high potential returns, the survey found.

So, many advisers may still be hesitant to provide recommendations on these digital assets, as they don’t have a fiduciary duty to offer them. However, they may soon lose business to the competition if they don’t embrace them. The other side of things is that many clients may invest in cryptocurrency without telling their advisers.

With that, advisers may consider at least educating clients about cryptocurrency and the safer ways of investing in the asset. Questions about crypto will undoubtedly arise. Being educated on access to it and the investing risks involved could be useful for advisers as they guide clients.

Guidance For CFP® Professionals

In 2022, the Certified Financial Planner Board of Standards issued guidance for CFP® professionals to follow when recommending cryptocurrency-related products to clients. The Board does not prohibit a CFP® professional from providing financial advice about cryptocurrency-related assets; however, when doing so they should proceed with caution. They must also adhere to the same Code of Standards as with other financial products or assets. Moreover, they should be competent to provide such advice consider the particular attributes, risks, and uncertainties that cryptocurrency-related assets present.

The Bottom Line

Financial advisers are regulated by the Investment Advisers Act of 1940 (not Financial Advisors), they have a fiduciary responsibility to act in the best interests of their clients. This means that they must offer investment advice that is suitable for their clients based on the clients' financial circumstances, goals, and risk tolerance. Whether or not an adviser has a fiduciary responsibility to offer advice on bitcoin would depend on the specific circumstances of the client and the adviser's expertise in this area. While bitcoin and other cryptocurrencies can offer new opportunities as an alternative asset class, it also comes with unique risks and uncertainty. It is important for clients to discuss their investment goals and risk tolerance with their advisers in order to determine the best course of action.

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 other 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.