As Bitcoin, Ethereum and other cryptocurrencies continue to become a greater part of the financial, economic and social landscape, it’s become increasingly difficult for financial advisors to figure out ways to properly serve their clients. Legal and fiduciary risks as well as a general lack of knowledge regarding this fast-changing industry are presenting advisors with new questions about how and if to weave crypto into client accounts. The ETF Think Tank recently welcomed Caitlin Cook, the Head of Community and Research Associate at OnRamp Invest, and Jeremy Schwartz, Global Head of Research at WisdomTree, to discuss some of these challenges.
According to Cook, the biggest challenge today is education and there’s a need to make it very simple for advisors. Understanding the vocabulary around defi and cryptocurrency is probably the first step. Many advisors simply don’t know what they don’t know at this point and starting with the basics is often the most beneficial early on. She notes that, in many cases, the clients know more than advisors and you are not serving your clients properly by not having a certain level of education on the topic.
Another way, she says, to bridge the gap is advisors talking to other advisors. With education being the building block of trust and a widespread acceptance that this is not going away, it’s important for advisors to leverage each other whenever possible, so there’s less discouragement from adopting crypto faster. Most clients don’t understand crypto or the risks and volatility associated with them, so educating them before having the suitability discussion is a logical first step. One of OnRamp’s goals is to be a holistic source of education including curating resources for tax planning, financial planning and end of life planning and how crypto can get built into these things.
Another hurdle for advisors is making them feel comfortable having the crypto conversation with clients without having them feel as if they are going to run into compliance troubles. Compliance approval tends to scare advisors away. There is a big need to update legal disclosures and it’s about taking the time to do the research and covering their bases. One issue is that while there have been some regulatory comments from the SEC, there has not been a big come-together on guidance and that needs to happen at some point soon.
Schwartz talked about crypto in terms of how WisdomTree was working it into model portfolios. The company has recently added bitcoin to its 60/40 and 80/20 models, but in different ways. In the 60/40 model, the allocation to crypto came from bonds due to the belief that fixed income presented a poor risk/reward opportunity given record low yields. In the 80/20 model, it came from equities so as to add diversification without sacrificing long-term growth potential. WisdomTree has a 5% allocation to crypto in these models, enough to make it meaningful but not enough to expose them to undue risk.
Schwartz also talks about how WisdomTree’s approach to alternative asset classes has changed over time. The company has traditionally maintained more of a value orientation that weighted towards things, such as dividends and earnings. Today, product offerings cover themes, including growth, momentum, and disruptive tech. Some of the models, he notes, also include small allocations to gold, commodities and crypto, so the thinking has evolved a bit over time. As it stands today, WisdomTree is keeping an eye on inflation, but believes that high inflation and money printing could lead to increased demand for cryptocurrencies over time.
Both Cook and Schwartz agree that the crypto space will continue experiencing rapid growth and acceptance. There’s work to be done for advisors making clients more knowledgeable about this sector, but eventually most will be weaving crypto in the conversations in the same way that they are with stocks, bonds, and real estate today.
This week our guest will be Frank Holmes, joining us to discuss crypto, gold, and mining. Sign up here.
The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).