Crypto may seem like the last thing financial advisors want to talk with clients about in this environment, where each day seems to bring a fresh embarrassment for the once-feted asset class.
While former crypto exchange FTX’s disgraced ex-CEO Sam Bankman-Fried waits in jail for his potential extradition to the United States to face criminal charges, the crypto winter continues and rival exchange Binance reportedly losing as much as $3 billion to client withdrawals at one point earlier this week.
But client interest is here to stay, certainly among younger investors, and it’s in times of crisis that advisors shine. Speakers at Financial Planning’s virtual INVEST Cryptocurrency for Advisors conference this week said that the industry is entering a more mature, structured phase in how it engages with digital assets.
FP Wealthtech Reporter Justin Mack and Editor-In-Chief Brian Wallheimer each moderated a panel in which speakers looked back at crypto for advisors in 2022 and looked ahead at 2023, respectively.
“We don’t have that FOMO that we had in 2021,” said Adam Blumberg, a certified financial planner who is the co-founder of Interaxis and PlannerDAO, in the panel discussion Tuesday.
Interaxis is a company producing educational materials for the advisor community, including a CFP Board-approved certified digital asset advisor certification course that can be taken online. PlannerDAO is the first decentralized autonomous organization — an online community run as a pure democracy without central authorities, where each participant has an equal vote, and where all actions are viewable on a public record in a blockchain — for financial advisors.
A year ago, Blumberg said, clients would walk into their advisor’s office “with five and six figures’ worth of crypto that they didn’t really know how they got. They just bought a little bit, it shot up.”
Unsure of what to do next, they would ask for help.
“Advisors were doing anything they could to just add crypto to their practice somehow because it was the thing to do. It was a hype cycle.”
‘Where we should have started’ Now, though, coming after all the meltdowns of once-hot businesses in the crypto world, the industry will see financial professionals beginning to learn how the technology actually works, Blumberg said. Clients and advisors will be looking at “trying to buy things not because you think they’re going to go 100x, but because you think there’s actually good value there.”
Jackson Wood, a financial advisor and portfolio manager at Houston-based registered investment advisor firm Freedom Day Solutions, said FA’s have an opportunity without the distraction of last year’s “raging bull market” in crypto, to avoid chasing gains and speculative conversations with clients and focus on more fundamentals in 2023, just as they would with any other investment.
Financial advisors might be still in reactive mode at the moment, given the fear and uncertainty in the markets, so their meetings with clients are likely to focus on crypto allocations, taxes and tax-loss harvesting, estate planning and “offering some sort of fiduciary guidelines on properly storing these,” Wood said.
“And that conversation is where we should have started.”
Looking ahead to 2023, “the conversations will shift to, how do you store your wallet or your coins? How do you take wallets off of an exchange and into self-custody? How do we interact with DeFi protocols natively, instead of outsourcing yield farming to a CeFi company?” Wood said.
CeFi, or centralized finance companies, are middlemen offering consumers access to peer-to-peer crypto lending, where they can earn interest on the crypto that they deposit. BlockFi, Celsius and Voyager are three examples of such companies; all three filed for bankruptcy this year.
While these recent corporate meltdowns can be a deterrent for advisors to learn about crypto, they are also important to distinguish from the actual blockchains themselves, which remain intact — a point that advisors might share with jittery clients.
“The failures we’ve seen [in crypto] are because of human error and not because the technology is flawed or been hacked or smart computers are breaking into wallets or anything like that,” Wood said.
It’s just a matter of finding the trustworthy players and platforms, by this logic.
Where things are headed, further down the line In 2023 and beyond, there will also be growing interest in identifying crypto and decentralized finance projects that stand out for long-term investing, especially ones that have strong “use cases” or practical applications in the real world.
As development and demand for applications from other cryptocurrencies grows, so will the number of use cases, Blumberg said.
Both panelists cited Ethereum, which underwent a major upgrade this year known as the Merge, shifting its operations from the energy-consuming Proof-of-Work mechanism to the more energy-efficient Proof-of-Stake mechanism, as an example of a project to watch that offers such utility. Ethereum is the second-largest cryptocurrency after Bitcoin by market capitalization.
“It’s the one that the entire DeFi ecosystem is built on. NFT’s exist because of Ethereum. Basically, Ethereum took blockchain technology and said, ‘we can bring this to other industries by utilization of smart contracts,'” Wood said.
Wood added that he believed “the tokenization of securities and assets is going to be a big topic in the future.”
“If we do take equity in a company, and we can tokenize that, that trades on a regulated exchange and sits in a regulated wallet, it makes the securities industry more efficient. It makes our job as financial advisors and portfolio managers easier,” Wood said.
Wood has owned Bitcoin himself since 2012.
Institutional players are waitingThe big players in the industry are also expected to continue ramping up their presence in the crypto world, though current setbacks may have them easing up on the gas if not slamming the brakes.
“Many of the institutions that are getting into crypto, either through custody or trading or allowing their clients to own it, allowing advisors to manage it, they’ve done their homework. They’re not getting in just because it’s a fad,” said Blumberg, citing the amount of capital investment, due diligence and regulatory and compliance scrutiny such companies have to subject themselves to. He gave Fidelity as a prominent example of a company that seems to be “all in” on crypto.
Fidelity “decided they didn’t have the confidence to outsource things like custody or trading, so they built it all in-house,” Wood said, adding that other big names may be interested in doing the same, but it could take them a while.
“I don’t think they’re all in a position like Fidelity to just build it themselves,” he said, noting that as far back as 2015 when he was working at Fidelity, the giant asset management firm was already “hard at work on crypto and building their entire division there.”
Scandals like the one at FTX may put “the brakes on institutional adoption momentarily, because now they have to question whether or not these different custodial platforms are rehypothecating their deposits and investing in startup companies with their deposits,” Wood said.
“But as soon as there’s kind of a path forward and there’s regulated exchanges and custodians and they feel comfortable outsourcing some of the management, then I think it’s full steam ahead.”
Looking for Gensler’s update With formal regulation likely to come soon and provide more clarity, Wood said, confidence will likely be restored to the market.
“I want to be clear, I’m not saying that the entire industry needs to be regulated and that nothing should be able to exist outside of regulations,” Wood said. “But specifically with our industry and securities rules, it would be very helpful to have some sort of framework from the SEC or from the regulators on what is a token, what is not a token, what different exchange needs to register as a broker-dealer.”
Gary Gensler, chair of the Securities and Exchange Commission, which has charged Sam Bankman-Fried with crimes including securities fraud, wire fraud and money laundering, is under pressure from a Democrat lawmaker who accused him of not acting sooner to prevent the loss of FTX customers’ funds — which may push the SEC to issue regulatory frameworks sooner, at some point in the new year.
Engaging millennials who love crypto The decision to invest in crypto may not be for every advisor, and advisors nearing retirement whose client base is also elderly, in their 70s, 80s and 90s, may choose to steer clear of it, Blumberg said.
But choosing not to learn about it also means missing out on an opportunity to more deeply understand the entire financial services industry. Blumberg said he learned more about the industry from crypto than from years of studying finance in college and working as a CFP.
“What crypto, DeFi is doing, is breaking it all apart and letting us reassemble it the way we want to. And you have to understand how the whole system works to get there,” Blumberg said.
If the clients are younger, though, or an advisor is looking to capture more of the coveted millennial and Gen-Z demographics as they benefit from the great ongoing wealth transfer, research also suggests that crypto is not a game they can afford to sit out.
“Even if you hate crypto,” said Ben Cruikshank, president of tech platform Flourish, “if your affluent accumulator-age clients are walking in the door with crypto positions, and you say, ‘No, we don’t touch that, we don’t deal with that because we advise against it, we can’t even have a conversation with you,’ that’s a huge problem for advisors.”
This attitude would be especially short-sighted if the crypto markets “come roaring back a year from now,” Cruikshank said.
Flourish, a tech platform owned by the insurance company MassMutual and aimed at registered investment advisors, helps advisors track client assets. The company offers a turnkey service for holding and trading cryptocurrencies, built for independent RIA’s, which allows advisors to view client balances and manage accounts. They can also store investments in both hot and cold wallets through a partnership with digital asset custodial company Paxos.
Cruikshank added that Flourish serves around 80 RIAs and the average client age is 48, meaning there are also clients well above that age who are interested in crypto.
Cruikshank and Janet King, vice president of research at Financial Planning’s parent company Arizent, discussed research on client and advisor interest in cryptocurrencies and what it means for the future of the profession in a panel at the conference Monday. Justin Mack moderated.
Millennials are especially interested in crypto, Cruikshank said, citing research from CNBC showing that 83% of millennial millionaires owned crypto as of December 2021.
“I talk to advisors every day. If I ask them, what is your biggest business priority going forward? Winning more wealthy accumulating-age clients is at the top of virtually everyone’s list,” Cruikshank said.
“Any growth-minded advisor would love to win more millionaires who are between 25 and 45 years old, let’s call it. The reality is, almost all of those people already own crypto. And it doesn’t matter if the allocation is 15% or 1%. It is there. It is real. So if I’m an advisor trying to win more of those clients, I certainly should want to be educated on the topic.”
Engaging them now, and being able to talk clients of all ages through the mess of the current crypto landscape can pay dividends for a wealth manager’s practice down the line, Cruikshank said.
“Just think about those clients who invested a year ago. They’re sitting on losses. They might have had money stolen. Things are painful. They’re not sure about the tax consequences.”
King presented research from Arizent, completed in November, showing similarly that financial advisors reported the strongest interest in crypto coming from clients of around that age.
“Advisors are telling us that most of the interest is coming from millennials and Gen X,” King said.
Men in the study were nearly twice as likely as women to be interested in, using or investing in crypto.
Arizent plans to release more research in January with a report on its predictions for crypto and advisors in 2023, King said.
Over half of financial advisors surveyed, or 56%, reported investing in crypto themselves, although some advisors are just dipping their toes in and one-third said they had less than $10,000 in crypto.
But a majority of advisors, 61%, agreed with this statement: “I need to be educated about cryptocurrency to properly serve my clients.”
Still, many advisors currently still don’t feel confident advising their clients who are hurting from the decline in the crypto markets.
“You only have 11% of advisors who say that they feel very confident helping clients who maybe have witnessed a decline in their portfolio as a result of some of the recent changes,” King said. “Thirty-two percent who are somewhat confident.”