The confusion over crypto assets

Financial advisers’ clients are clamoring for crypto assets, while brokers and advisers are trying to figure out how this nascent asset class fits, if at all, into their investment and retirement portfolios.

That hurried, confused ardor for cryptocurrencies and digital assets is occurring even amid incredible drops in the market value of such assets: The price of Bitcoin, the granddaddy of digital currencies, fell nearly 20% in January from its November high of $67,582. Last Wednesday, Bitcoin was trading at $44,259.07.

Demand for digital assets has gotten so strong that even Hollywood is getting into the act — always a troubling sign for investment professionals, who abhor high-priced celebrity pitchmen who hype market highs rather than the cold, hard data of investment management.

Many financial advisers undoubtedly enjoy the oeuvre of Matt Damon — Jason Bourne is a clear favorite. But Damon’s recent commercial for, an app for trading Bitcoin and digital currencies that uses the tagline “Fortune favours the brave,” will create confusion for clients, who want to start trading and demand that their advisers start trading now!

Fortunately for clients and their financial advisers, despite the interest and demand, buying digital assets and currencies still isn’t easy. But the wealth management industry, with roughly 300,000 retail-focused registered reps, or brokers, and investment advisers, is slowly turning its focus to crypto assets.

“Crypto is hard to ignore,” Walt Bettinger, CEO of Charles Schwab Corp., said last month in an interview with Bloomberg. “It’s fairly significant today. We have a lot of ways that clients today can invest in crypto. What we don’t offer is direct trading. We would welcome the chance if the opportunity presents itself, from a regulatory standpoint.”

Indeed, for the most part, broker-dealers are currently avoiding direct trading and custody of digital assets, leaving that to startups and specialty shops. Instead, they’re opting to give advisers access to a limited number of digital and crypto-linked funds while waiting for the Securities and Exchange Commission to give the OK on exchange-traded funds that invest directly in digital currencies like Bitcoin.

Much of the brokerage industry’s ability to sell the asset class depends on what securities regulators do in the next few months. The big question is, when will mutual funds and exchange-traded funds be able to buy and hold digital currencies like Bitcoin and Ethereum, the two largest coins in terms of market capitalization? Many in the industry are hoping that happens this year, giving financial advisers much easier access to the asset class.

But client demand is real and it’s happening right now. That means the longer it takes the SEC and the Financial Industry Regulatory Authority Inc. to figure out the intricacies of the trading and custody of Bitcoin exchange-traded funds, the greater the potential confusion for investors and their financial advisers.


Regardless, interest is real. In a survey of more than 600 financial advisers from across the spectrum of the financial advice industry, from financial planners to wirehouse advisers, 94% said they had received questions from clients about crypto in 2021, up from 81% the year before, according to a January survey from Bitwise Asset Management and ETF Trends.

The percentage of advisers allocating to crypto in client accounts grew sharply, from 9% last year to 15% this year, according to the survey. An additional 14% of financial advisers said they will “probably” or “definitely” allocate in 2022.

“Financial advisers are the next major audience to move into the crypto market.”

 Matthew Hougan, CIO, Bitwise Asset Management

It’s getting easier for advisers to invest their clients in crypto assets or give them exposure to the asset class, although the issue of how much risk such an investment involves is still the key question for advisers.

“When Bitcoin was first created back in 2009, you had to have a wallet and it was really do-it-yourself,” said Matthew Hougan, chief investment officer at Bitwise Asset Management, a cryptocurrency index fund manager with $1.7 billion in assets. “That process has become more institutionalized and regulated. For example, we custody one fund with Fidelity Digital Assets.”

“Financial advisers are the next major audience to move into the crypto market,” he said. “But despite improvements, it’s still not push-button easy to get diversified exposure to crypto assets.”

Hougan added that Bitwise Asset Management has 20 wholesalers knocking each day on the doors of RIAs and broker-dealers, a sizable commitment in staff to sell a product.

According to a report this month by the Wells Fargo Investment Institute, there are currently three ways for investors and financial advisers to gain exposure to cryptocurrencies.

First is buying directly from an exchange, which means dealing with complex technology and high speculative investment risk, according to the report.

Next come mutual funds, ETFs and grantor trusts: Mutual funds and ETFs are currently backed by futures and not the digital assets themselves, while the trusts are dogged by high fees and volatile asset values, according to Wells Fargo.

Wells Fargo advises against those first two methods. Until mutual funds and ETFs are backed by digital assets themselves, a development awaiting the approval of securities regulators, Wells Fargo prefers providing exposure to cryptocurrencies via professional management through a private placement, according to the report.

A key takeaway of the Wells Fargo report is that the embrace of cryptocurrencies is inevitable; indeed, they look to be nearing “a hyper-adoption phase, similar to that of the Internet during the mid-to-late 1990s,” according to the report. In conversations with numerous industry executives over the past few months, that notion that cryptocurrencies’ path resembles that of the worldwide web 25 years ago, is currently part of the prevailing thinking on the asset class.


Meanwhile, the financial advice industry’s largest firms are taking a varied approach to digital assets and cryptocurrencies. The big firms are worth watching closely when a new group of investment products is introduced because their smaller competitors often follow.

But a wide range of responses from advisers and their firms is an indication of how far the market has to go to develop.

About a year ago, Morgan Stanley started offering wealthy clients access to three funds that enable ownership of Bitcoin. Only wealthy clients with an aggressive risk tolerance — and at least $2 million held by the firm — will have access to the funds, two of which are managed by Galaxy Digital and the third by FS Investments and NYDIG.

UBS, on the other hand, is bearish on the asset class and has an extremely limited offering of crypto-related funds, said an industry source, who asked not to be named. Merrill Lynch declined to answer questions about whether the Thundering Herd was able to sell crypto-related products.

LPL Financial currently has about half-a-dozen crypto-related funds, including the Grayscale Bitcoin Trust, on its platform for its brokers and financial advisers, the overwhelming majority of whom are independent contractors and not employees, like those working at the wirehouses.

“We have crypto training and concentration limits, the kind of risk structure you would have with traditional complex products,” said Rob Pettman, executive vice president of wealth management solutions at LPL. “But there is not an additional demand for advisers to get access to crypto assets right now.”

“Some of the sales of securities — about one-third — is from advisers to themselves,” Pettman said. “They want to learn about it. A lot of folks are just curious about how these things operate.”

Broker-dealer interest in digital assets is clearly picking up. Because of custody, technology and reporting, trading such assets clearly remains a distant goal, but applications to Finra from broker-dealers to work in the crypto industry have soared of late, said Mitch Avnet, CEO of Compliance Risk Experts, a consulting firm.


A couple of years ago, his firm was working with two or three broker-dealers on applications to work as a placement agent of crypto funds, sales and training, and other aspects of the business, Avnet said. Now his firm is working with more than a dozen broker-dealers on such applications.

And Finra is taking its sweet time to approve those broker-dealers as it waits for the SEC, along with the rest of the brokerage industry.

“Anytime you have an unregulated part of the industry that’s new and evolving, it’s an opportunity to attract people who are questionable in background,” Avnet said. “And Finra want to make sure that broker-dealers have robust processes to vet them before transactions.”

As the crypto market takes shape for financial advisers, RIAs initially have an advantage over broker-dealers, Avnet added. RIAs are regulated by the SEC and depend on disclosure rather than receiving regulatory approval in such matters, he said.

An example of RIAs taking the lead in crypto came in December, Avnet and others said, when Rithholtz Wealth Management and WisdomTree said they were collaborating to offer access to a diversified cryptocurrency index in the form of a separately managed account on the Onramp Invest platform.

“I don’t think anyone is rushing to [cryptocurrency], but it is divided between RIAs and everyone else, broker-dealers, wirehouses, hybrid firms,” said Tyrone Ross, CEO and co-founder of Onramp Invest. “RIAs like Ritholtz have the most latitude. The SEC has given [RIAs] guidance on Bitcoin, custody, billing policies and procedures. So, it’s starting to bubble in that segment of the industry.”

[RELATED: Comments not likely to sway SEC to approve Bitcoin ETF]

The post The confusion over crypto assets appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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