The past few years have experienced a rapid expansion of the use of digital assets within global financial markets. With momentum fueled by retail investors on various online digital exchanges, the total market capitalization of globally traded cryptocurrencies has increased threefold between March 2016 and March 2017.
Viewing these new products in a productive light, wealth managers can prepare for the likely scenario of a client inquiring about their advisor’s digital asset capabilities. In a survey conducted by Bitwise, a leading provider of index and beta cryptoasset funds, nearly 80 percent of wealth management companies surveyed reported that clients had asked about digital assets in 2018.
Advisors can begin to take strategic actions today to better prepare themselves to support future digital asset capabilities. The same Bitwise survey found that 20 percent of companies surveyed planned to include cryptocurrencies in their portfolio offerings. By acting now when the prevalence of digital assets is low and the industry is still in its infancy, advisors can ensure that they are current on what they need to offer in order to stay competitive.
The viewpoint that digital assets (whether tokens or cryptocurrency) belong in a portfolio is not likely to gain rapid popularity overnight. The required infrastructure is not institutionalized within wealth management, the underlying distributed ledger technology and regulatory structures are still in their infancy, and there is not widespread understanding of the many capabilities that digital assets provide. This, however, should not deter wealth managers from adopting a strategy geared toward upskilling themselves and their staff in digital asset capabilities that exist today. By taking a proactive learning approach, wealth managers can adopt new capabilities as they become available.
Some of the actions that wealth managers can take include educating the necessary investment staff, attending conferences and community events focused on digital assets, hiring outside agencies to conduct workshops and training sessions, and incentivizing employees to learn about digital assets and associated capabilities. Integrating these strategies into day to day processes for employees will help foster a culture where ongoing education of digital assets is encouraged. As client demand grows, investment professionals will be better equipped to answer questions in an advisory role or act on investment requests.
Wealth management firms concerned about the impact of new digital products on portfolios should begin developing specialized partnerships with key companies operating in the digital asset space.
Platform partnerships: Digital assets require a high-level of security and encryption to custody the tokens and ensure no fraud occurs. The new technology and infrastructure required to support digital assets is complex and the expertise to build solutions in-house may not be available to all institutions. As a solution to this complex barrier of entry, wealth managers can look to partner with market participants who provide platform-related digital asset services, such as a securities marketplace, issuance provider or exchange. These partnerships will also help smaller wealth managers scale their digital asset practices without requiring significant investment in additional resources or expertise. By connecting with emerging companies like Securitize, Bitwise or TZERO, wealth managers can quickly integrate required infrastructure for digital assets into their practices and service their clients without significant investment.
Specialized product partnerships: Product partnerships will be important for wealth managers to meet the increased demand for in-house product knowledge and specialists. As the concepts of digital assets and tokenization become adopted more broadly, the ability to participate in direct investment becomes more accessible to retail investors. For example, a client may be interested in owning a piece of a multi-family rental property in Rome, Italy, or partial ownership in the music streaming rights of a popular new song. Certain digital products that were not previously looked at through an investment lens may now be viewed as investable. Thus, wealth managers will increasingly need to seek specialized partnerships with brokers and a new class of product and investment specialists.
If incumbent firms look to begin forging these relationships sooner rather than later, they will gain a competitive advantage with regards to the products they can offer their clients. This allows an initially defensive strategy, geared at mitigating the disruptive impacts of digital asset adoption, to become offensive and serve as a customer acquisition tool via offering unique investments in a variety of products that may not be available elsewhere.
While the above strategies will be beneficial to wealth managers as the digital asset landscape develops and evolves, it will be equally important for market participants to continuously invest in enhancing digital asset capabilities. This type of broad strategic guidance can vary, and firms should optimize their investment selection processes by finding projects that will provide the greatest return on investment.
Externally focused investment: Externally focused investment refers to investments that enhance a firm’s connectivity with market participants outside of the firm. For example, investment in a service from a well-respected digital asset custodian, such as Coinbase Custody or BitGo, rather than building a custodial solution in-house. Firms can also invest in a variety of other asset market services such as exchange connectivity and execution, specialized research services, broker-dealer services and full-service based solutions that incorporate critical market functions into a single product. Focusing on investing in the right external services allows wealth management firms to enter the digital asset market in a financially conservative, flexible manner that can be scaled based on client demand.
Internally focused investment: Internally focused investment is rooted in the idea of investing in the relationship between the wealth management firm and the customer interested in digital assets. This could include investment in a customized client portal that allows for a holistic dashboard view into traditional assets (equities, fixed income) as well as non-traditional assets (private company ownership, cryptocurrencies and other new types of digital products). Internally focused investments seek to provide a deeper and more meaningful customer relationship between the wealth manager and the client. Making internal investments to build a more enhanced digital asset customer experience will be a differentiating factor as this landscape continues to mature.
The future client base of wealth management companies is uniquely interested in the world of digital assets and cryptocurrencies. While the institutional market for these products is still relatively in its infancy, client interest exists and provides a potential market for early adopters to take advantage of. By preparing today for the digital asset wealth management market of tomorrow, firms can evolve and adapt, turning a potentially disruptive technological movement into a growth opportunity.
Tyler Salathe is a senior consultant at Capco.