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Editor's Letter: January 2014

Editor's Letter: January 2014

How Can You Give Advice About What You Don’t Understand?

We’ve taken no formal poll, but anecdotal conversations with several financial advisors in recent weeks lead me to believe that many are stymied by the increasingly perplexing options confronting individual investors.

 Take Bitcoin. The online currency is a mystery to many. It is an unregulated, decentralized electronic mechanism of exchange that has no hard underlying asset.

 Loved by libertarians and those that distrust the power of central banks to debase fiat currencies, proponents say that Bitcoin has the potential to create a system of value exchange, enabled by the Internet, independent of interventionists and regulators. “Bitcoin is mainly considered a get-rich-quick scheme with a little financial privacy thrown in,” Jon Matonis, the executive director of the Bitcoin Foundation, recently told The New York Times. “But its larger implications down the road are major disruptions to certain legacy industries.”

 Warren Buffett said never invest in what you don’t understand, and by no means are we advocating an investment. Prices are too volatile, and frankly, investment isn’t the point. Yet understanding the evolution of the currency can only help. It’s doubtful you have any clients asking about Bitcoin; it’s probable you will soon.

 Analysts at Merrill Lynch released a report saying that Bitcoin could become a major player in e-commerce and online payments. Federal Reserve Chairman Ben Bernanke told a Senate committee hearing that “such currencies may hold long-term promise.” A casino owner put his $7.8 million mansion up for sale, payable in Bitcoin. A Silicon Valley firm has created a Bitcoin fund for self-directed IRAs.

 Bitcoin may be a libertarian pipe dream. Yet it holds something in common with another innovation in finance, peer-to-peer lending. Here, individuals and institutions invest in loans, using “real” currency, choosing lendees and setting terms online. The idea is to make an end-run around the traditional banking structure as the middleman in the transaction. Vikram Pandit, the former CEO of Citigroup, recently joined a group of investors in funding a new peer-to-peer lending venture.

 Banks suffer from a labyrinth of regulations, at both the state and federal levels. The thicket of regulations keeps them from innovating. The success of Bitcoin or peer-to-peer lending is far from assured. But they point to the inevitability of the evolution of financial markets outside the traditional arenas.

 Instead of scorning these movements, financial advisors should learn all they can from them and draw some inspiration. Advisors too are working in an industry that is rapidly transforming away from the traditional, centralized markets (think of when brokers were basically Main Street salesmen for Wall Street products) to networks of independent practitioners of a fiduciary-based model of financial planning. Advisors in the future will need to embrace innovation, not shun it.

 I’d like to hear what you think. Drop me a line about this or any other topic. Happy New Year.



David Armstrong


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