Wealth technology firms are building and launching advisor-focused crypto platforms at a rapid pace, providing improved accessibility of, and transparency into, clients’ crypto holdings. But providing advisors with new technology is only addressing part of this schismatic asset class, according to an array of panelists that included Michael Kitces, Tyrone Ross Jr. and Adam Blumberg at the 2021 Bitcoin for Advisors virtual conference, which saw just under 1,000 registrations. All speakers agreed that despite tech advances, there’s still a number of unresolved issues advisors are facing.
The one-day event, now in its second year, revolved around a lively conversation between Kitces, chief financial planning nerd at Kitces.com, and Ross, CEO and co-founder of Onramp Invest. Shortly into the conversation, Kitces drew a line between blockchain technology, which he said he’s “super bullish on,” and cryptocurrencies, where he “still struggle[s] a bit with the fundamental investment thesis.”
New ledger technology has the potential to upend the buyer and seller interactions underpinning today’s version of the stock market, Kitces said. “I can't even wrap my head around all the cool applications that people are coming up with in blockchain.”
Cryptocurrencies present more problems, and perhaps less upside, according to Kitces. Because of its volatility, investing in crypto puts advisors at a higher risk for defending themselves in a lawsuit. Kitces pointed out that every bear market produces a spike in court action against advisors. Even if advisors are in the right, defending against lawsuits can become onerous and not worth the hassle, he said.
Crypto is also still relatively costly for advisors, added Kitces. “ETFs are going to have their own layers of costs,” he said, noting that the potential higher returns of crypto come with their own corresponding higher costs. “Even if [crypto assets] give a higher return, that doesn't necessarily mean it gives a higher return net of costs.”
Another counterpoint to crypto enthusiasm is the investment thesis, said Kitces. While crypto coins may be limited in their supply, crypto as a concept is “infinitely splittable and infinitely forkable,” he said. Those characteristics of crypto are what keep Kitces from drawing a clear comparison between crypto and gold, he said. “No one's forking gold.”
But despite an arguably shaky investment thesis for crypto, advisors dismissive of crypto are at risk of alienating clients and potential clients.
“We see a growing swath of young people doing everything from real estate investing to cryptocurrencies, and they just don't want our good old-fashioned stocks and bonds,” said Kitces. “Part of what you're seeing here, at least in the intermediate term, is changing investor behaviors for young people.”
Crypto doesn’t have to be so scary, however. “Advisors hide behind ‘fiduciary.’ I think we do,” said Ross. As long as advisors are doing what’s in the best interest of their clients, providing best execution and providing ongoing advice and monitoring, they’re fulfilling their fiduciary obligations in the eyes of regulators, he said.
Solutions for those mandates come from technology now available to advisors, said Blumberg, co-founder of Interaxis, an advisor-focused crypto education platform. Advisors can model the addition of Bitcoin, for example, inside of a traditional portfolio and look at estate and tax planning situations. “The greatest value we can provide today is just going over those minor things as we, as advisors, get more educated on the topic,” he said.
Tech providers are providing integrations that make those evaluations possible. Riskalyze and Onramp recently partnered to bring risk evaluation to Bitcoin. Meanwhile, MassMutual’s Flourish Crypto has integrations with planning tools like eMoney Advisor and reporting tools from Envestnet.
“As [advisors] get educated on [crypto], you get more comfortable with it,” concluded Blumberg. “You can start to incorporate it in [clients’] plans at a deeper level.”
“If it makes sense for you and your clients, then you allocate to it,” he said. “While it's exciting to think about putting Bitcoin in client portfolios … most of us just need to talk about the basic things, like preventing your clients from blowing themselves up or making regrettable decisions that they don't know because they're kind of educated, but they don't know what they don't know.”