Surprise! Your clients already have crypto, and here's what you need to do about it

Although some advisors today may foresee themselves never recommending crypto investments, the last thing they should want is to look like “a deer in headlights” should a client ask about digital assets.

So said Don Friedman, president of the professional group Digital Assets Council of Financial Professionals, on the first day of Financial Planning’s INVEST: Cryptocurrency for Advisors virtual event on Dec. 12. Friedman was one of many industry representatives who said that even with the recent FTX scandal and related bankruptcies, he doesn’t expect cryptocurrency to be going away. That means advisors can expect clients to continue asking about it.

The consensus advice: Even if you don’t foresee yourself steering clients into digital assets, you should still learn the basics. Friedman’s fellow panelists at the day’s “Advising on Crypto in Today’s Environment” session said advisors will inevitably be faced with questions about opportunities in digital assets.

“You don’t have to necessarily drink the crypto Kool-Aid,” said Jackson Wood, a financial advisor at the Houston-based registered independent advisor Freedom Day Solutions.

Learning about crypto, he added, “paints you as someone who cares about their future whether you think the asset class is going to disrupt the world or not.”

Wood and Friedman both said they wouldn’t be surprised if many advisors find themselves dealing with clients who have invested in crypto on the side and now are wondering what they should do following the collapse of the crypto exchange FTX. FTX, once the third-largest crypto exchange in the world measured by its assets under management, declared bankruptcy amid revelations that it had made billions of dollars of poorly collateralized loans to an affiliated trading company, Alameda Research. The cryptolender BlockFi has since followed FTX into bankruptcy.

With many wondering where the contagion will stop, clients with digital assets are likely to wonder how exposed they are. Helping them, Wood said, will require advisors to have knowledge of different digital assets and exchanges so they can gauge the risks involved in both what their clients are holding and where they are holding it. Then they need to know about cold storage — ways to hold crypto off of publicly traded exchanges — and tax-harvesting strategies that might help clients salvage any losses from crypto.

The likelihood that more clients are invested in crypto than advisors perhaps know was borne out in a report this month from the JPMorgan Chase Institute, the investment bank’s in-house research unit. Looking at 5 million Chase accounts, JPMorgan found that roughly 13% had transferred crypto in or out of an account at least once by June. But the amounts were small in general. The median transfer was for $620. 

Ben Cruikshank, the president of financial products platform Flourish and moderator of the “Advising on Crypto in Today’s Environment” panel, cited a CNBC survey from December 2021 finding that 83% of millennial millionaires own cryptocurrency.

For advisors eager to learn more about crypto, several panelists offer instructional opportunities. The Digital Assets Council of Financial Professionals has an online course offering advisors continuing-education credits. And the investment management firm Arbor Digital, a sponsor of the event and another panel participant, offers a designation as a certified digital asset advisor.

Speaking at the panel “Incorporating Digital Assets/Crypto into Advisory Practice,” Arbor Digital President Matthew Kolesky said cryptocurrency — partly because of its relatively unregulated state — is more complicated than most investment vehicles financial planners are likely familiar with. That’s why, he said, it’s important “for advisors to work with people who have lived and breathed in this space.” 

Another speaker on the same panel — Chris Leap, the founder of the Dallas-based registered investment advisor Leap Wealth Management — said Arbor Digital proved an indispensable resource when he first considered recommending crypto for clients.

“When I started, I knew enough to scratch the surface,” Leap said. “And what I wanted to be able to do is align myself with the experts and have a portfolio that I could bring forward to my clients.”

Advisors who do decide they might want to recommend crypto, at least to some clients, have a host of other steps they’ll have to take. Matt Calabro, executive director of the software company Compliance Solutions Strategies and another panelist at the “Advising on Crypto in Today’s Environment” session, said advisors getting into crypto will have to do their due diligence to make sure the investments they are recommending are sound. They will also have to do more humdrum things, like set up ways for customers to open accounts and figure out how they are going to report results. Perhaps most importantly, Calabro said, advisors will have to make sure they talk to clients in a way that conveys all the risks of getting into a particular digital asset.

Wood said Freedom Day Solutions makes it a point to bring up crypto only with certain clients.

“It’s a question of: Does their financial plan look robust enough that we can look them in the eye and say, ‘We will open this door to you,'” he said. “Do you want to allocate a small sliver, say 1% to 2% percent of your liquid net worth?”

The day’s speakers were also unanimous in their belief that digital assets aren’t going away anytime soon. Dave LaValle, the senior managing director and global head of exchange-traded funds at the digital asset management firm Grayscale Investments, said this “crypto winter” is different from previous downturns in the market for digital assets.

“What we are seeing people ask now is: Is this the right time to buy?” he said. “That’s a very different posture.”

Grayscale Investments is now locked in a battle with regulators at the Securities and Exchange Commission over its plan to turn its Grayscale Bitcoin Trust — the first publicly listed bitcoin fund in the U.S. — into a spot ETF. Approval would allow investors to put their money into a fund tracking the value of bitcoin, much as they can do now with ETFs tracking the value of commodities like gold, LaValle said.

The SEC rejected Grayscale’s petition in June 2022, partly over concerns that cryptocurrency remains too loosely regulated. Grayscale responded with a lawsuit that’s still pending before the U.S. Court of Appeals for the District of Columbia Circuit. LaValle said having a bitcoin-tracking ETF would benefit not only investors but also advisors.

“The biggest benefit of having this ETF come to market is that advisors understand how to utilize exchange-traded products as building blocks in their clients’ portfolios,” LaValle said. “In many cases, advisors are solely using exchange-traded funds for those building blocks.”

LaValle said that one frustration for advisors is no doubt seeing clients who search for alternative means of getting into crypto in the absence of an ETF or some other tried-and-true means. He said he hopes the collapse of FTX and other digital exchanges will spur regulators to issue rules that will make investing in crypto both easier and safer.

“For the advisors that are listening, this is going to be something that has an allocation in every one of their portfolios,” LaValle said. “So let’s get the framework correct. Let’s bring these opportunities to invest in the market in a way that gives clients and advisors and institutions a high degree of confidence.”