Once the preserve of hardcore early adopters, cryptocurrencies are breaking into the financial mainstream and attracting the interest of investment giants in the process.
Morgan Stanley recently became the first major US investment bank to offer clients with at least $2 million in assets access to bitcoin funds. Soon after Morgan Stanley’s entry into bitcoin, rival Goldman Sachs announced they will shortly provide ways for clients of their private wealth management division to invest in a range of cryptocurrencies.
A handful of financial institutions may be slowly warming to digital currencies, but the challenges for professional advisers in offering clients access to, and advising on, cryptocurrencies are considerable. From difficulties in valuing cryptocurrencies to custody concerns and a lack of understanding of digital currencies, many financial advisers are finding it hard to embrace these currencies.
Robert MacDonald, financial planner at Succession Wealth, an independent wealth management and financial planning business with £8 billion of assets under management, believes the main issue with cryptocurrencies is their unregulated nature.
“The Financial Conduct Authority is unlikely to get involved in this asset class due to the lack of tracking ability, potential prospects of theft, fraud and violence surrounding the coins,” says MacDonald.
“In essence, cryptocurrencies are just ‘bets’ and not incoming-producing assets. As such, wealth managers are likely to avoid putting cryptocurrencies in front of their clients as an option.”
Rising investor demand for bitcoin
Many wealth managers and financial advisers may view cryptocurrencies as uninvestable, but interest from UK investors in digital currencies is reaching fever pitch. Sixty-three per cent of investors in the UK are planning to purchase bitcoin for the first time or increase their holding during 2021, according to a survey by UK financial markets platform Investing.com.
It’s not difficult to see the attraction of a cryptocurrency like bitcoin that has a history of rapid price growth to investors with an outsized risk tolerance, with a single bitcoin increasing its value from under £3,000 at the start of 2019 to hitting highs of more than £43,000 this year. Yet, as Richard Jones, senior partner at Oundle Wealth Management, points out, the volatility of cryptocurrencies is well documented.
“While some people have made tremendous returns from bitcoin and other cryptocurrencies, there is nothing to guide us as to what future returns may look like,” says Jones.
When he speaks to clients about cryptocurrencies, the primary driver for considering these investments is the fear of missing out. “Typically these tend to be clients who are otherwise not high risk takers and have simply heard stories of others getting rich quickly,” says Jones, whose firm is a partner practice of St. James’s Place Wealth Management, which manages client funds of more than £129 billion.
Although not wanting to miss the chance to take part in a seemingly booming investment can be a powerful reason for some ambitious investors to try out cryptocurrencies, fear of missing out is not exactly a new concept. “I often point clients towards the example of tulips in 17th-century Holland to remind them of how markets can overreact,” Jones adds.
Growing adviser appetite for crypto
The number of advisers allocating to crypto in client portfolios increased by 49 per cent in 2020, growing from 6.3 to 9.4 per cent, according to a recent survey of financial advisers by Bitwise/ETF. Advisers that responded to the survey reported rising client demand, inflation hedging and high potential returns as key reasons for adding crypto exposure to client portfolios.
As one of the small but growing number of advisers who have embraced crypto, James Vermillion believes cryptocurrencies will play a central role in the future of finance.
“I view crypto as the first totally new asset class in my lifetime and we’re likely in the infancy of how these technologies will impact the world. Like any new technology, time, a maturing market and education will widen the appeal to advisers and wealth managers,” says Vermillion, founder of independent financial planning and investment management firm Vermillion Private Wealth.
Softening anti-crypto rhetoric from some institutions and well-known business leaders, as well as a number of companies adding bitcoin to their balance sheets, are a few of the factors Vermillion attributes to prompting some advisers to welcome bitcoin and other cryptocurrencies.
Despite the growing mainstream acceptance of cryptocurrencies and associated technologies, he is acutely aware of the barriers stopping these innovations from reaching widespread usage by advisers.
“One of the challenges at the moment is the unclear regulatory environment and limited platforms for advisers to implement holding cryptocurrencies in client portfolios. This will surely change as crypto matures as an asset class and regulators adapt. In the meantime, there are other ways to get crypto exposure, but none of them are a replacement for holding the assets and come with various other risks,” says Vermillion.
Attracting millennial clients
Every adviser has their own motivations for backing cryptocurrencies. Some view this as an early opportunity to invest in innovative technology, akin to the opportunities found in the dot com era, according to Dan Eyre, chief executive of Blockchange, a digital asset investing platform for professional wealth managers.
“Others see it as an opportunity to diversify into an asset class that appears to be eating portfolio allocations across gold, cash and fixed income,” he adds.
A perhaps surprising benefit advisers can gain from advising on cryptocurrencies is the ability to attract hard-to-reach millennial clients, as younger investors are driving the increase in bitcoin adoption. Only 1 per cent of over-65s own bitcoin, compared to 18 per cent of 18 to 34 year olds, according to a Blockchain Capital survey.
Eyre concludes: “Nearly all firms that engage with this asset class understand by participating they’re sending a clear message to the market they’re paying attention and are willing to adapt to the desires of a shifting demographic during the largest generational wealth transfer in history.”
