More than a decade after Bitcoin’s launch, cryptocurrency interest remains heated among investors. But for financial advisors, the wise approach to crypto may feel more tepid.
Fielding client questions about digital currencies can put advisors in a tight spot. That’s because it’s unclear which U.S. financial regulations apply to crypto assets and the extent to which they might apply. This leaves many advisors wary of inadvertently crossing a regulatory gray line when talking about crypto.
To get more clarity around the cryptocurrency market from a financial advisor’s point of view, we spoke with Douglas Boneparth, president of Bone Fide Wealth, who has been vocal about his experience with Bitcoin as a miner and advisor in newsletters and with the media.
In the interview, he shares his views on how advisors are dealing with the regulatory landscape and what financial advisors can do for clients without running afoul of the Securities and Exchange Commission or Financial Industry Regulatory Authority. Here are edited excerpts from that interview.
How are financial advisors dealing with cryptocurrency in their practices?
It’s not easy. We’re just not there yet from a regulatory standpoint. We don’t have the integration we need on the technology side. And there are myriad other considerations as an operator and service provider that I need to consider, from liability and risk to the firm’s marketing and brand.
I just renewed my errors and omissions insurance, and it says right at the top in bold: “Your insurance does not cover crypto trading.”
We can’t effectively advise or solicit the sale or purchase of cryptocurrency, and there’s no way to practically place actual crypto into client portfolios. But we can educate our clients about how it works, what it is, the associated risks, where exchanges are located and how they work.
Meanwhile, there are leaders in the crypto community saying to fire advisors who aren’t recommending cryptocurrencies. It’s a slap in the face for advisors who do believe in cryptocurrency but can’t advise on it for the reasons I’ve mentioned.
What does the regulatory landscape around cryptocurrency and financial advice look like right now?
It’s cumbersome. A lot of the things you need to do to advise and implement the recommendations are new.
How many insurance carriers are even going to be comfortable insuring registered investment advisors of any size in this space? Very few. And the ones that do offer insurance, how much are they going to charge to do it?
You might have to be big enough to self-insure on this. And assuming you could do that, how much of client assets would you be allocating to it? Maybe 1% to 5% across the board? If you’re a small firm, that’s just not going to be enough volume to justify the risks and costs, no matter how much you believe in it or how much you think it would be a benefit to your clients.
There’s an easy solution to that, and that’s a cryptocurrency exchange-traded fund or mutual fund. And it’s coming, but just not here yet.
How can advisors talk about cryptocurrency with clients without crossing a regulatory line?
Because I’ve been vocal and I’ve shared my experiences with crypto, clients and prospects will come to me because they know I know about it.
I shared my story as a miner, wrote articles, blog posts and newsletters about cryptocurrency, so they know I have some expertise in the area. They might approach me with the desire to learn more or to talk about what they’ve already done in the space.
They might say, “I’m thinking about doing this,” and ask me to tell them the pros and cons of using Coinbase versus PayPal or something like that. And I can do that. What I can’t do is say, I think you should invest 4% of your portfolio in cryptocurrency. That’s investment advice.
If clients aren’t approaching you, I don’t see any lines being crossed by bringing up cryptocurrency with clients in an educational manner. But saying, “Have you put thought into investing in crypto?” is probably not the best way to go about it. Be careful and proceed with caution.
The way I’ve chosen to do it is to tell my story through content and the media. You could broach it through a blog post and see where it goes. Or you could go about it by displaying thought-leadership on the topic. That way, you can create a buffer there by just espousing your opinions and letting clients come to you.
If you’re an advisor, make sure you’re documenting your conversations. Make sure you’re doing your own due diligence. Most people are going to err on the side of being conservative and just say no. I understand the rationale. But if you took the time to educate yourself, you could get over that fear.
How can advisors educate themselves about cryptocurrency?
For advisors, there are great resources, such as Onramp Academy.
They will show you what a classic, 60/40 risk-adjusted portfolio would look if it had anywhere from 1% to 5% of Bitcoin in it over various time frames. They provide risk statistics and various portfolio metrics, so clients can see what they’re getting into from a statistical standpoint.
They also have fact sheets for every major cryptocurrency. Providing this information is not telling clients they have to invest in crypto. It’s showing them how it looks in a portfolio and how it behaves. I view all of that under an educational lens rather than advice.
More from U.S. News
Q&A: How Financial Advisors Talk About Cryptocurrency With Clients originally appeared on usnews.com