By Mallika Mitra Your Money Guide
Financial advisor Douglas Boneparth considers himself to be fairly pro-crypto. But, despite the fact that he has clients who directly hold cryptocurrencies, he can’t actually recommend that they buy or sell their digital coins.
That’s because cryptocurrency isn’t regulated by agencies like the Securities and Exchange Commission and Financial Industry Regulatory Authority, which Boneparth and other advisors take their guidance from before bringing recommendations to clients. The most he can do is educate them on where and how they can buy it if they choose to themselves, the risks associated with incorporating crypto assets into their portfolios and how it can impact their overall financial goals.
“There is a regulatory and compliance landscape that is handcuffing the vast majority of registered investment advisors from making recommendations about the purchase or sale of crypto assets,” says Boneparth, an advisor at Bone Fide Wealth based in New York City which specializes in millennials.
But interest in cryptocurrency has boomed in the last year, with Bitcoin’s price reaching an all-time high of more than $63,000 in April of 2021 after sitting around $8,000 just a year earlier. Apps like Robinhood and Webull allow users to trade cryptocurrency at lightning speeds with no fees, and even roboadvisors, which have long touted the goal of helping young people with longterm investing, are dipping their toes into crypto.
So it makes sense that financial advisors are getting inundated with questions from clients about whether or not cryptocurrency should be a part of their investment portfolio. And some advisors are warming up to the idea of digital currency. The Financial Planning Association’s (FPA) 2021 Trends in Investing Survey found that 14% of advisors surveyed say they are currently using or recommending cryptocurrencies, up from below one percent in 2019 and 2020. And 26% said that they plan to increase their use or recommendation of cryptocurrencies over the next year.
But even if financial advisors want to recommend that their clients include digital coins in their investment portfolio, their hands are tied.
While government agencies don’t prohibit advisors from selling or recommending cryptocurrency, Bitcoin remains unregulated in the U.S. Since the digital currency doesn’t adhere to the rules government agencies have for other assets traded on the public market, like how public companies need to release regular financial statements, many firms don’t allow advisors to make crypto recommendations.
Still, that doesn’t mean investors aren’t asking: the FPA survey also found that nearly half of advisors said clients asked about the asset in the last six months, compared to 17% in 2020. Clients ask Tiffany Welka about cryptocurrency every day, the financial advisor and vice president at VFG Associates in Livonia, Michigan says.
“I have to keep saying the same thing because our compliance department actually has told us and coached us that we’re really not supposed to be advising our clients to be in cryptocurrency,” Welka says.
It’s tough because, while such a speculative investment might not be in the best interest of her clients right now, it could also represent the future of investing, spending and saving, she adds. For now, Welka lets her clients know that she isn’t able to recommend cryptocurrency — and if they decide to buy crypto on their own, she can’t manage it for them.
However, interest from clients and financial advisors has spurred investment firm Baird to re-evaluate the investing case for cryptocurrencies, says Ross Mayfield, an investment strategy analyst at Baird. When it comes to client interest and institutional adoption, it certainly seems like the crypto space is here to stay, he adds — and that might not have been something he would have been as confident saying just two years ago.
“It’s a whole new world today,” Mayfield said.
Buying Coinbase stock is one way to thread the needle, so to speak.
The Securities and Exchange Commission (SEC) has repeatedly blocked efforts to bring a Bitcoin ETF to the U.S. market, and investors should be cautious of the volatility and potential for fraud when investing in Bitcoin. But experts don’t think a Bitcoin ETF is out of the realm of possibility, though likely not for at least a year or two. Analysts have been encouraged by the appointment of Gary Gensler, who previously taught blockchain and digital currency classes at the Massachusetts Institute of Technology, to the SEC. ETFs track the prices of underlying assets of indexes, so the price of one share of a Bitcoin ETF would move with the price of Bitcoin, according to the Canada’s Corporate Finance Institute. In other words, investors could invest in Bitcoin without having to deal with a crypto exchange. (Canada has approved Bitcoin ETFs.) An approved Bitcoin ETF in the U.S. would change the game for advisors who want to recommend adding Bitcoin to a portfolio but can’t, as well as their clients who might not feel comfortable buying it on their own via one of the crypto exchanges or trading apps.
For now, financial advisors are keeping their eye on the potential of changing rules. And if the last few years are any example, the foreseeable future could change quickly when it comes to Bitcoin.