Crypto Too Big For Advisors To Ignore, McKinsey Says

Wealth managers can no longer ignore digital assets as they go mainstream, although the assets still have three hurdles for broader acceptance, according to a McKinsey report.

Some of those concerns are already non-issues, according to crypto-investing advocate Tyrone Ross Jr., CEO of OnRamp Invest, which offers advisor tech for digital assets.

The issues identified in McKinsey’s “U.S. Wealth Management: A growth agenda for the coming decade”:

• Regulatory ambiguity: On asset classification and tax reporting, among other issues — has lingered, often creating uncomfortable levels of risk exposure for wealth managers. While it is still early days, the advent of crypto exchange-traded funds (ETFs) could help address some of these challenges.
• Infrastructure: The infrastructure required for offering digital assets, including custody services, differs from what is required for traditional investment products.
• Education: Digital asset classes are not well understood by many advisors, so advising on the products is challenging for them.

'Proven To Be A Boon'

Despite the concerns, the report’s authors acknowledged the rising tide of digital assets.

“The arrival of an army of new retail investors has proven to be a boon to the growth of new asset classes that were incubated in the margins of the market,” according to the report. “Nowhere is this phenomenon clearer than in the realm of digital assets, which have ballooned from a combined valuation of $100 billion in 2019 to a market capitalization of more than $2.5 trillion today.”

Advisors can be sure their clients are crypto-curious and already in that space, some in the affluent range.

“The cryptocurrency market has grown too large to ignore amid robust client demand; 11 percent of affluent clients and 8 percent of HNW clients invest in digital assets,” the McKinsey authors wrote.

The market cap is closer to $2 trillion today as digital assets enter what is widely considered a crypto winter, essentially a long-term bear market that can go on for years. Although that might be welcome news to those who continue to buy and hold no matter the price, it is unsettling to advisors used to the relatively staid equities market. But that is more an advisor than a client problem, Ross said.

“When I was at Merrill Lynch, and the market was down 2% advisors would be hiding under the desk,” Ross said, turning to crypto-investing. “Is it too volatile for their clients? No, because they already own it. Right. When I worked with my clients, they never complained about the volatility. They looked at it as an opportunity, because they would dollar-cost average, they would rebalance.”

What about the regulatory ambiguity cited by McKinsey? It is not ambiguous for registered investment advisors, Ross said, adding that the Securities and Exchange Commission provided guidance in a risk alert early last year.

The guidance let RIAs know what they should do to remain compliant on crypto assets, and the SEC gave updates on custody, Ross said. Those guidelines concern assets such as Bitcoin and Ethereum, but clarified that yield-generation products, such as the BlockFi and Celsius, are considered unregistered securities. These are crypto-lending platforms that have had a bit of pushback from the SEC.

Difficulties Persist

As far as infrastructure difficulties, Ross said he is well aware of them as the head of a company building the tech to connect with platforms.

“There are qualified custodians, there are federally chartered banks in the crypto space,” Ross said. “The systems that advisors use -- their CRM, the portfolio management software, their normal custody, Pershing, Schwab, Fidelity -- they don't connect with the crypto ecosystem directly,” he said. “Which is why advisors wanted an ETF so bad because it'll just be simple.”

The SEC has rejected rule changes, and ETF proposals from big players such as Fidelity.

It amounts to an assets under administration problem because advisors are blind to their clients’ crypto exposure, which Ross said is being overlooked, even by the McKinsey report.

“It wasn't mentioned in that report but this is very much in an AUA story, AUS plus discretion,” Ross said. “The clients own it themselves. They're doing it all over the place. The problem is the advisors can't see it. So it ties into the infrastructure play because now we have to take that data and pipe it back into the holy trinity of the RIAs tech stack, if you will, which is their CRM, the portfolio management software and the planning software.”

Ross agreed with McKinsey’s third point that advisors are underinformed about crypto, not surprising considering his company has OnRamp Academy to teach advisors about the asset class. He pointed out that he was doing a introductory webinar for American College on crypto on Tuesday and about 1,400 people had signed up.

The McKinsey report authors indicated that their concerns were not roadblocks, but were more like the tricky curves as clients increasingly navigate the space.

“Whatever the motivation,” the report said, “investors’ enthusiastic embrace of digital assets is very clear.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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