Is It Time For Advisors To Consider Bitcoin?

Is it time for advisors to open a conversation with clients about cryptocurrency now that bitcoin and others are skyrocketing in price?

According to a proponent of bitcoin who says the asset can help save retirements, the answer is no.

That might seem counterintuitive, but Tyrone Ross Jr. means advisors might not be wise to start conversations about investing in crypto, however, advisors would be irresponsible if they did not learn about digital currency to answer clients intelligently when they ask about it.

Ross is a former Merrill Lynch advisor who now leads the startup Onramp Invest, a platform for advisors to invest in cryptocurrency such as bitcoin and Ethereum. The company plans a soft launch in a few weeks with some initial advisors. Ross said he has a waiting list of advisors representing more than $30 billion in assets under management.

Ross still advises a small group of clients and said he has a deep understanding of the fiduciary responsibilities that guide recommendations. And crypto is an area not one to boldly go into before a client asks about it.

“They shouldn’t recommend it -- 99.9% of advisors shouldn't be making recommendations,” Ross said. “What they should be doing is educating themselves, preparing their practice for questions, making sure that they have researched books, webinars, newsletters, all these things that they can learn from and they could share with clients.”

And advisors can count on getting more questions from clients, especially after the ride bitcoin took last week, springing from $18,106 on Dec. 11 up to a new record high of $24,122 by Dec. 19, according to CoinDesk.

In other recent bitcoin news:

• MassMutual bought $100 million in bitcoin, according to a Wall Street Journal report on Dec. 10. Although it is a sliver of the $235 billion that the insurance giant held in investments as of Sept. 30, the purchase was considered another vote of confidence in mainstream finance.
• Coinbase, the largest cryptocurrency exchange in the United States, disclosed that it is planning an initial public offering to be managed by Goldman Sachs.
• Guggenheim Partners Chief Investment Officer Scott Minerd said last week that bitcoin should be worth $400,000 during an interview on Bloomberg TV.

But it will take a lot more than all that to get many financial advisors comfortable with crypto as an investment. Most say it is still too risky, but do acknowledge that clients have been asking about it.

For example, Leon C. LaBrecque, chief growth officer of Sequoia Financial Group, Troy, Mich., said the firm is starting to pay attention to crypton, not only because clients are asking about it, but also because heavy hitters are getting into that market.

“There appears to be a new interest in institutional investors looking at it as well, plus the option that crypto might be an alternative to gold,” LaBrecque said. “I personally think crypto is emerging as an asset class, but I can't help thinking about Warren Buffet’s analogy to gold: it doesn't make anything while you hold it. I'll be more interested as blockchain becomes more mainstream.”

The firm is keeping an eye on Fidelity’s bitcoin-only fund for wealthy investors, which would be available to registered investment advisors, family offices and other institutions. Fidelity Digital Assets would be the custodian, with a minimum investment of $100,000.

Fidelity’s announcement touched off enough interest and criticism that it offered a research paper in November reviewing top concerns about bitcoin.

What Is It?

LaBrecque called bitcoin an alternative to gold, but what is it really?

Bitcoin was launched amid the anxiety around government control of currency during the 2008 crash, with the first block mined in January 2009 to include a reference to a Times of London headline about the second round of government bailouts.

The software is used to create immutable blocks of information, eventually topping out at 21 million blocks. That limit creates scarcity that many investing proponents say ensures escalating value.

That hard limit engenders the analogy to a limited commodity like gold, and its price seems to appreciate and drop like a volatile commodity. It is especially volatile as institutional investors jump in with huge buys and sells that affect price in the relatively thin market. But bitcoin is also considered a currency, although given its tendency to appreciate, who would want to spend currency that could leap in value tomorrow?

Ross acknowledged the confusion that would go through the mind of an advisor new to bitcoin.
“Is it digital gold? Is it a store of value? Is it a currency? Is it money?” Ross said. “It’s all those things, by the way. These are the things that advisors need to question.”

And they should ask those questions now, because advisors might be surprised by which clients start asking about them, Ross said. And when they do, that should cause advisors to take note.

“And then if your client owns crypto, you have to reprofile that client immediately,” Ross said. “’All right, Mr. and Mrs. Jones, we said your risk tolerance was a three. You're asking about bitcoin, and bitcoin’s at 12. Let's talk about this.”

At that point, Ross said, an advisor would be wise to review risk and the portfolio. If clients have the extra money and want better gain, they are probably already wondering about crypto.

“If it's a 55-year-old client, and they have more money than God and they don't need to worry about money again, and your client says, ‘I want exposure,’” Ross said. “The bonds are going nowhere. Where am I going to get yield in my portfolio? You probably should listen.”

Ross cautioned that advisors should be meticulous about documenting any communication and activity around crypto, citing brokers and regulators recommending transparency on crypto as an advisor and even in advisors’ own investing.

If clients watch financial shows, they are already getting the message.

“’Paul Tudor Jones said…,’ ‘Bill Miller said …,’ ‘Stan Druckenmiller said …,’ ‘Ray Dalio said …,’ that's what advisors are going to get from clients, because CNBC is running that over and over,” Ross said. “So an advisor at some point has to say, ‘Oh, crap. All right. Let me get smart on this. So I can only look like a dummy in front of my clients.’”

Waiting For The Whale

Larry J. Rybka, CEO of Valmark Financial Group, acknowledged that clients have been asking his advisors about crypto, but it is still too early for advisors to dive into the space. Although MassMutual’s $100 million purchase of bitcoin was a good headline, it represents a tiny amount of the carrier’s overall investment, Rybka said, likening it to the company taking the money out of the petty cash drawer.

The crypto world is still unruly and volatile – conditions that draw compliance and ethical concerns. Rybka said at this point, if clients want to put money into digital assets, advisors can treat it like any other side venture in which the client might want to indulge.

“I think there's no good way for a financial advisor to get them into that,” Rybka said. “So, I think it's smart to say, ‘Hey, look, Steve, if you want to take 5% of your portfolio and just buy whatever you want, day-trade it, and some of it in bitcoin, have at it.’"

It is not just compliance and volatility concerns, but it’s also difficult even to buy crypto in a bulletproof, dependable way for clients. Rybka compared it to clients wanting gold.

“The same thing is true if a client wants to invest in physical gold,” Rybka said. “It's very difficult for a financial advisor to help them do that. It's like, ‘Look, here are three or four safe sites. You can buy it at 2% to 3% over the gold price. They'll ship it to you in a secret box, and if you want to put that in your safe and do that, that's up to you. I'm not going to try and talk you out of that. But I only would have tremendous downside by being involved with that. We're not regulated to do things like that.’”

That is the barrier that Ross is hoping to bring down with Onramp’s platform. As he launches and tests the platform, Ross expects that the next breakthrough in acceptance will a big RIA making a splash.

“Next year, you can call this a prediction,” Ross said, “but you're going to see a multibillion-dollar RIA say we have $100 million allocated to bitcoin across our book of business. It'll be interesting to see if that if that turns out. And based on the demand that I'm seeing, I don't think I'm too far off there.”

It is still going be a long while before RIAs generally will be comfortable with bitcoin, but Ross said the pressure will be increasing.

“We're 11 years, 12 years in, you can't ignore this anymore,” Ross said. “That's where we are with the registered investment advisor space. And to be very clear, registered investment advisor space are going to be the last in the pool. Some folks are dancing around in the kiddie pool now.”

Steven A. Morelli is editor-in-chief 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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