Can your financial adviser give advice on crypto?
Whether bullish or bearish, cryptocurrency is getting a lot of attention: 94% of financial advisors responded to client questions about cryptocurrency in 2021, according to a survey by Bitwise and ETF Trends. The same survey reports that 47% of advisors hold crypto assets in their personal portfolios. Yet only 16% of advisors allocate to crypto in client accounts.
While investors are interested in holding crypto, advisors may seem slow to recommend the digital asset class. Whether your advisor will help you invest in crypto depends on how they feel about the outlook for crypto, the tools they have, your risk tolerance, and your financial goals.
Read on to find out why your advisor might be reluctant to recommend crypto, what questions to ask your crypto advisor, and what to do if your advisor doesn’t provide crypto investment advice.
Fundamentals of Crypto Investing
To get started, you’ll want to understand the crypto investing landscape so you have the basic knowledge to ask better questions and be better prepared to evaluate the answers.
First, there are different ways to invest in the crypto and blockchain space. You can buy real digital currencies like bitcoin
- Cryptocurrency exchange and wallet provider Coinbase.
- Block digital payments company. Block owns Cash App, which supports bitcoin trading.
- MicroStrategy Analytics Company
. The company has a massive bitcoin investment on its balance sheet.
Alternatively, you can invest in crypto-related exchange-traded products. Some crypto funds only hold crypto stocks, while others track digital currency prices and are backed by cryptocurrencies or derivative contracts.
Why Some Financial Advisors May Be Reluctant to Recommend Crypto
Unfortunately, your advisor might avoid recommending direct or indirect crypto exposure for several reasons. He or she may not have the expertise or the bandwidth to keep abreast of the ever-changing crypto landscape. Or maybe your advisor doesn’t like the risk profile of crypto. After all, recommending a highly volatile asset can create difficult situations for advisors. Customers will either be happy or angry most of the time. Neither extreme is ideal.
Another problem is that of the remuneration of advisers. Major brokerages do not (yet) support cryptocurrency trading. If your advisor recommends holding digital currencies directly, you may need to execute trades yourself. And all resulting crypto assets would live in an account that is not under the jurisdiction of the advisor.
In this scenario, your advisor earns no money or less money for sharing crypto tips. If your advisor charges an annual percentage fee applied to your account balance, this annual compensation will decrease when you withdraw funds to buy crypto. And commission advisors simply won’t earn anything on these trades.
Your financial advisor probably doesn’t want to earn less, if not as much, for adding crypto monitoring to your service package.
Questions to Ask Your Current Crypto Financial Advisor
Asking questions is the best way to test your financial advisor’s willingness to oversee your crypto assets. Start with general questions to test the waters. Next, be more specific if your advisor doesn’t end the conversation. For instance:
- What do you think of crypto? There is a wide range of possible answers here. Some finance professionals liken cryptocurrency trading to gambling. Others predict that the value of bitcoin will skyrocket over the next five to ten years.
- Do you personally own digital currencies or crypto assets? Why or why not?
- Can you explain how cryptocurrencies work? An advisor with crypto expertise should provide an informative and articulate response.
- What level of crypto exposure would you recommend? Expect a single-digit percentage here, unless you prefer aggressive, high-risk investing.
- What is the best approach to investing in crypto? This question should spark a discussion rather than a single answer. Unless your advisor knows you very well, he or she will want to know more about your goals and why you are interested in crypto investing.
- Can you manage my crypto assets? There are tools like Onramp Invest and HeightZero that allow advisors to manage your crypto assets. These are called turnkey digital asset management platforms or TDAMPs. These are primarily aimed at independent advisors who work in crypto. They can greatly streamline the deliberation process.
- Describe the services you can offer when it comes to crypto investing. You should expect a pro-crypto advisor to educate you on your investment options, recommend target exposure for crypto holdings, and explain how that target exposure affects your current exposures. You would also want an advisor who is comfortable making buy, sell, and hold recommendations on crypto assets. And, if the advisor has the right tools, it is best if they can directly view and manage your crypto assets.
- How are crypto transactions taxed? In the United States, your crypto transactions are taxed like stocks. When you record a gain, you pay the short-term or long-term tax rate, depending on how long you have held the asset. Your advisor should recommend that you keep careful records of your transactions. You don’t want to work with someone who suggests flying under the radar with your crypto trading business.
If Your Advisor Doesn’t Recommend Crypto
If your current advisor isn’t helping you with crypto, you have two options. You can trade yourself. You can temporarily hire a consultant who can teach you about crypto and crypto investing. Find these professionals by searching for Cryptocurrency Consultants, Crypto Advisors, Crypto Professionals, or Crypto Experts.
Your second option is to find a new advisor who has experience in crypto. Relying on industry designations is one of the best ways to locate wealth managers who are pro-crypto. Two designations to be aware of are the Certified Digital Asset Advisor (CDAA) and the Certificate in Blockchain and Digital Assets (CBDA).
1. Certified Digital Asset Advisors
Certified Digital Asset Advisors have successfully completed 12 hours of courses on bitcoin, ether, blockchain, crypto wallets and exchanges, and crypto regulation and compliance. They also have continuing education requirements. You can search for SADCs here.
2. Blockchain certificate and digital assets
The Blockchain and Digital Assets Certificate is a program offered by the Digital Assets Council of Financial Professionals (DACFP). It is for financial advisors who want to recommend crypto investment strategies to their clients. Certificate holders must complete 11 learning modules and sign a code of ethics each year.
You cannot currently search for CBDA certificate holders online. You can, however, confirm that a person holds the CBDA designation by calling the DAFCP.
Be prepared to interview multiple candidates. You want someone who knows crypto, as well as traditional investing and personal finance in general. The right advisor will also be trustworthy and personable. Learn more about selecting financial advisor candidates here.
Working with a Crypto Advisor
Your financial plan should ultimately dictate if there is a role for crypto. Trust your adviser’s advice on this unless you have a good reason not to. If he or she says crypto is too volatile for you and your goals, don’t dismiss that advice.
You can still trade small amounts of crypto on your own for now. It is likely that the tools available to advisors and the crypto space in general will evolve and mature over the next few years. You can revisit this topic with your advisor later when crypto is more established as a mainstream asset class.