Investment Solutions Roundtable: Crypto Solutions for Wealth Managers At An Inflection Point

Riskalyze and Blockchange, Inc. Discuss the Future of Crypto with Investment Product Strategy and Portfolio Construction

Bitcoin, Cryptocurrency, Blockchain, Tokenization…. Doge Coin… these terms are increasingly used in ongoing financial advisor conversations, spurred by growing investor demand.   

Looking beyond conventional industry situations, consider the fact that Tom Brady recently rewarded a Tampa Bay fan with a bitcoin for returning a milestone 600 TD pass game ball.  

Without question, crypto, a topic that initially started with high-net-worth individuals and niche enthusiasts, has made its way to cocktail parties and family gatherings.  This raises the pressure on financial advisors across the board, who need to get smart on the rapidly evolving digital assets ecosystem.

And just to keep things interesting, industry regulators – including the SEC and FINRA – as well as wealth management firm compliance departments are stepping up their efforts to address gaps in consistent policy as well as supervision.   

All of which brings us to the question of the month for the Wealth Solutions Report Investment Solutions Roundtable, where we bring together two to three experts at the intersection of wealth management, asset management and wealthtech: “Will cryptocurrency play a role in future product strategy and portfolio construction?  And if so, what will that look like?”

This Month’s Roundtable Participants

For this month’s Roundtable, I’m pleased to welcome:

• Patrick Hannon, Vice President of Enterprise Solutions at Riskalyze, the company that invented the Risk Number™ and was twice named as one of the world’s 10 most innovative companies in finance by Fast Company Magazine. 

• Dan Eyre, Co-Founder and CEO of Blockchange Inc., the industry’s first digital asset SMA and TAMP platform – known as BITRIA – for asset managers and wealth managers

In my discussion with Patrick Hannon, we found common ground in our shared belief that any investment recommendation should start with assessing client risk and their objectives for their portfolio.

Patrick Hannon, Vice President of Enterprise Solutions, Riskalyze

Cryptocurrencies are already shaping portfolio construction for financial advisors. However, advisors struggle to articulate the basics to clients because of the limited resources available and how many compliance teams serve as an operational roadblock instead of a shepherd in this new world digital asset classes.

“Should I invest in Bitcoin?” “How much should I allocate to my portfolio?” “Which cryptos should I invest in?”  are already common question for advisors. But the impact and response isn’t any different than investing in a Risk 99 security like SNAP or TSLA. 

“What is your risk tolerance and risk capacity? What are your goals and does your portfolio work to achieve those goals?” Conversations about risk should always be at the heart of a client relationship. 

At Riskalyze, we allow the data from any investible security, product or asset to inform advisors and clients of the impact investment selection on a security, account or portfolio level. Like any single security, the return, volatility, and correlation metrics will inform the client of the potential downside loss an in given period. Cryptocurrencies are no different. Financial advisors want help optimizing the portfolio to get access to the upside of crypto, while limiting risk.  

COVID rapidly accelerated a change in clients. Before COVID, clients were already comfortable with iPads, account dashboards, and DocuSign. Now the current cohort of retirees are proficient with Zoom and Instagram, and many run their entire financial life on their iPhones. 

Current retirees have embraced this digital age. It makes sense that a high percentage are aware or have purchased crypto. 

The narrative in the advisor community for the last decade has centered around the generational wealth transfer and the aging of the advisor population. We assumed that as advisors left for God and golf, we’d see a new cohort of advisors ready to invest in new technology and ideas to serve the next generation of investors. 

Clients made the change first. Financial advisors need to serve their same clients in new ways. And yes, that includes showing clients the impact of crypto on their portfolio. 

After discussing client risk and objectives, the conversation turned naturally towards deployment.  I connected with Blockchange, Inc. to talk about best ways to deliver digital assets to a client, given the gap between client demand and financial advisor readiness.

Dan Eyre, Co-Founder & CEO, Blockchange Inc.

It’s important to build investment solutions around the clients’ needs and demands – Versus building the investment solution and then trying to find clients for the solution.  And right now, the wealth management space has an enormous opportunity to take this exact client-centered approach to digital asset management.

Like it or not, cryptocurrencies are already playing an important role in portfolio construction for a growing number of wealth managers and asset managers.  Even crypto-skeptic financial advisors are increasingly feeling the pressure from clients of all ages.  

Financial advisors and asset managers are hearing from anxious clients who – quite rightly – recognize that digital assets are now mainstream and are worried about the significant opportunity costs for them if the professionals managing their money keep ignoring this reality.

In terms of how financial advisors can best engage with crypto as an asset class, there’s a misguided belief being pushed by certain segments of the digital assets space about how financial advisors need to over-educate themselves before doing anything with crypto.  

And frankly, that’s a canard that is usually thrown around by crypto solutions providers who don’t have a meaningful digital asset management product fully constructed yet.

Yes, advisors do need to be educated about crypto, but the main purpose of the education should be to enable intelligent discussions with clients about the asset class, versus trying to become an expert in crypto portfolio construction and management. 

Allocation to crypto will typically be from 1% to 5% of client AUM, so it doesn’t make sense for advisors to be spending 30% or more of their time learning about the intricacies of crypto. They need to be focused on clients and growing AUM.

There are already many investment options available. Funds like Grayscale and trusts such as Bitwise are the starting point for many advisors, and while these solutions fulfill vital roles, they don’t offer the benefits of direct asset ownership, and in some cases have premium risk and high minimum investment thresholds. 

Meanwhile, Crypto ETFs are a hot topic now, but they only offer exposure to a single asset like Bitcoin or Ethereum, so investors will miss out on much of the potential of crypto. Digital Asset TAMPs are a good solution for advisors with experience in crypto who want to directly manage client portfolios and allocations across different digital assets – but this is a small subset of advisors.

In our view, the optimal solution for most advisors is a crypto Separately Managed Account (SMA). There are many professionally managed SMA solutions that offer all the benefits of direct asset ownership and cater to investors with different levels of risk tolerance and investment interest. 

Financial advisors can simply outsource their clients’ crypto allocations to an expert SMA portfolio manager, an arrangement similar to how other specialty and alternative asset classes in traditional currencies are managed today.

Next Month’s Roundtable – Your Call

Thanks so much to Patrick Hannon and Dan Eyre for their perspectives to one of the most talked about topics in the world of financial advice and asset management today.

Next up:  Reader preferences on our next Roundtable topic and participants.  If there is a particular subject you’d like to know more about, or industry leaders you’d like to hear from, we want you to please let us know.

And as always, please take a moment to share this month’s roundtable feature with your colleagues and industry contacts, including via LinkedIn.

Thanks for your continued support and interest!

Allison Pratt is a strategic advisor to C-suite teams and boards of directors for wealth management and asset management firms across the country.  She can be reached at ContributingEd@wealthsolutionsreport.com