In much of the crypto press, you often find a lot of optimism, positivity and hope for the future of this asset class, even in the face of challenging markets.
This kind of optimism can be contagious. Indeed, over the past two years the mainstream financial press has adopted a mostly benign, if not enthusiastic, stance towards crypto.
But the financial industry still has mixed feelings towards crypto, misgivings that have only been amplified by the market turmoil of the last few months.
Perhaps nowhere is this better represented than in the towering personae of legendary investors and Berkshire Hathaway leaders Charlie Munger and Warren Buffett, both of whom have emerged as outspoken critics of digital assets and crypto not only as investments, but as concepts altogether.
The reluctance to manage crypto assets
To live up to the standards they’re governed by, fiduciary advisors have to straddle the line between enthusiasts and critics, but that doesn’t mean they have to embrace digital assets, said Scott Eichler, founder of Standing Oak Financial, a Newport Beach, California-based registered investment advisor (RIA).
“A lot of my clients privately own crypto, and we end up advising on it as well because it is part of their portfolio and asset allocation,” he said. “I don’t mind if a client wants it. I don’t mind building it in as part of their asset allocation, but I do mind accepting the fiduciary role of managing crypto. I don’t think we’re in a good position to act as fiduciaries in terms of trading and rebalancing crypto. We can give advice, but we can’t really act.”
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Eichler’s comments come in stark contrast to many crypto-positive advisors who believe there is a fiduciary duty to handle crypto on behalf of clients – instead, he believes that it is very difficult for an advisor to remain acting as a fiduciary and directly handle digital assets.
Advisors’ primary obstacle to handing crypto, according to Eichler, is information.
“There’s a number of things we’re supposed to do as far as fiduciary responsibilities go, and one of them is to be able to diversify the client’s assets and to be well-informed about their choices,” he said. “Last year alone something like 4,000 new coins hit the marketplace. It’s impossible to keep up unless it becomes our full-time job.”
Standing Oak is far from a conservative firm holding to traditional assets – Eichler himself is a proponent of investing in alternatives. But crypto is a new asset class, he said, that’s grown so quickly in such a short time frame that there’s no way a financial advisor with responsibilities to clients and all of their assets can keep up with the developments.
Eichler said that advisors still don’t have a well-functioning, multi-custodial system for trading assets outside of individual accounts. Standing Oak uses traditional RIA custodians like TD Ameritrade, which up until now have not offered advisors the ability to trade individual coins.
“I would have to keep track of every trade basically on paper,” Eichler said. “To my knowledge there is no system right now that will do all the trade-tracking and journaling and everything required as a fiduciary.”
Will crypto ETFs create more investment opportunities?
For many firms with these problems, the solution is found in a cryptocurrency exchange-traded fund (ETF) or private placement product, which Eichler views as poor fits for individual investors and therefore inappropriate recommendations for fiduciary advisors.
But what if a low-cost, spot cryptocurrency ETF was approved by the SEC?
“At that point I kind of laugh, because the whole point of crypto seems to be to eliminate me or the middleman, and it’s become a question of whether I should assert the third-party nature of buying ETFs,” Eichler said. “The purpose of crypto is to eliminate the need for an ETF and an advisor. There are plenty of good coins to choose from with good track records, why would you come to me to invest in them? It would be like asking me to go and get you a $100 bill. If you really want it, you shouldn’t pay me a fee to do that.”
Instead, Eichler asks his clients to tell him how much money is invested in cryptocurrency, and how many different coins they are investing in, so he can add it to their asset allocation. Then he tracks the value of their crypto holdings over time, suggesting they buy or sell when an allocation is out of alignment with their portfolio’s goals.
It’s similar to how Standing Oak treats clients’ private real estate holdings, where advisors ask the value of the holding and the cash flow it produces so they can integrate it into a client’s overall portfolio and trade assets around the real estate holding to maintain an allocation.
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The big difference: cryptocurrency is assigned a much higher risk weighting than an asset class like private real estate.
“I don’t act as a fiduciary here, I’m acting as an informed participant,” he said. “I’m not trading it, I’m not buying it, we’re just giving it an asset allocation and making sure it stays within those parameters. The asset allocation is already a fiduciary responsibility.”
FOMO, risk tolerance and volatility
As a fiduciary, Eichler also tries to ensure that a client’s crypto holdings reflect their capacity for risk and volatility.
“If they have a very low risk tolerance, I’ll tell them they shouldn’t invest in crypto, because it would cause them to take on too much standard deviation to bear emotionally when their portfolio goes down,” he said. “If they have a higher risk tolerance, they can take it on and it might be a great asset for them. Crypto has the ability to fluctuate wildly upward, so if you’re good about it and stick to rebalancing it can create alpha within a client portfolio because it’s so noncorrelated.”
True alpha comes not from crypto’s ability to be a high-performing asset class, Eichler said, but from an advisor’s ability to rebalance a portfolio around it to periodically capture and lock in outsize returns.
Eichler said he would need two things to begin handling crypto as a fiduciary on behalf of his clients: A clear analysis of the governance of crypto coins and a robust system for buying and selling of crypto that could appropriately record sales and purchases.
“We know who manages cash: the Federal Reserve and the Treasury. I can see who is governing and what their decisions are,” he said. “I can’t do that with most cryptocurrency. I would actually prefer not to see laws issued on this matter. Does an authority come out and say they’ll be the authority on crypto and make sure these coins aren’t being fragmented and split and watered down, an authority that can give a coin their blessing, which then would make it more valuable? That’s something I’m watching for.”
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