How Advisors Can Add Value to Clients With Crypto

Being a crypto-competent advisor can help to differentiate yourself from other financial professionals and add value to your client relationships and practice.

CoinDesk Insights
Oct 7, 2021 at 1:00 p.m. UTC
Updated Oct 7, 2021 at 1:31 p.m. UTC

Ryan Firth, CPA/PFS, is the founder and president of Mercer Street Personal Financial Services, an investment advisory firm based in Houston, Texas, that works with HODLers and the crypto-curious.

Clients work with you because you are their trusted advisor. You bring value to the client-advisor relationship in myriad ways and, hopefully, you are fairly compensated for the work that you do on behalf of your clients.

Now there’s growing interest from investors in cryptocurrencies. This is a movement that started on the retail investor side and has seen slow uptake on the institutional side and by investment professionals. In fact, it’s been my experience there aren’t enough financial advisors who are competent in crypto.

This column originally appeared in Crypto for Advisors, CoinDesk’s new weekly newsletter defining crypto, digital assets and the future of finance. Sign up here to receive it every Thursday.

There’s a good chance your clients are investing/speculating in crypto right now and not talking to you about it. That’s a problem, because if you can’t or don’t want to have a conversation with your clients about it then the trust you’ve worked so hard to build over time will start to erode. To be more blunt, if you can’t meet your clients – or prospective clients – where they’re at, then they’re going to look elsewhere for advice.

So how can you help clients who come to you seeking your advice on crypto? Here are a few steps I’d recommend to start off:

  1. Educate yourself and keep up to date on what’s happening in this sector. If you’re reading this article you’re in the right place! Use resources like CoinDesk, other media outlets, Medium and Twitter.
  2. If you’ve never owned crypto before, buy a nominal amount, because the best type of learning is experiential. Download a digital wallet to your computer or smartphone, transfer a small amount of money – nothing you’d lose sleep over at night – to the wallet; buy ether (ETH); then buy a non-fungible token (NFT) on one of the many marketplaces available to buy and sell these digital assets (remember to report the capital gain or loss on your tax return because you’ve just likely had a taxable event). You can even make your own NFT and sell it (again, that’s a taxable event, so be sure to report it to Uncle Sam). If you have some ETH left over, you can lend it out and earn more ETH – of course, the taxman gets a cut of that, too!
  3. Keep an open mind. Don’t discount any ideas, and try to listen much more than you speak. The crypto space is evolving quickly so you will likely learn something new just by listening to what your clients are into, which in turn can only help deepen your connection with them and further enhance your client-advisor relationship.

If you feel like you’ve got 1 through 3 down pat, then here are some questions you’re likely to encounter, or should be thinking about:

  • In what ways can you get your clients exposure to cryptocurrency? Options include direct exposure to the token or coin, indirect exposure via derivatives such as futures contracts, hedge funds, venture funds, index funds, trusts and stocks of companies that are directly or indirectly tied to cryptocurrencies and blockchain technology. Currently, there are no crypto exchange-traded funds (ETFs) in the U.S., though this is likely to change at some point in the future.
  • How much, if any, of your client’s portfolio should be allocated to cryptocurrency, and to which coins or tokens? There’s no cookie-cutter answer to this one. Factors to consider include the client’s level of sophistication with respect to this asset class, their ability to take on risk and withstand potential losses, and which projects or protocols they find most interesting or have strong convictions about.
  • How should your clients custody their crypto holdings? The two most common methods are to self-custody with a hardware wallet or paper wallet (cold wallet), or to keep the crypto on an exchange (hot wallet). Each option has its pros and cons, which you can help your clients work through. For example, cold wallets can be a more secure way to store crypto because they’re not as susceptible to theft via hacks as hot wallets; the downside is that they’re not as easy to use and can be lost easily if not stored and managed properly.
  • What are the tax ramifications of transacting in cryptocurrency? This is fairly straightforward (though there are some nuances of which the uninitiated might not be aware). There are misconceptions about what triggers a taxable event and is therefore reportable on a tax return; for example, one of the more common fallacies is that like-kind exchanges of crypto prior to Jan. 1, 2018, are not taxable events. The Internal Revenue Service has devoted, and continues to devote, resources to cracking down on taxpayers who under-report or don’t report any of their crypto gains, as this is an area rife for enforcement.

As you know, there is no one-size-fits-all approach to investing (crypto is no exception), so an exploration of answers to these questions with your client can certainly deepen the relationship and further solidify your status as trusted advisor. Having an open dialogue with clients about these questions as well as any other questions or concerns that may arise during the course of a meeting, continuing your education about crypto, and understanding risk and investor behavior can easily demonstrate the value that you bring to the table. As cryptocurrency is more broadly adopted by investors, financial advisors will increasingly field more questions from clients about crypto assets, so you need to be prepared to have those conversations.

Getting paid for your advice on crypto assets

The next piece of this is, how do you get paid for the advice you provide to your clients? If you charge clients an asset-based fee for your services, it can be more challenging to charge for your advice based on the value of your client’s cryptocurrency holdings because these digital assets tend to be highly volatile, and there aren’t a lot of investment vehicle options available to financial advisors (though this is rapidly changing).

There are a growing number of financial advisors and their firms (though still a minority as compared to advisors who charge an assets under management fee or are compensated via commissions) who utilize a fee-for-service model, whereby they charge clients a flat fee or time-based fee (i.e., hourly). Fee-for-service models tend to work well with respect to advising on crypto assets as compared to more traditional fee models, because the pricing structure is straightforward and transparent. It also gives advisors greater flexibility to charge on assets that are under advisement but are not discretionarily managed, which is often the case with cryptocurrencies.

Key takeaways

Many investors don’t understand crypto and think it has no place in their portfolios. But an increasing number of investors are curious about crypto and want exposure (especially those who are younger, well-educated and with higher incomes). We’re in the midst of the greatest wealth transfer in our lifetime, and as those assets get passed, the inheritors are likely to ditch their parents’ financial advisor and invest some of their newfound wealth in crypto. Accordingly, financial advisors need to adapt, lest they become irrelevant.

Because there are few financial advisors who will work with clients who hold crypto or are thinking of buying these digital assets, you have an opportunity to really stand out from the crowd of undifferentiated financial professionals. Working with clients who are interested in crypto can be a wide, blue ocean strategy for advisors who are willing to take the plunge.

DISCLOSURE

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