In recent years, much of the investment community has watched with fascination as flows into cryptoassets such as Bitcoin and Ethereum gained impressive ground.
The retail-led surge into this emerging asset class has landed many financial advisors in uncharted territory: for quite possibly the first time in their careers, their clients are more knowledgeable about an investment than they are.
Cryptoassets are being talked about everywhere: on the news, across social media, in Ubers and at dinner parties. Looking at
The best advisors know that they must always be learning to adapt to their clients’ needs. Crypto and the world of DeFi are growing exponentially and it can often feel hard to keep up. I have broken up the process into three steps to help advisors as they embark on their educational journey into this novel asset class:
Step 1: Blockchain and cryptoasset comprehension
As with any journey into a foreign environment, nothing will resonate if you cannot speak the language. If you thought that the financial services industry was already full of jargon, crypto takes it to a new level. That is why there is no skipping steps when it comes to learning the basic characteristics of an asset class with as many unique complexities as cryptoasset markets. Not only is crypto a new asset class, but it is built upon modern technology that differs from its traditional counterparts.
A strong foundation is critical to understanding how the rest of DeFi operates. Learn about the basics of blockchain first and how it works. Coins versus tokens, public versus private keys and hot versus cold storage are foreign concepts yet critical for understanding the space. Once you’ve mastered fundamental building blocks, you can begin to branch out.
Step 2: Viewing cryptoassets and DeFi through the eyes of an investor
You are now baseline crypto-conversant. You know what a blockchain is, you have a broad understanding of how crypto works and how decentralized networks are structured. Now, let’s think about it from an investment perspective. Here are just some of the questions advisors will need to be able to answer for their clients:
- How do you purchase crypto?
- What investment vehicles are available?
- Where and how can I custody cryptoassets?
- How do I determine a crypto asset’s value?
- What factors should I take into consideration when assessing the current market conditions?
- How do
brokers, exchanges and custodians come into play? (For instance, did you know that in DeFi some firms operate as all three? There are both decentralized and centralized exchanges — what is the difference?)
Just as one does when analyzing stocks, bond funds and REITs, advisors must develop an understanding of the asset’s underlying drivers, important metrics to monitor, risk factors and volatility.
Step 3: Implementation — working with clients to incorporate cryptoasset investment strategies
It is one thing to learn about an asset class but there are additional considerations for advisors who act as fiduciaries. RIAs and independent advisor representatives operating within their purview have certain hoops to jump through and many boxes to check from a compliance and regulatory standpoint when navigating the crypto universe.
Cryptoassets require the same implementation into a firm’s suite of services as any other asset. While not officially considered a security, the SEC’s
Individual financial advisors, depending on their relationship with the client, also have a variety of roles to play. Do they help with estate planning? Tax planning? Does a cryptoasset allocation fit within the client’s broader financial plan? A few things advisors should consider, if they have not already, is how to equip their business with the necessary workflows to manage cryptoassets. An incomplete list would include completing the Form CRS; updating the rest of their Form ADV; updating all disclosures; investor policy statements, estate planning, tax planning and more.
By investing the time to learn about cryptoassets, advisors ensure they are staying well informed and are positioned to provide their clients with best-in-class service.
