(Photo: AP)

Calling cryptocurrency a hot topic in the financial universe would be an understatement. Given the extensive media coverage that this new asset has received, financial advisors need to proactively broach the subject with their clients. It isn’t simply a question of demonstrating value for clients — brushing up on cryptocurrencies and talking with clients about whether or not such investments align with their goals is the fulfillment of an advisor’s fiduciary duty.

For investors, the biggest downfall involves allocating money and resources into investments that are not in alignment with their goals. It can be very tempting to invest in an initial coin offering or a cryptocurrency, but a key component of an advisor’s value proposition, as well as their duty as a fiduciary, is to prevent investors from making short-term, emotionally driven decisions.

It’s easy for investors to put their money into cryptocurrency investments, so advisors should begin an educational, meaningful conversation about this asset before clients are tempted to invest in something that they may not fully understand. Clients may not think to bring up the topic during annual meetings or other interactions with advisors, so the latter can take the initiative.

Start by saying, “You’ve probably heard a lot about cryptocurrencies. Is this something you’re interested in?” If a client has already invested in cryptocurrencies, the advisor can follow up with, “What are your goals for that investment? And how does that investment fit into your overall investment strategy?”

Another very important question to ask is, “Do you understand the risks involved?” Even though the word “currency” is part of “cryptocurrency,” a cryptocurrency is not a broadly accepted currency — it’s an asset that some would consider very speculative. Advisors demonstrate enormous value for investors interested in cryptocurrencies by working with them to make sure they have the appropriate means and understanding to place a bet on this type of asset — and by reminding them to think about what impact a cryptocurrency investment would have on their holistic financial picture before placing such a bet.

Don’t End Up Like Kodak

Advisors can’t appropriately advise their clients on cryptocurrencies unless they themselves are familiar with the asset. It would be a mistake to assume that the cryptocurrency fad will eventually fizzle out — after all, Kodak made that assumption about digital cameras. In late 2017, CME Group launched Bitcoin futures, and ETFs investing in companies that develop the blockchain technology underpinning Bitcoin and other cryptocurrencies are popular with investors. In other words, cryptocurrencies aren’t going away any time soon.

If advisors don’t provide expertise and guidance on cryptocurrency investments, they risk losing business to competing advisors, as well as emerging advisory shops — such as Chicago-based Walden Bridge Capital — that specialize in helping investors who wish to invest in cryptocurrencies. As cryptocurrencies continue to generate headlines, more startup specialist advisors will likely pop up to serve interested investors.

To Understand Cryptocurrencies, Advisors Must Understand Blockchain

As advisors become more familiar with cryptocurrencies, they should also think about how the technology at the heart of this asset class will change their overall business.

As consultants and advisors to their clients, they need to be educated regarding cryptocurrencies in order to advise properly — but blockchain technology drives cryptocurrencies, and blockchain is expected to change the way money is moved. If blockchain eventually leads to less friction for transferring and opening investment accounts, then the current custodian model that forms the backbone of an advisor’s business will evolve, giving advisors more freedom as far as how and where they keep their clients’ assets.

In this way, the cryptocurrency asset class can offer promising opportunities for advisors as well as their clients. As the buzz around cryptocurrencies continues to rise, advisors should take the time to address the asset with clients to ensure that any investments they make align with their long-term financial goals. Even if advisors don’t offer cryptocurrency investment products, they should at least be able to provide the necessary guidance to help clients make smart decisions about the asset.

— Check out Does Any Token Exist That Is Not a Security? on ThinkAdvisor.


David Lyon, CEO, OranjDavid Lyon is CEO and Founder of Oranj, a Chicago-based provider of digital wealth management solutions for financial advisors.