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Getting Better Outcomes With Crypto and Other New Products

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What You Need to Know

  • Advisors should remember emerging markets were once an emerging asset class.
  • Today, cryptocurrencies hold 3.7% of global market cap but are 60 times more volatile than bonds and 15 times more volatile than stocks.
  • Advisors should explain these new products as useful in solving a problem, rather than explaining their features.

These days, we seem to be bombarded by shiny new investment trends, whether it’s cryptocurrency, non-fungible tokens, or environmental, social and governance investments.

As an advisor, you may already be fielding questions from clients who have seen the 220% a year returns of Bitcoin or are one of the 95% of millennials who say they want to use their financial capital for socially responsible investing.

How can advisors navigate this seemingly new world of investment options? And, more importantly, what is an effective way to communicate with clients about how these new options realistically fit into client portfolios?

Set Realistic Expectations

This isn’t the first time new asset classes have appeared. Emerging markets only started to rise to prominence in the 1980s. When they first were measured in 1988, emerging market equities made up 1% of global market cap. Today, the asset class has grown 1,300% to 13% of the global market cap.

In contrast, cryptocurrencies are only 3.7% of today’s global equity.

Despite the huge growth that an asset class like emerging markets has seen, the typical allocation in U.S. investors’ portfolios remains fairly small, estimated at only 3% to 7%. These allocations generally complement and diversify the workhorse asset classes of U.S. equities and U.S. bonds.

New asset classes such as crypto are likely to play similar roles where they could add meaningful return and diversify risk, but won’t provide immediate riches, especially given the massive volatility that they often experience.

Bitcoin, for example, is 15 times more volatile than the S&P 500 and 60 times more volatile than bonds.

Advisors need to be prudent when considering new asset classes for client portfolios and set realistic client expectations.

But, what is the best way to communicate the tradeoffs — good and bad — of adding new asset classes to a client portfolio?

Trying to explain in terms of portfolio risk, return or volatility is not likely to be meaningful to clients. It is certainly not as effective in making clients take action on their investments as the headline featuring the latest Bitcoin millionaire.

Highlight Benefits, Not Features

The answer may lie in an old sales maxim that is, unfortunately, rarely put to use in financial services: Sell the benefits, not the features.

Features are a property of a product. For an investment portfolio, these would be common selling points like risk-adjusted portfolio return or volatility or diversification.

Benefits, on the other hand, describe a product’s ability to solve a problem.

In financial services, the problems that clients are trying to solve are how to attain financial goals, such as retirement, a down payment or college tuition.

Clients go about solving these problems by answering two main questions: How long can they wait to obtain the goal? How much savings (present and future) can be dedicated to the goal today? Then they find a mix of waiting and saving that is both achievable and preferred over all other options.

Adding an investment portfolio to this mix often allows the client to find a better mix of waiting and saving.

In other words, the client can wait or save less and still achieve their goal.

Clients invest because the feature of an investment portfolio — risk-adjusted return — leads to the benefit of a shorter waiting period and/or a lower savings requirements. The portfolio is acting as a subsidy lowering the other “costs” a client must bear around time and savings.

Thus, these benefits should be the main selling points advisors use with clients.

In fact, research by Morningstar reinforces this idea, finding that the number one thing clients value in a financial advisor is that he/she/they helps them reach their financial goals.

This approach also applies to new asset classes like crypto, where advisor-client conversations can shift away from features — “I can add crypto to your retirement portfolio and improve your expected return by 0.75%” — and toward the tangible benefits, like: “I can add crypto to your retirement portfolio such that you can expect to retire a year earlier.”

Better Relationships Through Benefits

Clients want to attain their financial goals more quickly and with less savings. Alternatives and crypto offer new potential for meaningful performance improvements that could translate to lower wait times and savings rates.

Expressing the portfolio improvement results in those benefit terms will result in stronger advisor-client relationships where clients have a better appreciation of the benefits provided by advisors.

Even if you aren’t promising to make your client a Bitcoin millionaire, you can still be seen as a hero by positioning the portfolio as offsetting other time and savings costs for your clients.


Chip Castille is the founder of GoalBased Investors, the company behind the Lasso app. He has pioneered investment and financial engineering ventures throughout his 30-year career that all aim to help individuals better understand investing problems without needing to become financial experts.