Shifting Tides: Financial Advisors and the Cryptocurrency Conundrum

In the realm of financial advising, there exists a notable hesitancy towards the adoption of cryptocurrencies. However, this sentiment may undergo a shift due to burgeoning investor interest.

Approximately 45% of financial advisors anticipate incorporating cryptocurrencies into their strategies in response to client demands, as indicated by a report from Cerulli Associates.

A scene of intrigue unfolds as a passerby gazes upon a bitcoin emblem adorning the window of a firm specializing in blockchain solutions on a brisk December day in Berlin, Germany. The year 2021 witnessed a remarkable surge in the valuation of Bitcoin and various other digital currencies.

Despite this surge, financial advisors have been cautious in integrating cryptocurrencies into their clients’ investment portfolios. Nonetheless, the allure of this alternative asset is becoming increasingly difficult to overlook.

Cerulli Associates, through their research, have unearthed that nearly half of advisors foresee embracing cryptocurrencies in the future, spurred by client demands.

Conversely, a mere 7% of advisors currently advocate for cryptocurrency based on their own convictions, while 10% do so at the behest of their clientele.

Investors are displaying a keen interest in exploring opportunities within this domain, with 80% of advisors reporting inquiries from clients of all age groups regarding cryptocurrencies, according to Cerulli.

In contrast, a survey conducted in June 2021 by the Financial Planning Association and the Journal of Financial Planning revealed that approximately 49% of advisors had fielded queries about cryptocurrencies in the preceding six months.

The driving force behind this heightened investor interest lies in the remarkable surge in cryptocurrency valuations witnessed last year.

The market capitalization of cryptocurrencies soared to $3 trillion in 2021 before experiencing a slight decline to approximately $2 trillion this year.

Of this, the free float market capitalization, representing the tradable volume of cryptocurrencies, stands at approximately $1.3 trillion, with Bitcoin and Ethereum dominating the landscape.

Matt Apkarian, a senior analyst at Cerulli Associates, emphasizes the importance of advisors taking a stance on cryptocurrencies, suggesting that failure to do so may place them at a disadvantage, potentially leading to client attrition.

Despite this, financial advisors continue to exhibit greater enthusiasm towards other alternative assets.

Private equity constituted 20.9% of advisors’ allocations to alternative assets in 2021, while other private investments such as debt, natural resources, infrastructure, and real estate accounted for 20.6%. Nontraded real estate investment trusts (REITs) comprised 18.6%.

In contrast, cryptocurrency represented a mere 2.3% of advisors’ alternative asset allocations.

Looking ahead to 2023, advisors anticipate bolstering exposure to alternative assets such as infrastructure, with an expected increase of 2.5% from current allocations, alongside hedge funds and venture capital, each projected to witness a 1.3% uptick.

However, the anticipated increase in cryptocurrency exposure lags behind, with a marginal 0.2% increment forecasted.

The reluctance of advisors towards cryptocurrencies stems from various factors elucidated by Cerulli.

Some advisors may refrain due to a lack of time to delve into the complexities of the cryptocurrency market, while others harbor concerns regarding potential breaches of their fiduciary duty. Additionally, limited availability of cryptocurrencies on their platforms poses another challenge.

Moreover, the absence of robust regulatory frameworks governing these assets further adds to advisors’ reservations. Apkarian suggests that the approval of a spot bitcoin exchange-traded fund (ETF) may take several years.

Independent registered investment advisors may be better positioned to embrace cryptocurrencies initially, owing to their smaller size and more adaptable management structures. Nonetheless, major financial institutions are also bolstering their expertise in this domain.

In the interim, individual investors may explore cryptocurrency avenues outside of their advisory relationships through platforms like Robinhood and Coinbase.

Advisors are urged to maintain a comprehensive understanding of their clients’ cryptocurrency exposures, even if they lack direct control over these assets, underscores Apkarian.