As the crypto market continues to grow, financial advisors must be aware of the risks and benefits of investing in cryptocurrency in order to meet their fiduciary duties to their clients. Noah Billick, Partner – Director of Regulatory, Funds and Compliance from Rennoco & Co. law firm, shares his perspective on how advisors can support client investment interest in this asset class.
Simply put, advisors who cannot intelligently discuss the place of cryptocurrency in a client’s overall investment portfolio are doing their clients a disservice and are putting themselves at risk, says Billick.
In March 2021, Morgan Stanley Wealth Management’s Global Investment Committee published a report entitled, The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio. Since then, the market has matured, allowing service providers to refine their offerings and, in many cases, to become regulated entities.
The U.S. Department of Labor (DOL) issued Compliance Assistance Release No. 2022-01, which warned 401(k) plan fiduciaries to exercise extreme care when considering adding cryptocurrencies to client portfolios. The guidance identified five areas of concern, being: speculative and volatile nature of crypto investments; the difficulty for plan participants to make informed decisions; custodial and recordkeeping concerns; valuation concerns; and the evolving regulatory environment.
The good news is that the industry is progressing on all fronts, says Billick. While crypto is still speculative, better information about the qualities of different tokens is allowing advisors to gain a more nuanced understanding of the factors that make some coins more or less attractive than others.
The ultimate proof of the mainstreaming of cryptocurrency as an investable asset class is the approval of regulated products and services. The first crypto fund prospectus accepted by a North American securities regulatory authority was in 2019, when the Ontario Securities Commission approved a bitcoin ETF managed by 3iQ, a Canadian leader in cryptocurrency investment.
Advisors must continually add to their professional body of knowledge in order to meet their ongoing professional obligations. With the maturing of the crypto market, advisors can no longer remain ignorant of this asset class.