When offering digital assets such as crypto and NFTs to their clients, financial advisors are faced with an important question: how will I manage those assets? Generally, there are two approaches: do it yourself (DIY), or using a Separately Managed Account (SMA), where a third-party manager takes charge of those assets. To help advisors make an informed decision, here are the risks and benefits of using an SMA.
One potential advantage of using an SMA is gaining access to the knowledge base and execution capabilities of a specialized asset manager. “From market trends and technological advancements to identifying investment opportunities, these professionals understand the intricacies of digital assets,” says the Fidelity Digital Assets survey. SMAs also provide advisors with valuable time savings, letting them put a greater focus on client relationships and personalized advice.
Market volatility is common for emerging assets like crypto. To offset the associated price swings and unpredictability, asset managers adopt diversified strategies by spreading assets across various currencies and sectors, deploying various investment approaches. This diversification may help curb risk and minimize the impact of market fluctuations, subsequently bolstering portfolio stability.
Asset managers operating SMAs typically use cutting-edge tools, analytics platforms, and trading technologies to perform their daily job functions more efficiently and accurately. These resources, in turn, provide advisors with comprehensive market data, advanced risk management tools, and efficient execution capabilities.
One potential downside to utilizing an SMA is the added cost. With margins shrinking in an increasingly competitive environment, any additional fees can significantly impact an advisor’s bottom line and book. The value asset managers provide in terms of expertise, risk management and time savings needs to justify the fee.
Another factor to be mindful of when working with an asset manager is the type of control they will require over investment decisions and strategies. Advisors must carefully select asset managers aligned with client goals and investment philosophies.
The digital asset space is subject to evolving regulatory frameworks and compliance requirements. Using an SMA adds another layer of complexity to navigating these regulations, as advisors must ensure the asset manager operates within legal boundaries and meets all regulatory and compliance obligations.
Leveraging an SMA for managing clients’ assets in the digital asset space presents both advantages and disadvantages for financial advisors. “Ultimately, a well-informed decision based on the unique circumstances and requirements of each advisor and their clients is key to launching a successful digital asset offering,” says the Fidelity Digital Assets survey.
When considering whether to use an SMA or DIY approach for digital assets, financial advisors should weigh the potential benefits of expertise, efficiency, diversification, and access to advanced tools against the associated costs, investment control, and regulatory challenges.