The Rise of Digital Assets: Understanding This Emerging Asset Class

Long viewed as a little understood, highly speculative asset class, digital assets such as bitcoin are becoming a more frequent topic of calls and inquiries from clients of financial advisors.

In a survey published in March 2021...more than 9 in 10 investors (92%) expect their financial advisors to be able to give them advice about bitcoin.

In a survey published in March 2021, New York Digital Investment Group (NYDIG) found that more than 9 in 10 investors (92%) expect their financial advisors to be able to give them advice about bitcoin. A separate study conducted by Bitwise in 2019 noted that 76% of financial advisors have received questions from their clients about digital assets.

Institutional attitudes have shifted as well. Goldman Sachs and Morgan Stanley recently announced they will be offering access to Bitcoin for their wealth management clients. On the market infrastructure side, top financial institutions have established themselves as major players in the digital assets space. Fidelity, for example, entered the space seven years ago to do research and development on blockchain technology and, in 2018, launched an institutional custody and trade execution platform called Fidelity Digital Assets. BNY Mellon announced earlier this year that it is developing the industry's first multi-asset digital custody and administration platform for traditional and digital assets.

As the digital assets community awaits potential SEC approval of a bitcoin ETF, the deck is already set for wide-scale adoption of the asset class. Financial planners need to be ready.

Digital Assets Are Here to Stay

“The digital assets ecosystem has grown significantly in recent years, creating an even more robust marketplace for investors and accelerating demand among institutions,” noted Peter Jubber, managing director of Fidelity Digital Funds. “An increasingly wide range of investors seeking access to bitcoin has underscored the need for a more diversified set of products offering exposure to digital assets.”

The evolution that Jubber describes enabled the financial services industry to meet the increased demand brought on by the pandemic.

“There’s been an acceleration of interest [in digital assets] since the start of the pandemic due to the unprecedented levels of monetary and fiscal stimulus and the attractiveness of a fixed supply uncorrelated asset,” adds Jubber. “What types of questions clients are asking really depends where they are in the adoption cycle, but we are seeing engagement from all of the institutional segments we serve – RIAs, family offices, hedge funds, corporates, pensions, endowments and foundations.”

“Financial planners need to become knowledgeable about this new asset class for the simple reason that it’s not going away,” says Edelman.

As digital assets entrenched themselves in the public discourse over the past few years, financial planning thought leaders, such as Ric Edelman, Founder of the nation’s largest RIA, Edelman Financial Engines, have been making the business case for learning more about digital assets within the context of financial planning.

“Financial planners need to become knowledgeable about this new asset class for the simple reason that it’s not going away,” says Edelman. “Consumers are learning about digital assets everywhere. Just recently bitcoin was featured on the front page of both USA Today and The New York Times.”

Education Does Not Equate to Buy Recommendations or Investment

Skepticism of digital assets abounds among the financial advice community, but Edelman is quick to point out that consumers’ recent desire for advisors to have knowledge of digital assets does not mean that they are demanding advisors to buy this type of asset.

“I would put this in the same category as annuities,” he says. “Every financial planner can talk in great detail with their clients about annuities. Every financial planner has a strong opinion about annuities. Advisors either love them or hate them, but whether you love them or hate them, you can explain in great detail why you have the feelings you have. Financial planners must be able to do the same thing with bitcoin, but they currently lack that knowledge.”

Douglas Boneparth, CFP®, president of Bone Fide Wealth (and a CFP Board Ambassador) embodies this approach. In an interview with ThinkAdvisor, Boneparth, who is waiting on the development of a bitcoin ETF before offering recommendations to clients, explains how he has focused on education.

“I can share what I’ve learned with clients, about the risk profile and how to think about having bitcoin in their portfolios,” Boneparth told ThinkAdvisor. “I recommend they do their research on the ways to invest in crypto and find the solution that’s right for them, but I also break down how fee structures work at various exchanges or through trusts.”

Of course, the prices of digital assets like bitcoin have proven to be exceptionally volatile since their development, which Edelman argues should not be an excuse for rejecting the digital asset outright.

“If you look at the price history of Microsoft, Amazon, Apple and Alphabet, you would find very similar histories in their early days,” he says comparing them to bitcoin. “Advisors have to go beyond price volatility to reach a conclusion that this [digital assets] is not something to recommend to clients. We challenge advisors to learn about the technology to confirm their skepticism. You can cite many legitimate reasons for not investing in this asset class, but price volatility is not a legitimate reason.”

“For those concerned with bitcoin’s volatility, we believe that volatility is primarily due to its lack of established history,” says Fidelity’s Jubber. “It is a relatively new asset so its adoption as a store of value is unlikely to be linear, but we anticipate the day-to-day volatility may come down over time as the development of new products leads to greater ownership and participation by more market participants.”

Knowledge Is Power: Digital Assets as a Differentiator

In the same study from NYDIG, 62% of investors said that they would change advisors if they weren’t able to help them with bitcoin. Not only do investors now expect their advisors to be knowledgeable, but this figure also suggests that they will now take action to look elsewhere.

“Knowledge of digital assets may become a differentiator for advisors,” says Jubber. “Among digitally native generations, there is a greater propensity to hold Bitcoin, so I’d encourage advisors to think about the long-term implications for their practice and how they serve next gen investors.”

Speaking of expertise in digital assets, Edelman notes that it offers one of the best ways that he’s seen in decades to differentiate yourself in the market.

In regards to talking with clients about digital assets, Jubber encourages advisors to understand their clients’ goals and motivations.

“In the same way that financial planning expertise was unique decades ago, knowledge of digital assets has become a differentiator,” Edelman says. “Since very few advisors understand blockchain and digital assets, a financial planner who takes the time to learn about these assets has an opportunity to set themselves apart.”

In regards to talking with clients about digital assets, Jubber encourages advisors to understand their clients’ goals and motivations. “In terms of client conversations, advisors should start conversations with ‘why?’ to understand where a client’s interest in bitcoin is coming from and what their goals are in exploring it as part of their portfolio,” says Jubber. “Whatever their reason, ensuring clients feel educated on the technology and digitally native assets is an important foundation. Any investment should be evaluated within the context of an investor’s overall portfolio and risk profile to determine if it is suitable for their financial goals.”