Need To Know Points About Crypto and Wealth Management

There was a time in 2021 when the combined market value of listed cryptocurrencies was $3 trillion. Today, that figure is closer to $1.03 trillion so it can be said that if there’s an intersection between crypto and wealth management, it’d be to manage clients away from digital assets.

A simplistic view to be sure, but the ongoing crypto winter and contagion effect caused by the demise of FTX is, understandably, making advisors skittish about talking crypto with clients. It’s a vexing scenario to be sure because, depending on the estimate, just 15% to 20% investors own digital assets. However, data also confirm enthusiasm for the asset class, desire to learn more and possibly increase exposure.

Advisors, particularly those with crypto-enthused clients or those looking to appeal to younger demographics, might want to consider evaluating some other key data points. For example, some forecasts indicate that roughly half of institutional have some exposure to digital assets and 70% of those that don’t plan on changing that.

Those are just data points, but they underscore the point that if high-level pros are interested in crypto, it’s reasonable to expect everyday investors will follow suit and expect their advisors to be well-versed in this asset class.

Crypto Starting Points for Advisors

On the surface, crypto appears to be a daunting asset class, even for advisors. However, advisors don’t need to have all the answers. A solid framework will do just fine as Fidelity indicates in a recent whitepaper on the subject.

“Yet many investors are undeterred by the unresolved questions, and they’re looking to advisors for help understanding and stepping into this market,” notes the asset manager. “They don’t need all the answers; they see value in crypto—as a potential inflation hedge, as an historically uncorrelated asset, or as a speculative investment—and they want help thinking through how best to get in. Investors don’t want to wait; so, advisors can’t afford to wait either.”

For advisors that need more convincing regarding the potential rewards that could accompany increased crypto knowledge in a wealth management practice, it’s worth noting that more than eight in 10 high net worth (HNW) individuals want crypto guidance from advisors.

An area ripe with potential for advisors and wealth management firms, particularly those with tax experts on staff, is tax treatment of crypto – a confusing yet crucial subject for clients.

“It is critical that advisors understand the tax treatments common to each option for exposure, as well as those specific to individual products in consideration,” adds Fidelity. “The IRS designation of crypto as property has easy-to-understand but impactful implications for investors with direct exposure. Conversely, growth and innovation among products with indirect exposure has led to the use of a variety of tax structures, even among products marketed within the same categories (such as “funds” or “trusts”). This variability means that seemingly similar products may be taxed differently, as it is the tax structure of these products—rather than how they’re categorized in market—that determines their tax treatment. For this reason, it is critical that advisors and investors read the offering documents for each option in consideration to understand how it is structured and taxed.”

Seizing Crypto Opportunity

Like it or not, crypto is an opportunity for wealth management firms and there a myriad ways in which practices can capitalize on that opportunity set, several more of which are detailed by Fidelity.

Translation: The time is now for advisors to up shore up their crypto foundations because clients are expecting as much.

“Investors are turning to trusted advisors for help, and advisors need to be ready to have those conversations. This moment offers an opportunity for advisors to build their brands and strengthen relationships with clients, but it also presents a risk that advisors may fall behind the evolving investment landscape. Now is the time for advisors to invest in their competencies around crypto,” concludes Fidelity.

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