The question of how to effectively deploy client capital to the digital asset market has become one of the hottest topics in the financial advice industry, with SEC Chairman Gary Gensler’s every utterance on possible crypto regulation and the future of crypto ETFs receiving the same voracious attention that was once fixed on the thickness of Alan Greenspan’s briefcase before FOMC meetings.
This overwhelming focus on crypto ETFs presumes that these vehicles will be most investors’ preferred means of accessing cryptocurrencies and other digital assets in the future—but it may also be obscuring a more important debate over what is actually best for investors, especially high-net-worth clients with complex financial needs.
As advisors search for tools to help them add crypto exposure in a way that meshes seamlessly with clients’ broader financial plans, they should be aware that other approaches already exist. In particular, one core tool that advisors to HNW clients already use extensively—the separately managed account (SMA)—offers distinct benefits in the digital asset arena.
ETFs And SMAs: Blunt Instrument Versus Sophisticated Client Service Tool
For many investors, the attraction of ETFs is their simplicity—they’re a "set it and forget it" option for gaining exposure to certain themes, industries or markets. For a complex asset class like cryptocurrencies, then, an ETF sounds like the perfect way to gain access with minimal hassle.
As advisors know, however, ETFs are really more of a blunt instrument than a viable way to serve clients with sophisticated financial needs.
For one thing, ETF investors don’t own the assets in the fund’s portfolio—they simply own shares of the ETF itself. This means that when markets experience volatility, or when investors are reviewing their portfolios at the end of the year, they don’t have the ability to sell underperforming individual assets within the ETF for tax loss harvesting purposes.
In an SMA structure, by contrast, investors hold the underlying assets in their own portfolios, enabling them to sell specific investments when it makes sense for their broader financial plans. This flexibility allows them to think about their tax planning needs and investing strategies from a more granular, precise perspective—and, as advisors who serve HNW clients are well aware, precise tax planning is a vitally important consideration in serving these investors.
The ability to target specific assets for tax loss harvesting is even more valuable in still-developing markets with high volatility—a definition that certainly applies to crypto and other digital assets today. Variance in price movements between various cryptocurrencies, for example, provides SMA investors with opportunities to lock in the tax benefits of a loss on one coin while staying invested in other, better-performing currencies— opportunities that would not be available in an ETF.
SMAs also offer stronger diversification benefits for HNW investors, at least in the short term. The first crypto ETFs will likely provide exposure to only a single asset, namely bitcoin. While ETFs with a broader array of digital assets will certainly follow, the more robust diversification options—and their attendant risk mitigation benefits—currently reside in the SMA space.
Do You Know Where Your Investment Dollars Are Going?
Two other significant benefits of the SMA structure are customization and transparency. Many high-net-worth investors today have become accustomed to directing their dollars toward specific investments, partially as a result of the rise of ESG investing and the desire to steer clear of certain sectors.