The biggest sticking point for RIAs who might want to invest in digital currencies for clients is the custody rule, says Melissa Bender, asset management partner at Ropes & Gray. So far, the only traditional custodian to open a cryptocurrency custody and trade execution operation is Fidelity, which debuted Fidelity Digital Assets in March.
Since other traditional custodians aren’t in the space, that leaves advisors with more limited options, including the possibiliity of having to self-custody and the risks that come with that, Bender says.
Not Ready For Prime Time
Financial advisors who personally own cryptocurrency assets say that compliance departments and regulations keep them from advising clients because of the custody issues. That also keeps them from recommending that clients buy digital currencies via third-party platforms like Coinbase. But if clients ask, these advisors say they will talk about digital assets in general terms.
Chris Gure, financial consultant at Fortress Financial Partners in Raleigh, N.C., notes that most of his firm’s clients who own cryptocurrencies have very little interest in selling them. Gure’s philosophy is that he’s doing holistic planning anyway: Any asset the client holds that is less than 5% of his or her total net worth would not jeopardize a financial plan in any case.
Andrew Whalen, CEO at Whalen Financial in Las Vegas, says he won’t recommend cryptocurrencies to clients until a Bitcoin exchange-traded fund is available. If and when that happens, he says he would allocate a very small portion for clients because he believes digital currencies are an asset class that can play a role in a portfolio. As of press time, the SEC had yet to approve a Bitcoin ETF.
How To Have The Talk
Tyrone Ross, a financial consultant who specializes in cryptocurrencies, says the advisor-client conversation about digital assets should include what coins clients own, when they bought them, how much they own and whether they’re up to date on their currency’s taxes.
Another thing to ask, he says, is how clients store their coins. For security reasons, all cryptocurrencies should be kept in “cold storage” or a “cold wallet”—kept offline, in other words, which keeps them safe from hackers, he says. Cryptocurrency exchanges have reportedly been hacked and coins stolen because custodians have the assets in “hot storage,” or something connected to the internet.
Cryptocurrencies evolved to be decentralized and out of institutional control, Ross says. That means retail buyers have better custody options than institutions, and the platforms have evolved to cater to retail buyers’ needs. He adds that one of the best places for clients to store small amounts of cryptocurrencies is at Coinbase, which is backed by the New York Stock Exchange, USAA Bank (the investment arm of the insurer) and other entities. Coinbase stores its coins in cold wallets.