Wealth management firms: Is it time to embrace crypto?
- Due to new regulatory frameworks, growing investor demand and broader acceptance by mainstream financial institutions, more wealth management firms are considering offering crypto investments to their clients.
- However, wealth managers will need to responsibly manage risk by rigorously implementing AML and related compliance standards and also educating their clients on the pitfalls of investing in cryptos, like high price volatility, as well as the potential upsides.
- Firms should consider partnering with an outside advisor to develop a strategy around offering crypto to their clients and ensure that they meet all regulatory requirements.
Wealth management firms have traditionally avoided investing in cryptocurrency. But as the crypto industry grows more mature, is it time for that to change?
Younger clients, in particular, see crypto as an exciting asset class. And as large mainstream financial institutions begin making it easier for their clients to buy and sell cryptocurrencies, mid-market wealth managers should consider that if they don’t follow suit, they may find that their clients simply invest outside of an advisory relationship or seek new asset management entirely.
Keep reading to learn more about why now is the right moment for wealth management and registered investment advisory (RIA) firms to embrace crypto and how to do it safely.
Why should wealth management firms consider recommending crypto as an investment?
Cryptocurrency is increasingly attractive to the mainstream. In one survey, 86% of institutional investors held crypto assets, with a large majority planning to increase their holdings. And with new regulatory frameworks either in place or under development in Congress, the market is no longer the wild west that it was even a year or two ago.
- Investors want in: Demand is the biggest reason to consider offering crypto investment opportunities. Investors see the eye-popping returns that the crypto market can generate and want in on the action. This is especially true of millennial and Gen Z investors, who will only increase their share of the investor pool over the next several years.
- Growing acceptability: Two years ago, it wouldn’t have been socially acceptable for wealth managers to recommend crypto to a wide range of clients. That’s rapidly changing, to the point where managers need to feel comfortable having meaningful conversations about crypto with their clients.
- Institutional embrace: Over 50% of institutional investors are allocating at least 5% of their assets under management to crypto. Meanwhile, giant banks like JPMorgan Chase have begun allowing certain clients to use Bitcoin and Ethereum as collateral on loans.
- Crypto ETFs: The sector has now seen the launch of mainstream investment vehicles like crypto exchange-traded funds (ETFs). This allows wealth management firms to invest in crypto for their clients in a way that’s more in line with their traditional investments and without triggering more complex reporting requirements.
- New regulatory structures: The crypto markets are more regulated than before. The GENIUS Act created an oversight framework for stablecoins, while the One Big Beautiful Bill Act (OBBB) clarified that the Commodity Futures Trading Commission has authority to regulate crypto commodities and the SEC oversees crypto securities. The market structure bill currently being developed by Congress will hopefully create a middle ground that supports decentralized finance (DeFi) while bringing it inside a more comprehensive regulatory framework.
What are the risks for wealth management firms that begin offering crypto investments?
Crypto is not a treasury bill or an AAA-rated bond. While the market is more regulated than it was even a year ago, there are still significant risk management challenges that wealth advisory firms will need to consider before offering crypto as an investment opportunity for their clients. These include exposure to financial crimes and a lack of market understanding on the part of both fund managers and their investors.
Financial crime risks necessitate complex regulatory requirements
Financial crimes like fraud and money laundering remain common use cases for crypto, so firms will need to ensure that anti-money laundering (AML), know your customer (KYC) and Bank Secrecy Act (BSA) controls and governance structures are properly in place.
This is an area where you should engage with an outside advisor to audit your systems and processes to make sure you’re in compliance. While these regulatory requirements exist for all asset classes, not just crypto, you’ll want to ensure you fully understand the nuances of this particular space.
Lack of crypto-specific understanding for both managers and clients
Wealth managers also need to understand the nuances of the crypto market, both for themselves and to be able to better educate their clients on the risks involved. Crypto markets are highly volatile — a given token can experience huge swings in valuation over a short period of time — so managers need to feel comfortable helping their clients understand that volatility is part of the game.
Managers should also be prepared to explain why leveraged investments in crypto are especially dangerous and communicate the value of investing in crypto ETFs versus direct investment. Firms may look to invest in ETFs whenever possible, as this is generally a safer, smoother process for clients and may offer better integration into existing firm platforms and reporting.
Market concentration for ETF token custody
Finally, firms should assess which ETFs they recommend investing in. Most crypto ETFs use Coinbase to custody the actual tokens backing their funds, and while crypto exchanges like Coinbase are more secure than they were a decade ago, there are still risks associated with too much market concentration on a single platform.
Advisors should understand the differences between crypto custody providers and traditional custodians. Smart wealth managers might also differentiate themselves by steering their clients towards ETFs that hold their tokens elsewhere.
How should wealth management firms responsibly offer crypto investments to their clients?
Wealth management firms exploring new crypto offerings should adopt practices and strategies to do so responsibly. This includes learning what your clients are looking for from their crypto investments, educating them on different types of crypto assets and working with an advisor to understand and mitigate your own risks.
1. Find out what your clients want
Simply offering crypto is not a customer acquisition strategy. If you want to grow your crypto client base, you need to understand how these investors align with your existing ideal client profile. You will also want to understand what crypto options your existing clients desire.
Getting a clear sense of who you’re working with will help you present options that make sense and fit your clients’ needs.
2. Educate your clients on crypto
Like any investment, before your clients invest in crypto, you should make sure they understand it. Clients need to see the ways in which crypto differs from other assets, like routine pricing volatility, so they can assess the risks and rewards of including crypto in their portfolios.
This includes the distinction between investing directly in tokens or in crypto ETFs, as the latter can help your clients mitigate some of their own risks when entering the crypto market.
3. Work with a third-party risk management advisor
Working with an external risk management advisor can make adding crypto investments to your service offerings a smoother process. You don’t know what you don’t know, so an advisor can help you bridge gaps in your internal knowledge and come up with a crypto strategy that fits both your and your clients' needs.
An advisor is especially useful from a risk management perspective. Ask your advisor to help you implement proper AML, KYC and BSA controls, understand current compliance rules and otherwise meet your responsibilities under federal and state law. This can also mean carefully considering third-party risk and vendor due diligence.
How Wipfli can help
We help wealth management firms grow and strengthen performance. Let’s talk about how to responsibly offer your clients cryptocurrency investment opportunities and mitigate your own risks. Start a conversation.
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