Can Your Financial Advisor Give Advice On Crypto?

Whether up or down, cryptocurrency garners lots of attention: 94% of financial advisors fielded client questions about cryptocurrency in 2021, according to a survey from Bitwise and ETF Trends. The same survey reports that 47% of advisors hold crypto assets in their personal portfolios. Yet, only 16% of advisors allocate to crypto in client accounts.

While investors are interested in holding crypto, advisors may seem slow to recommend the digital asset class. Whether your advisor will help you with crypto investing depends on how the advisor feels about crypto’s outlook, what tools the advisor has available, and your risk tolerance and financial goals.

Read on to learn why your advisor might be reluctant to recommend crypto, what questions to ask your advisor about crypto, and what to do if your advisor won’t provide crypto investing guidance.

Crypto Investing Basics

To start, you’ll want to understand the crypto investing landscape so that you’ll have the background knowledge to ask better questions and be more prepared to evaluate the answers.

First, there are different ways to invest in the crypto and blockchain space. You can buy actual digital currencies like bitcoin
BTC
or ether
ETH
. But you don’t have to. You can also get crypto exposure indirectly through certain stocks, such as:

• Cryptocurrency exchange and wallet provider Coinbase.

• Digital payments company Block. Block owns Cash App, which supports bitcoin trading.
• Analytics company MicroStrategy
  MSTR
  . The company has a massive bitcoin investment on its balance sheet.

Alternatively, you can invest in crypto-related exchange-traded products. Some crypto funds hold only crypto stocks, while others track prices on digital currencies and are backed by cryptocurrencies or derivatives contracts.

Why Some Financial Advisors May Be Reluctant to Recommend Crypto

Sadly, your advisor might avoid recommending direct or indirect exposure to crypto for a few reasons. He or she may not have the expertise or the bandwidth to stay current on crypto’s constantly changing landscape. Or, perhaps your advisor doesn’t like crypto’s risk profile. After all, recommending a highly volatile asset can create challenging situations for advisors. Clients will either be elated or angry most of the time. Neither extreme is ideal.

Another issue is one of advisor compensation. The big brokerages don’t (yet) support cryptocurrency trading. If your advisor recommends holding digital currencies directly, you may have to execute the trades yourself. And any resulting crypto assets would live in an account that’s outside the advisor’s purview.

In that scenario, your advisor either makes no money or less money for sharing crypto advice. If your advisor charges an annual percentage fee applied to your account balance, that annual compensation would go down when you withdraw funds to buy crypto. And commission-based advisors simply won’t earn anything on those trades.

Your financial advisor likely doesn’t want to earn less, or even the same, for adding crypto oversight to your service set.

Questions to Ask Your Current Financial Advisor About Crypto

Asking questions is the best way to test your financial advisor’s willingness to oversee your crypto assets. Start with broad questions to test the waters. Then get more specific if your advisor doesn’t shut down the conversation. For example:

• How do you feel about crypto? There is a wide range of possible answers here. Some financial professionals liken cryptocurrency trading to gambling. Others predict bitcoin will skyrocket in value over the next five to 10 years.
• Do you personally own digital currencies or crypto assets? Why or why not?
• Can you explain how cryptocurrencies work? An advisor with crypto expertise should provide an informative and articulate response.
• What level of crypto exposure would you recommend? Expect a single-digit percentage here, unless you prefer aggressive, high-risk investing.
• What’s the best approach for crypto investing? This question should prompt a discussion rather than a single answer. Unless your advisor knows you very well, he or she will want to learn more about your objectives and why you’re interested in crypto investing.
• Can you manage my crypto assets? There are tools like Onramp Invest and HeightZero that allow advisors to manage your crypto assets. They’re called turnkey digital asset management platforms or TDAMPs. These are mostly geared for independent advisors who work in crypto. They can greatly streamline the advisement process.
• Describe the services you can offer with respect to crypto investing. You should expect a pro-crypto advisor to educate you on your investing options, recommend a target exposure for crypto holdings, and explain how that target exposure affects your current exposures. You’d also want an advisor who’s comfortable making buy, sell, and hold recommendations on crypto assets. And, if the advisor has the right tools, it’s best if he or she can view and manage your crypto assets directly.
• How are crypto transactions taxed? In the U.S., your crypto transactions are taxed like stocks. When you record a gain, you’ll pay the short-term or long-term gains tax rate, depending on how long you owned the asset. Your advisor should recommend you keep careful records of your transactions. You don’t want to work with someone who suggests flying under the radar with your crypto trading activity.

If Your Advisor Doesn’t Recommend Crypto

If your current advisor won’t help you with crypto, you have two options. You can do the trading yourself. You might temporarily retain a consultant who can educate you about crypto and crypto investing. Find these pros by searching for cryptocurrency consultants, crypto advisors, crypto professionals, or crypto experts.

Your second option is to find a new advisor who has crypto experience. Leaning on industry designations is one of the best ways to locate wealth managers who are pro-crypto. Two designations to know are the Certified Digital Asset Advisor (CDAA) and the Certificate in Blockchain and Digital Assets (CBDA).

1. Certified Digital Asset Advisors

Certified Digital Asset Advisors have successfully completed 12 hours of coursework in bitcoin, ether, blockchain, crypto wallets and exchanges, and crypto regulation and compliance. They also have continuing education requirements. You can search for CDAAs here.

2. Certificate in Blockchain and Digital Assets

The Certificate in Blockchain and Digital Assets is a program offered by Digital Assets Council of Financial Professionals (DACFP). It’s for financial advisors who want to recommend crypto investing strategies to their clients. Certificate holders must complete 11 learning modules and sign a code of ethics annually.

You can’t currently search for CBDA certificate holders online. You can, however, confirm an individual holds the CBDA credential by calling the DAFCP.

Be prepared to interview several candidates. You want someone who’s versed in crypto, as well as traditional investments, and general personal finance. The right advisor will also be trustworthy and personable. Learn more about vetting financial advisor candidates here.

Working with an Advisor on Crypto

Your financial plan ultimately should dictate whether there’s a role for crypto. Trust your advisor’s guidance on this, unless you have a good reason not to. If he or she says crypto is too volatile for you and your goals, don’t dismiss that advice.

You can always trade small amounts of crypto on your own for now. It’s likely the tools available for advisors and the crypto space generally will evolve and mature over the next several years. You can revisit the topic with your advisor later, when crypto is more established as mainstream asset class.