Personal finance

Financial advisors are still reluctant to use cryptocurrencies. Investor demand may change that

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A man walks past a bitcoin symbol in the window of a company that offers blockchain application services on Dec. 21, 2021 in Berlin, Germany. Bitcoin and other virtual currencies rose strongly in value in 2021.
Sean Gallup | Getty Images News | Getty Images

Financial advisors have been reluctant to integrate cryptocurrency into client portfolios. They likely won’t be able to ignore the alternative asset for much longer.

Cerulli Associates, in a study, found that 45% of advisors say they expect to use cryptocurrencies in the future in response to client requests.

Meanwhile, just 7% of advisors say they are currently using these assets based on their own recommendations, and 10% are using it because of client requests.

Investors are curious about exposure to these assets, with 80% of advisors saying clients of all ages have asked them about cryptocurrencies, according to Cerulli.

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In comparison, a June 2021 survey from the Financial Planning Association and the Journal of Financial Planning found about 49% of advisors said clients had asked about cryptocurrencies in the preceding six months.

One key reason for increased investor interest: The surge in value cryptocurrencies saw last year.

Their market capitalization climbed to $3 trillion in 2021, before falling to around $2 trillion this year.

The free float market capitalization, which represents the amount of cryptocurrencies available for trading in the market, is around $1.3 trillion. Bitcoin and ethereum comprise much of that.

“If advisors aren’t including it or at least having some sort of stance on it, then they’re placing themselves at a disadvantage and could potentially lose clients over it,” said Matt Apkarian, senior analyst at Cerulli Associates.

Yet financial advisors continue to be more bullish on other alternative assets.

Private equity comprised 20.9% of advisors alternative asset distributions in 2021, while other private investments — debt, natural resources, infrastructure and real estate — represented 20.6%. Non-traded real estate investment trusts made up 18.6%.

Cryptocurrency accounted for just 2.3% of advisors’ alternative distributions.

For 2023, advisors expect to boost alternatives exposure to infrastructure, with an anticipated 2.5% increase from their current allocation, as well as other areas like hedge funds and venture capital, with a 1.3% increase expected for each.

Cryptocurrency exposure, however, is expected to increase by just 0.2%.

Why advisors are hesitant

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There are reasons why financial advisors are reluctant to increase how much they devote to cryptocurrencies, Cerulli found.

Some may shy away from it because they do not have the time it takes to understand the cryptocurrency market, while others may worry they could breach their fiduciary duty. Moreover, their platforms may not include cryptocurrencies as investment options.

Notably, there is still a lack of regulation of these assets. The approval of a spot bitcoin exchange-traded fund may still take a few years, Apkarian said.

Independent registered investment advisors may be able to integrate these assets first, due to more flexibility because of their size and management structure.

However, large financial firms are also adding to their expertise in this space.

In the meantime, individual investors may be able to access cryptocurrencies outside of their advisor relationship through platforms like Robinhood and Coinbase.

It is up to advisors to make sure they have a full picture of their clients’ exposures to cryptocurrencies, even if they don’t have control of those assets, Apkarian said.

“They can at least make sure that they have an understanding of what their clients have in outside assets,” Apkarian said.

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