How Advisors Can Add Value To Clients With Crypto

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Customers work with you because you are their trusted advisor. You add value to the client-advisor relationship in multiple ways and hopefully get paid fairly for the work you do on behalf of your clients.

Now there is a growing investor interest in cryptocurrencies. This is a movement that started on the retail investor side and has seen slow adoption by the institutional side and by investment professionals. In fact, in my experience, there aren’t enough knowledgeable crypto financial advisers.

This column originally appeared in Crypto for Advisors, CoinDesks’ new weekly newsletter defining crypto, digital assets, and the future of finance. Sign up here to receive it every Thursday.

Chances are your clients are investing / speculating in crypto right now and not telling you about it. This is a problem, because if you can’t or don’t want to have a conversation with your clients about it, then the trust that you’ve worked so hard to build over time will start to erode. To be more direct, if you cannot meet your clients or potential clients where they are, then they will seek advice elsewhere.

So how can you help customers who come to you for crypto advice? Here are a few steps I recommend to get started:

Educate yourself and keep up to date with what is happening in this industry. If you are reading this article, you have come to the right place! Use resources like CoinDesk, other media, Medium, and Twitter.

If you’ve never owned crypto before, buy a nominal amount because the best kind of learning is experience. Download a digital wallet to your computer or smartphone, transfer a small amount of money so that you don’t lose any sleep at night on the wallet; buy ether (ETH); then buy a non-fungible token (NFT) on one of the many marketplaces available to buy and sell these digital assets (don’t forget to report the capital gain or loss on your tax return as you probably just ‘have a taxable event). You can even create your own DTV and sell it (again, this is a taxable event, so be sure to report it to Uncle Sam). If you have ETH left, you can lend it and earn more ETH of course, the tax authorities also get a share!

Keep an open mind. Don’t neglect any idea and try to listen to a lot more than you speak. The crypto space is changing rapidly, so you’ll likely learn something new just by listening to what your clients are doing, which can only help deepen your connection with them and further improve your client-advisor relationship.

If you feel like you have 1 to 3 weak points, here are some questions you are likely to encounter or should think about:

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In what ways can you expose your customers to cryptocurrency? Options include direct token or coin exposure, indirect exposure through derivatives such as futures, hedge funds, venture capital funds, index funds, trusts, and company shares directly or indirectly related to cryptocurrencies and blockchain technology. Currently, there are no crypto exchange-traded funds (ETFs) in the United States, although this is subject to change at some point in the future.

How much, if any, of your customer portfolio should be allocated to cryptocurrency, and what coins or tokens? There is no cookie-cutter answer to this one. Factors to consider include the level of sophistication of clients with this asset class, their ability to take risks and bear potential losses, and which projects or protocols they find most interesting or for which they have strong convictions.

How should your customers keep their crypto holdings? The two most common methods are to self-guard with a hardware wallet or a paper wallet (cold wallet), or to hold the crypto on an exchange (hot wallet). Each option has its pros and cons, which you can help your customers overcome. For example, cold wallets can be a more secure way to store cryptocurrency, as they are not as likely to be stolen through hacks as hot wallets; the downside is that they are not as easy to use and can be easily lost if not stored and managed properly.

What are the tax ramifications of cryptocurrency transactions? It’s pretty straightforward (although there are some nuances that the uninitiated might not be aware of). There are misconceptions about what triggers a taxable event and therefore is to be reported on a tax return; for example, one of the most common mistakes is that similar crypto exchanges before January 1, 2018 are not taxable events. The Internal Revenue Service has devoted, and continues to devote, resources to cracking down on taxpayers who underreport or do not report any of their crypto earnings, as this is an area plagued by enforcement. law.

As you know, there is no one-size-fits-all approach to investing (crypto is no exception), so exploring the answers to these questions with your client can certainly deepen the relationship and further solidify your status. trusted advisor. Having an open dialogue with clients on these as well as any other questions or concerns that may arise during a meeting, furthering your crypto education, and understanding risk and investor behavior can easily demonstrate the value you bring. at the table. . As cryptocurrency becomes more widely adopted by investors, financial advisers will increasingly answer clients’ questions about crypto assets, so you need to be prepared to have these conversations.

Get paid for your advice on crypto assets

The next step is: How are you paid for the advice you provide to your clients? If you charge clients an asset-based fee for your services, it may be more difficult to charge your advice based on the value of your clients’ cryptocurrency holdings, as these digital assets tend to be very volatile and there are not a lot of investment vehicles. options available to financial advisers (although this is changing quickly).

There are a growing number of financial advisers and their firms (although they are still in the minority compared to advisers who charge for assets as a management fee or are remunerated through commissions) that use a pay-per-view model. act, according to which they charge customers a fixed fee. or a charge based on time (that is, by the hour). Fee-for-service models tend to work well when it comes to advice on crypto assets compared to more traditional compensation models because the pricing structure is simple and transparent. It also gives advisers more flexibility to charge for assets that are in the process of being advised but are not managed on a discretionary basis, which is often the case with cryptocurrencies.

Key points to remember

Many investors do not understand crypto and think it has no place in their wallet. But a growing number of investors are curious about crypto and want exposure (especially those who are younger, well educated, and with higher incomes). We were in the midst of the biggest wealth transfer of our lives, and as these assets are passed on, heirs are likely to abandon their parents’ financial advisor and invest some of their new wealth in it. cryptography. As a result, financial advisers have to adapt, lest they become useless.

Because there are few financial advisers who will be working with clients who hold cryptos or are considering purchasing those digital assets, you have the opportunity to really stand out from the crowd of undifferentiated financial professionals. Working with clients interested in crypto can be a broad blue ocean strategy for advisors willing to take the plunge.

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