Compliance Saves Businesses and FAs from Crypto Dumpster Fire – Wealth Solutions Report

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Sander Ressler, Expert Columnist, Compliance and Regulatory Affairs, WSR

For Experienced Wealth Management Compliance Professionals, Crypto Has Always Been Less Valuable Than Hill Of Magic Beans

As we ring in the new year, I have a question for our readers: Would you like to one day be the dumbest smart person in the room?

The wide world and the mad dash of crypto has certainly made many compliance professionals like me feel that way.

For example, in late 2021, when crypto boosters were posing with their (presumably rented) lambos on TikTok, I compared crypto to a hill of magic beans. And I got a ton of hate mail from crypto enthusiasts.

magic beans

At the time, I warned wealth management firms to proceed with extreme caution with this emerging asset class, warning that financial advisers who embrace crypto for clients could kill their own careers once this bubble exploded.

To be fair, I wasn’t the only one ringing five alarm bells about crypto as early as 2020 and 2021. But those of us who were willing to voice that perspective publicly in the media were definitely in the minority.

Perhaps most relevant to this column, many of the most vocal naysayers on the future of crypto have come from the compliance oversight profession.

And why? Because most of us didn’t get it. We’ve heard various crypto enthusiasts and self-proclaimed experts talk about the inherent and inevitably growing value of crypto and experienced wealth management compliance professionals couldn’t understand how any of this could be true.

WSR Crypto Survey Highlights

Highlighting the role compliance has played in preventing much of the wealth management industry from being caught up in the crypto meltdown, some of the results of the year-end crypto special survey 2022 of WSR with readers-financial advisors. Consider the following:

78% of respondents strongly agreed that compliance oversight restrictions were the biggest barrier preventing advisors from engaging with crypto when the asset was booming. Of this group of respondents, 67% strongly agreed with the statement that it is not worth pushing back when compliance has a very negative reaction to a specific product. respondents, 64% strongly agreed that they receive the most pressure to engage with crypto from younger members of customer families, as well as third-party vendors who do not have a strong track record in product due diligence or asset management Finally, a whopping 92% of respondents cited in the first bullet point of these summary survey highlights also strongly agree that crypto is unlikely to become a credible investment asset for the foreseeable future.

Not all heroes wear capes

Mitch Avnet, Managing Partner, Compliance Risk Concepts

According to Mitch Avnet, managing partner of Compliance Risk Concepts, a national compliance consultancy for financial services firms, the crypto craze could have ended as a truly horrific bloodbath for wealth management firms and their financial advisors, were it not for the fact that our industry is as regulated as it is. Seasoned compliance experts are much more likely to be very careful when dealing with new assets that seem to operate in an unregulated and wild way.

Avnet adds that the companies that most effectively avoided the crypto crash were those that had access to experienced compliance professionals.

Whether they are internal executives or external consultants, these are people who know the regulatory system inside and out and have witnessed several past market and economic cycles. They have seen unsustainable market fads and can sense when a new product is fake.

Avnet agrees that compliance professionals who have opposed the adoption of crypto by the wealth management industry have often been met with doubt and had their credibility questioned.

Human beings tend to have short memories, but not too long ago crypto was seen as the go-to asset of the future, and financial advisors who didn’t actively help clients engage with crypto were dinosaurs just before the asteroid impact, Avnet said.

The crypto-asteroid never happened

It’s easy enough to seem out of place to the wider retail investing community when you refute product endorsements from celebrities like Larry David and Kim Kardashian.

Greater crypto exposure in the RIA segment?

From the perspective of John Gebauer, president of COMPLY, a regtech compliance firm, whenever financial advisors are prevented by compliance policies from offering a popular asset among investors, there will be dissatisfaction on the market. moment.

John Gebauer, President, COMPLY

But part of the core mandate of any corporate compliance function is to avoid inappropriate products that are overly risky, overhyped and underregulated as part of their fiduciary duty as responsible advisers, and those are terms which most certainly apply to recent cryptomania.

Also according to Gebauer, who oversees COMPLY’s NRS subsidiary, the RIA segment was at a greater potential risk of being exposed to crypto downside risks than its independent counterparts.

Small and medium-sized RIAs often have less robust and mature compliance departments and resources. In response to growing client interest, these firms are more likely to include emerging asset classes in their practice without thorough due diligence, Gebauer said.

Indeed, the crypto meltdown seems to have served as a wake-up call for small and medium-sized RIAs to invest more adequately in compliance resources to avoid similar future risks.

Gebauer notes, Who knows what the next unsustainable asset bubble will be? No one has a crystal ball on this, which means companies must rely on compliance to draw the appropriate lines in the sand to protect themselves and their customers.

Look forward

For crypto ride or die types, much of this dialogue reflects hidden opinions that obscure the ability of cryptos to rebound in value.

Robert Cruz, Vice President of Information Governance, Smarsh

A RIA executive who asked not to be named notes, Big picture, if you bought the most credible crypto assets like Bitcoin or Ethereum early in their launch, you’re still ahead.

Today, crypto is where the internet industry was in the early 2000s. It’s not dying out, there’s just a flight to quality happening at an accelerating level. The crypto assets that come out the other side will be stronger for it.

Robert Cruz, vice president of information governance at Smarsh, a global regtech company, agrees with the sentiment that it is too early to delist crypto as an asset class.

Right now, it seems premature to say that crypto is on its way out. Although the current crypto market crash has likely discouraged many retail investors, many clients of financial advisors remain interested in long-term crypto.

Wealth management firms and financial advisors who conclude that they never have to worry about crypto again are unrealistic.

Cruz adds that regardless of investors’ current appetite for crypto and other digital assets, the SEC has consistently stated that wealth management firms must have the same compliance oversight for these assets as any other. investment solution.

According to Cruz, wealth management firms should use this time to review their compliance monitoring policies and processes. In his view, particular emphasis should be placed on regtech recordkeeping solutions that can outpace the rapidly evolving digital communications that are increasingly used by younger generations of investors.

Given the growing volume and variety of communications as well as emerging asset classes, companies must actively engage to ensure their compliance infrastructure is in sync with the tools and investment vehicles demanded by investors today, Cruz said.

What’s the worst that can happen?

Ultimately, compliance professionals have a well-deserved reputation for drawing lines in the sand, starting and ending with the question: What’s the worst that can happen?

And here’s a sample answer to that question: The once $32 billion-valued cryptocurrency exchange FTX filed for bankruptcy late last year, setting off a domino effect of pain across the industry.

Now the influencers are insolvent. The editors are in the red. Buyers of The Merge NFT have buyer’s remorse About $92 million worth of buyer’s remorse, to be exact. Celebrities selling crypto are scrutinized by the SEC and DOJ.

It turns out that the worst that can happen is really, really bad.

And no doubt, it’s especially bad for the traditional retail investor who has not only lost money, but possibly lost faith in the system.

It could have been so much worse

When compliance and supervisory leaders look beyond hyperbole to analyze fundamentals, we are most often viewed as pessimists at the time. We become the dumbest smart people in the room, because we have a lot of facts at hand, but we just don’t understand them.

Compliance saved the day

In fact, compliance specialists are really just realists who do an often unpopular job: making sure that financial advisers don’t face a career-altering catastrophe and that businesses don’t face an existential threat. in the form of fines and massive regulatory penalties.

So who are the dumbest smart people in the room, based on the aftermath of the crypto crash?

If you’re lucky, the answer lies in the compliance solution providers you work with every day.

Sander Ressler, WSRsExpert Columnist, Compliance & Regulatory Affairs, can be contacted via [email protected]

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