Can your financial advisor advise on crypto?

Whether up or down, cryptocurrency is getting a lot of attention: 94% of financial advisors fielded questions from clients about cryptocurrency in 2021, according to a survey by Bitwise and ETF Trends. The same survey reports that 47% of advisors have 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 reluctant to recommend the digital asset class. Whether or not your advisor will help you with crypto investing depends on how the advisor thinks about crypto’s prospects, what tools the advisor has available, and your risk tolerance and financial goals.

Read on to find out why your advisor may be reluctant to recommend crypto, what questions you should ask your advisor about crypto, and what to do if your advisor doesn’t provide guidance on crypto investing.

Crypto Investing Basics

For starters, you want to understand the crypto investment landscape so you 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 bitcoinBTC
or etherETH
. But you don’t have to. You can also gain crypto exposure indirectly through certain stocks, such as:

• Cryptocurrency exchange and wallet provider Coinbase.

• Digital payment company Block. Block owns Cash App, which supports bitcoin trading.
• The analysis company MicroStrategyMSTR
  . The company has a massive bitcoin investment on its balance sheet.

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

Why some financial advisors may be reluctant to recommend crypto

Unfortunately, your advisor may avoid recommending direct or indirect exposure to crypto for several reasons. He or she may not have the expertise or the bandwidth to stay current on crypto’s ever-changing landscape. Or maybe 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 happy or angry most of the time. Neither extreme is ideal.

Another issue is adviser compensation. The major brokers do not (yet) support cryptocurrency trading. If your advisor recommends holding digital currencies directly, you may need to execute the trades yourself. And any resulting crypto-assets will reside in an account outside of the advisor’s purview.

In that scenario, your advisor makes either no money or less money for sharing crypto advice. If your advisor charges an annual percentage fee on your account balance, the annual compensation will decrease when you withdraw money to buy crypto. And commission-based advisors will simply not make a profit on these trades.

Your financial advisor probably won’t earn less, or even the same, for adding crypto monitoring to your service suite.

Questions to ask your current financial advisor about Crypto

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

• What do you think about crypto? There is a wide range of possible answers here. Some financial professionals compare cryptocurrency trading to gambling. Others predict that bitcoin will rise in value over the next five to ten 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 answer.
• What level of crypto exposure would you recommend? Expect a single-digit percentage here, unless you prefer aggressive, high-risk investing.
• What is the best approach for crypto investing? This question should lead to a discussion rather than a simple answer. Unless your advisor knows you very well, he or she will want to learn more about your goals and why you are 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 are called turnkey digital management platforms or TDAMPs. These are mostly aimed at independent advisors working with crypto. They can greatly streamline the counseling process.
• Describe the services you can offer in regards to crypto investing. You should expect a pro-crypto advisor to educate you about your investment options, recommend a target exposure to crypto holdings, and explain how that target exposure affects your current exposures. You also want an advisor who is comfortable providing 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 US, your crypto transactions are taxed as stocks. When you record a gain, you pay the short-term or long-term capital gains tax rate, depending on how long you owned the asset. Your advisor should recommend that 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 does not recommend crypto

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

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

1. Certified Digital Asset Advisors

Certified Digital Asset Advisors have completed 12 hour courses in bitcoin, ether, blockchain, crypto wallets and exchanges, and crypto regulation and compliance. They also have requirements for continuing education. 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 the Digital Assets Council of Financial Professionals (DACFP). It is for financial advisors who want to recommend crypto investment strategies to their clients. Certificate holders must complete 11 learning modules and sign ethical guidelines annually.

You cannot currently search for CBDA certificate holders online. However, you can confirm that a person has the CBDA credentials by calling DAFCP.

Be prepared to interview several candidates. You want someone familiar with crypto as well as traditional investments and general personal finance. The right advisor will also be reliable and personable. Learn more about assessing financial advisor candidates here.

Work with an advisor on Crypto

Your financial plan should ultimately dictate whether there is a role for crypto. Rely on 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 is likely that the tools available to advisors and the crypto space in general will evolve and mature over the next few years. You can revisit the topic with your advisor later, when crypto is more established as a mainstream asset class.