Bitcoin
Bitcoin ETFs are not winning the hearts and minds of financial advisors
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“It’s something I’m researching because I think I’ll eventually recommend it, but I’m not there yet,” Lee Baker, founder and president of Apex Financial Services in Atlanta, said in an interview. “For me and other advisors, if we get more track record, it increases the likelihood that it will end up in clients’ portfolios.”
CNBC spoke to a dozen members of the CNBC Advisory Board, which includes Baker, to learn why so many financial planners are still turned off by bitcoin and bitcoin ETFs, and what could cause them to change their minds. It all comes down to two main things: time on market and regulatory compliance.
“When [bitcoin] becomes more regulated, you will see more adoption,” said Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. “That being said, even if there is no regulation, if over time this can prove to be as stable an asset as a technology – because my point of view on this is more early technology than money – you will see more adoption.”
Most advisers said they are not initiating conversations or responding to client questions about ETFs — and most do not have more than one client who has made an allocation to the funds. Of these advisors, some are proactively educating themselves about bitcoin investing, while others – often those with an older, more traditional and conservative client base – are more dismissive.
Some of these advisors work with younger clients who have a greater appetite for risk and a longer investment horizon. They say their clients were already interested and informed about exposure to cryptocurrencies before this year and that the arrival of ETFs did not motivate them to join.
Performance evaluation
At 15 years old, bitcoin is at a stage of maturity comparable to that of a teenager – it has great potential, but still presents a lot of volatility. Bitcoin is up more than 59% this year and about 230% since its 2022 low, which deepened during the FTX collapse. Over the past three, five and 10 years, the cryptocurrency has gained 85%, 704% and 10,854% respectively. It has also suffered several 70% drawdowns over the years, which not all investors have been able to tolerate.
Many hope that consistent flows into bitcoin ETFs over the years can reduce this volatility, but for now, it is still a deterrent for some.
“Financial advisors now have a way to give clients access [to bitcoin] this is safe, reliable and regulated,” said Bradley Klontz, managing director of YMW Advisors in Boulder, Colo. “I love it…that it’s a tool in our toolbox for clients who want it. I just don’t see, at this point, most firms recommending that because they’re not recommending any asset class, or any specific asset, that has that much volatility.”
Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, said that the majority of her clients prioritize long-term stability and growth over high-risk opportunities, and that bitcoin ETFs’ “relatively early stage in the landscape financial and the ongoing volatility associated with bitcoin” are the main factors that keep bitcoin ETFs out of your investment strategies.
Cathy Curtis, founder of Curtis Financial Planning in Oakland, California, said she doesn’t know if bitcoin will ever be a stable asset class, but that she would consider adding it to client portfolios if it shows stable returns over at least 15 years.
“If it proves to be a true diversifier in stocks, for example, maybe,” she said. “The history of this asset did not show me that.”
Apex Financial’s Baker highlighted that investors have decades of software and tools to show them how a certain percentage of a particular bond, ETF or other asset in a portfolio can improve returns or increase volatility and more.
“As a group, we are quite conservative and somewhat risk averse,” Baker said. “We are so used to pulling graphics and [asking] how this thing worked and in what types of markets – it’s almost the way we’re wired.”
With a few more years on the market, investors will be able to do similar modeling with bitcoin, he added, which will help advisors become interested in the funds. He also said board members’ buy-in is a matter of when, not if.
“Right now… everyone should be convinced that [bitcoin’s] here to stay, [they’re] we just don’t understand some of the metrics in terms similar to how we might look at and value stocks or bonds,” he said. “We simply don’t have that foundation, and that’s an additional reason why uptake is slow.”
“My guess is it will be slow adoption,” he added. “I truly believe we will start to see an increase or increase in the use of consultants somewhere in the next two to three years.”
Not regulated enough
While bitcoin ETFs now exist in the U.S. as a regulated investment vehicle, it’s still not always clear if or when advisors can recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York City.
“A lot of this still has to do with compliance offices and what the brokerage will allow when it comes to advisors and offering ETFs,” he said. “Just because the ETF was launched doesn’t mean the floodgates were open or that allocation capacity for it was easy.”
Jenkin said some brokerages have approved the purchase of bitcoin ETFs but restrict how much of it can be purchased, and other firms do not allow advisors to sell bitcoin ETFs.
Some say this is due to crypto’s notorious reputation for fraud, scandal and crime – a situation that gets a little cleaner every year but has undoubtedly left a scar on the industry. More point to the lack of regulation in the sector, which increases the chances of consumer complaints, potential lawsuits against brokers and potentially fines from the Financial Industry Regulatory Authority, or FINRA.
“Part of the reason this isn’t popular yet is that there are serious compliance issues in the industry,” Jenkin said. “Many firms are very nervous about the communications that financial advisors are having with their clients about digital assets, and none of them want to have violations with FINRA.”
“Most brokers are risk mitigators,” he added. “They want to allow advisors to do things for clients, but they certainly don’t want the spotlight to be on them to take more risks. That’s why you’re seeing there’s such a slow uptake on this.”
Building trust
Bitcoin and its ETFs need more time on the market to gain trust and adoption by big players like Vanguard, which earlier this year said it has no plans to offer them and will not change its stance unless the asset changes to become less speculative.
“That’s coming,” Boneparth said of customer confidence. This will come with “more time – moving from the early days to the more mature days. We are coming out of years where exchanges failed – this is not Bitcoin’s failure, but it muddies the water [and] people’s trust.”
Until then, the best position consultants can occupy is one where they educate their clients, he added.
“Even though bitcoin ETFs may fundamentally present a less risky and more regulated way of investing in digital assets… the association with bitcoin still tends to deter [clients]said Dorsainvil.
Advisors will likely be further deterred by ether ETFs, given the added complexity of this cryptocurrency’s use cases and functionality. Last week, the Securities and Exchange Commission gave the green light to US exchanges to list Spot Ether ETFswhich many investors predict will also be successful, but perhaps a fraction of what bitcoin ETFs have enjoyed.
“ETFs have made everything very easy for institutions, from pensions to large funds,” said Boneparth. “That’s where we’re seeing most of the flows going into these bitcoin ETFs. … It’s still very complicated at the retail consultant client level.”