How Advisors Can Embed Cryptocurrencies Into Client Portfolios



A new day, a new article on cryptocurrency. Stories about volatility, service providers and regulatory challenges grab the headlines. This leads to increased investor interest in all generations of wealth who are drawn to the potential for high returns.

According to the Journal of Financial Planning, nearly half of advisers surveyed in early 2021 said their clients have learned about cryptocurrencies in the past six months. Organizations are at a crossroads. They struggle to manage business, operational, and technological challenges without adding risk. Taking advantage of cryptocurrency as an investment option will be a big business. One misstep can increase the risk exponentially. Businesses interested in adding crypto should understand:

  • How to make your operations and your technological ecosystem scalable?
  • What will be the impact on the risk profile of your organization?

Approaching cryptocurrency challenges with a disciplined mindset, considering all impacts, will lead to better results for investors. Not having a well-controlled strategy will hinder success, lead to possible business interruption and impact returns.

What is the hype?

Cryptocurrencies are disrupting wealth management with rapidly growing adoption. Cardify found the the average crypto holder has an allocation of around 13%. An IN Research study showed that 79% of advisers plan to increase cryptocurrency investment recommendations over the next year if they don’t recommend them already.

Headlines have been dominated by major swings in the value of some cryptocurrencies, resulting in big returns for some and big losses for others. Some may see cryptocurrency as the “next big thing,” however, this emerging asset class has some perceived advantages. Initial research has shown that it is not correlated with other asset classes offering a source of diversification. Others view cryptocurrency as speculative. These are all factors that have aroused the interest of wealth management clients.

Where do Stablecoins fit?

Stablecoins are a cryptocurrency associated with a fiat currency or a pool of assets. The intention is to maintain a more consistent value. They may not offer the same level of volatility as other cryptocurrencies; However, they are gaining popularity with more conservative investors looking to include digital currencies in their portfolios.

Stablecoins have also caught the attention of regulators. One of the largest cryptocurrencies, Tether, has been banned by regulators in New York due to an overestimation of its support in US dollars. Federal regulators have raised concerns about possible defaults on the basis of collateral and liquidity risk issues, resulting in greater risk than expected by the investor. In the long run, stablecoins would be the most affected by central bank digital currency (CBDC).

What questions should I answer?

Embarking on a new investment strategy begins with the need to answer some basic questions. The Internal Revenue Service has already responded to one, stating that cryptocurrency should be treated as property, clarifying gains / losses. This leaves companies answering other questions when developing a business case.

  • Should your business offer cryptocurrency?

    The answer may be obvious, however, companies still need to think about if, when and why they decide to invest in crypto. You have to take into account the suitability for your target markets, your core competencies and the products that will be offered. Overlooking, the simplest question impacts the foundation for moving forward.

  • How are you navigating the changing regulatory landscape?

    A higher level of regulation is almost a certainty in the short term, forcing companies to deal with what has been mandated while developing an infrastructure to deal with what will happen tomorrow. One area in which companies will need to be proactive is investor suitability. The level of risk associated with cryptocurrency requires a certain level of verification from the client before authorizing an investment.

  • What changes need to be made to the advisor’s experience?

    Every time you expand your investment offerings, there is an impact on your investment teams and those in contact with clients. Ensuring that the adviser’s office has the necessary components to research, negotiate, and report is a major concern when developing your strategy. Advisors should be trained to assess client suitability and asset class risk. Despite the amount of information in the market, most advisers don’t know how to get the most out of cryptocurrency. This inherently increases the risk for the business.

  • What operational and technological transformations must take place?

    Existing systems must be reconfigured to process cryptocurrency. Additional modifications to the ecosystem and standard operating procedures must be made to reduce risk and maximize returns. Further considerations need to be made on sources of liquidity and portfolios / custody.

Where are you going from here?

The adoption of cryptocurrencies is on the rise and will continue to emerge as a viable investment option. It is clearer that a higher level of government oversight is on the horizon, complicating the decision on how best to integrate cryptocurrency. The wait should be, the way things look today will not be what they will be in the future. Carrying out thoughtful analysis is the first step in developing a clearly defined strategy that covers all technical, operational, risk and compliance needs and is essential moving forward.

Mike Tropeano, CFA, is Senior Director, Broadridge Consulting Services, Wealth Management Practice


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