In the crypto press, you often find a lot of optimism, positivity, and hope for the future of this asset class, even in the face of difficult markets.
This kind of optimism can be contagious. Indeed, over the past two years, the mainstream financial press has taken a mostly benevolent, if not enthusiastic, stance toward cryptocurrencies.
But the financial industry still has mixed feelings about cryptocurrencies, concerns that have only been exacerbated by the market turmoil of recent months.
Perhaps nowhere is this better exemplified than in the towering personalities of legendary investors and Berkshire Hathaway leaders Charlie Munger and Warren Buffett, both of whom have come out as outspoken critics of digital assets and cryptocurrencies not just as investments, but as concepts altogether.
The reluctance to manage crypto assets
To meet the standards to which they are held, fiduciary advisors must straddle the line between enthusiasts and critics, but that doesn't mean they have to embrace digital assets, said Scott Eichler, founder of Standing Oak Financial, a Newport Beach, Calif. RIA.
"Many of my clients privately own cryptocurrencies, and we end up advising them because they are part of their portfolio and asset allocation," he said. "I don't mind if a client wants to do that. I don't mind including it as part of their asset allocation, but I do mind taking on the fiduciary role of managing cryptocurrencies. I don't think we are in a position to act as a fiduciary in terms of trading and rebalancing cryptocurrencies. We can give advice, but we can't actually trade."
Eichler's comments are in stark contrast to many crypto-positive advisors who believe there is a fiduciary duty to handle crypto on behalf of clients - instead, he believes it is very difficult for an advisor to act as a fiduciary and trade digital assets directly.
The main obstacle for advisors to manage cryptocurrencies is information, according to Eichler.
"There are a number of things we need to do as part of our fiduciary responsibility, and one of them is to be able to diversify the client's assets and be well informed about their decisions," he said. "In the last year alone, about 4,000 new coins have come to market. It's impossible to keep up with that unless we make it our full-time job."
Standing Oak is far from a conservative company that sticks to traditional investments - Eichler himself is a proponent of investing in alternatives. But crypto is a new asset class that has grown so quickly in such a short time that it's impossible for a financial advisor with responsibility for his or her clients and their overall wealth to keep up.
Eichler said advisors still don't have a well-functioning multi-custodial system for trading assets outside of individual accounts. Standing Oak uses traditional RIA custodial accounts such as TD Ameritrade, which have yet to offer advisors the ability to trade individual coins.
"I would basically have to track every trade on paper," Eichler said. "To my knowledge, there's currently no system that can do all the trade tracking and logging and everything that's required as a fiduciary."
Will crypto ETFs create more investment opportunities?
For many firms with these problems, the solution lies in a cryptocurrency ETF or private placement product, which Eichler sees as a poor fit for individual investors and therefore unsuitable recommendations for fiduciary advisors.
But what if a low-cost, point-based cryptocurrency ETF got the green light from the SEC?
"At this point, I'm kind of laughing because the whole point of crypto seems to be to eliminate me or the middleman, and it's become a question of whether I should assert the third-party nature of buying ETFs," Eichler said. "The purpose of crypto is to eliminate the need for an ETF and an advisor. There are a lot of good coins with good track records to choose from, why would you come to me to invest in them? That would be like asking me to get you a $100 bill. If that's what you really want, you shouldn't pay me a fee for it."
Instead, Eichler asks his clients to tell him how much money is invested in cryptocurrencies and how many different coins they invest in so he can add them to their asset allocation. He then tracks the value of their crypto holdings over time and suggests they buy or sell when an allocation no longer aligns with their portfolio goals.
This is similar to the way Standing Oak handles its clients' private real estate holdings: advisors ask about the value of the property and the cash flow it produces in order to integrate it into the client's overall portfolio and trade assets around the real estate holdings to maintain the allocation.
The big difference: cryptocurrencies are assigned a much higher risk weighting than an asset class like private real estate.
"I'm not trading as a fiduciary here, but as an informed participant," he said. "I'm not trading it, I'm not buying it, we're just giving it an asset allocation and making sure it stays within those parameters. Asset allocation is already a fiduciary responsibility.
FOMO, risk tolerance and volatility.
As a fiduciary, Eichler also tries to make sure a client's crypto holdings reflect their risk tolerance and volatility.
"If they have a very low risk tolerance, I tell them not to invest in cryptocurrencies because it would put them at too much of a standard deviation that they wouldn't be able to handle emotionally if their portfolio goes down," he says. "If they have a higher tolerance for risk, they can take it on and it could be a great asset for them. Cryptocurrencies can fluctuate up a lot. So if you handle it well and stick to rebalancing, they can create alpha in a client portfolio because they're so uncorrelated."
True alpha comes not from cryptocurrencies' ability to be a high-performing asset class, Eichler said, but from an advisor's ability to rebalance a portfolio around them to capture and lock in above-average returns on a regular basis.
Eichler said he would need two things in order to trade cryptocurrencies as a fiduciary on behalf of his clients: A clear analysis of the governance of cryptocoins and a robust system for buying and selling cryptocurrencies that can adequately capture sales and purchases.
"We know who governs cash: the Federal Reserve and the Treasury. I can see who governs and what their decisions are," he said. "I can't do that with most cryptocurrencies. I would actually prefer if no laws were passed on the subject. Does an authority come in and say that they're going to be the authority on cryptocurrencies and make sure that these coins don't get fragmented and split up and diluted, an authority that can give its blessing to a coin, which would then make it more valuable? That's something I'll be paying attention to."