The new and aspiring Bitcoin and cryptocurrency millionaires want help from financial advisors and wealth managers. In particular, more than 70% of millionaires younger than 40 want this kind of advice, according to research by Capgemini, a French consulting firm. High-net-worth individuals are most interested in holding cryptocurrencies, the survey finds, because of the potential for outsized investment returns. In Canada and the US, about 25% of those individuals have a high level of interest in cryptocurrencies. Another 21% are curious, but need more information.
But there’s a huge gap between the demand for crypto-related services and the supply of financial advisors knowledgeable about cryptocurrencies. Only 35% of those surveyed say they had received professional advice on cryptocurrencies. That gap creates a significant business opportunity for financial advisors and wealth managers in an asset class with a $265 billion market capitalization*.
Why Learn about Crypto?
As countries around the world grapple with how to classify, regulate and tax cryptocurrencies, one thing is becoming clear: regulatory certainty is likely a tailwind, not a headwind, for crypto. Also, as the custody issues begin to disappear, institutional investors are likely to begin entering the marketplace in droves. With those institutional investors, crypto will also see a flood of new money, and of new investors. Recent job postings from Fidelity Investments, for example, suggest it’s planning to build its own digital assets exchange.
Look at the recent growth in the market. We have Fidelity preparing to join the fray. Coinbase, Kraken, and Circle are already major players. Earlier this year, Robinhood came in with over 1 million users joining their crypto trading waitlist in just a few weeks. This activity shows that main street awareness and adoption are likely to continue to grow. So too will the demand for guidance from financial advisors and wealth managers knowledgeable about the cryptocurrency marketplace.
If you’re starting from scratch, you can get up to speed with my article on the basics of bitcoin and the blockchain. Even if you work for a large brokerage firm that doesn’t allow advisors to advise on virtual currencies, you should still take an interest in them to stay ahead of the curve and help ensure you can talk intelligently about topics related to bitcoin, and other cryptocurrencies and tokens.
Advice on Income-Tax Complexities
Some people mistakenly think that all cryptocurrency transactions are anonymous. While privacy coins like Monero, Dash, and Zcash, are more anonymous than bitcoin and other cryptocurrencies, most are pseudonymous, meaning they’re made under the digital equivalent of a pen name, and can often be traced by anyone sufficiently motivated, and that includes the IRS. Speaking of the IRS, they have classified virtual currencies (a/k/a cryptocurrencies) as property for federal tax purposes, which makes cryptocurrency transactions subject to short- and long-term capital gains taxes.
This classification also means that any time you exchange a cryptocurrency, the transaction has the potential to create tax liability. If you receive cryptocurrency in payment, you must include its fair market value at the time of the transaction in your gross income on your tax return. And when you exchange cryptocurrency for other property, you will have a taxable gain or loss based on your adjusted basis in the currency and the fair market value of the property you receive in exchange. Investors can reduce their tax liability by holding virtual currencies in a retirement account. Understanding the basics of the tax rules associated with cryptocurrency can make advisors more valuable to their clients and their tax advisors.
Help with Estate Planning
Because of the virtual nature of cryptocurrencies, their value can be lost forever when the person who holds them passes away — unless there’s a plan in place to transfer those assets to heirs. Your client needs to maintain a record that covers:
- What cryptocurrencies they hold.
- What they paid for them.
- Where they are located.
- A carefully written access plan, that includes detailed instructions for the recovery and disposition of crypto holdings
- The cryptographic keys, seeds, and access codes that control those holdings.
Without that access plan, they may be forever inaccessible. Cryptocurrencies can be difficult to correctly and safely incorporate into one’s estate planning documents if their attorney is unfamiliar with them. Understanding how to include digital assets in a will, trust, and power of attorney correctly is a growing area of estate planning expertise. Furthermore, the demand is outpacing the supply of knowledgeable professionals in this area. Helping clients and their attorneys with specialized knowledge in estate planning for digital assets can be a valuable way to differentiate your practice.
Dealing with Divorce
The volatility and secrecy of cryptocurrencies make them especially tricky to divide equitably in a divorce. Knowing how to guide clients and their attorneys in dividing or selling crypto holdings as part of a divorce proceeding can be a valuable service. Further, cryptocurrencies can make the perfect hiding spot for undisclosed assets. Unwary spouses or divorce attorneys who don’t understand cryptocurrencies may not know where to look, or what for. For advisors who work with clients experiencing divorce, understanding the complexities of cryptocurrencies is no longer an option. It is a requirement, particularly if you are a fiduciary advisor.
An estimated 16 million Americans own one or more cryptocurrencies. Questions regarding crypto ownership should be part of your financial planning fact-finding process. Be prepared to answer questions regarding how to incorporate crypto holdings into your clients’ short or long-term financial strategies. Cryptocurrencies may only become more common as the market grows.
Teaching Best Practices
Regardless of your own beliefs regarding bitcoin and cryptocurrencies, clients will naturally look to their financial advisor or wealth manager for assistance. They want you to help them understand better the marketplace, and how they can buy, sell and safely store cryptocurrencies and tokens. Advisors should be prepared to explain the advantages and disadvantages of different exchange and storage methods and how they work. Do you know what to tell a client who asks if they should keep all their Litecoin in their Coinbase account?
Clients may also want guidance on how to properly evaluate Initial Coin Offerings (ICOs) and the more than 1,600 plus virtual currencies available. Teaching them how to identify and steer clear of potentially fraudulent ICOs- and the regulatory uncertainties regarding their classification as securities – can be quite helpful. You should educate your clients on these issues without offering specific advice on buying, holding or selling a particular cryptocurrency. That key distinction should make compliance departments happy while helping you avoid unsettled regulatory rules and guidelines involving digital assets.
Clients from all walks of life, including the new crypto millionaires, are seeking advice on their digital holdings. They represent an untapped market, which could help savvy financial advisors establish a client base for years to come. Watch carefully as the technology continues to unfold, regulatory uncertainty diminishes, and crypto’s main-street acceptance grows worldwide. Knowledge on these issues and others related to virtual currencies can set you apart from other advisors. In the process, you provide a much-needed service to both existing and potential clients, and their other professional advisors. Advisors who ignore cryptocurrency, do so at their peril.
*As of 7/5/18.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.