A survey says HNW people are interested in digital assets and cryptocurrencies but wealth managers don’t appear to be offering much by way of access. But are advisors wrong to be treading carefully, given the volatility?
While wealth managers have been regaled about the wonders of
cryptocurrencies (such as bitcoin) and digital
assets such as tokens in recent years, it seems as
though a large chunk of the sector isn’t getting the memo, so it
appears from a recent survey.
A question is whether firms’ shyness is a matter to be concerned
about, or whether wealth managers have developed a healthy
scepticism about this field.
According to an Avaloq
survey from October, 86 per cent of UK persons who don’t own
cryptos would jump in if their traditional financial provider
offered crypto asset services. The numbers are going up: Avaloq’s
study of 3,000 mass affluent to high net worth individuals across
six markets (Germany, Switzerland, the UK, Hong Kong, Japan and
Singapore), found that 29 per cent of UK investors hold crypto
assets, an increase from 22 per cent in 2022. Germany has
experienced similar increases, with the number of investors
holding crypto assets up six percentage points, from 34 per cent
in 2022 to 40 per cent in 2023.
When asked about these figures, Avaloq found that out of the 71
per cent of UK investors who don’t already own crypto assets, the
main reasons for not doing so are concerns about volatility (35
per cent), a lack of trust in crypto exchanges (31 per cent), and
not knowing where to start (28 per cent). It is quite possible
that in the US, for example, figures may show that the public is
also keen on cryptos, creating a wealth management
opportunity. A report in June 2022 said 46.5 million
Americans who have never purchased cryptocurrency before say they
are likely to invest in crypto for the first time in 2023
(source: The Ascent, a Motley Fool service.)
So given all this enthusiasm, why is the industry so shy? Well,
the conviction a few days ago of Sam Bankman-Fried for a massive
fraud that led to the collapse of his FTX exchange, along with
the implosion of certain so-called “stablecoins” and volatility
to bitcoin and other entities, may have made wealth managers
pause. Take the case in the UK of peer-to-peer platform
rebuildingsociety.com, which in October was stopped by the UK
regulator from approving financial promotions for Binance and
other crypto asset firms. Or let’s look at Switzerland: the
regulator wants to tighten regulations on the practice of
“staking” – this might drive some players out. (“Staking”
refers to depositing a certain amount of cryptocurrency to
support the operation of a Proof of Stake – a consensus
mechanism.) The European Union has recently rolled out
regulations for the sector. There is no single global regulatory
consensus yet (possibly not a bad thing) on what this market
should look like. With the SEC in the US, there still appears to
be a lack of clarity.
It is possible that wealth managers hope these issues should
have been ironed out by now, and are running out of
patience. Cryptocurrencies and other entities have been
around for more than a decade. And yet these problems,
coupled with a confusing patchwork of regulations around the
world, remain.
This news service decided to ask Avaloq why there’s
a disconnect between the noise around digital assets and
cryptos on the one hand, and the lack – so far – of wealth
offerings, on the other.
“Wealth managers share similar concerns about crypto assets as
other traditional financial market players. These usually relate
to the complexity of blockchain technology, regulatory
compliance, business and operational risk and secure custody,”
Nils Bulling, head of strategic innovation, ecosystem and digital
assets at Avaloq, said. “Moreover, given that we are still in a
rather early adoption phase, introducing digital assets can
present a challenging business case in the shorter term.”
“This attitude is reinforced by wealth managers’ value
proposition: their focus is more on providing clear and trusted
advice, rather than on executing mandates. Here, education is of
utmost importance, both for clients and advisors. At the moment,
many businesses lag behind in terms of crypto advisor
certification and holistic expertise on this multi-faceted
topic,” Bulling said.
There is plenty at stake for a wealth industry that knows that a
recession risk, and inflationary pressures can affect margins,
meaning that it is wise to seek new channels for clients.
According to Statista, which projects revenues in the digital
assets market (covering entities such as tokens, smart contracts,
etc) is slated to reach more than $56 billion this year, and
revenue is expected to chalk up a robust 16.2 per cent compound
annual growth rate from this year to 2027.
Getting the infrastructure in place at wealth managers costs
money.
“Offering digital asset services requires investment, either in
in-house digital asset infrastructure or in partnerships with
crypto firms,” Bulling said. “While the latter may have
benefits in terms of initial investment needs, such outsourced
solutions are usually less integrated, with less automation. They
also come with additional counter-party risk and involve giving
away control of the business roadmap.”
“Perhaps, most importantly, sub-custody solutions do not fully
leverage the firm’s key value proposition: trust. All this
results in a key challenge for wealth managers: when to start and
how? Simply avoiding the topic altogether is becoming an
increasingly risky option, as investor demand for digital assets
is here to stay,” he added.
Bulling said that education is an important starting point, and
that means managers and advisors should be fully trained for
offering digital assets. Managers must grasp the various demands
of clients and the different instruments available to cater to
those demands. Wealth managers can ease concerns surrounding
digital assets by engaging with regulatory advice firms,
Bulling said. (This, of course, will be a boon to such
firms.)
Bulling reckons that over time, wealth managers’ acceptance
of digital assets will increase in line with investor demand
and as clients request secure access to new investments. To back
up that statement, Bulling gives the example of Ferrari’s recent
announcement that it is now accepting crypto as payment for its
luxury sports cars in the US, with plans to extend this to Europe
in due course.
It may be that wealth managers do more to tap into this
demand, but given the ever-shifting concerns from the compliance
front, I doubt that there is going to be a rush. As I noted in
passing in my editorial two weeks ago about the fraught
geopolitical situation, banks and other financial players are
likely to face even more scrutiny over the use/misuse of
cryptos and related entities, and firms won’t want to get things
wrong.
Also, let’s not forget that the price of bitcoin has been
extraordinary – surging to as high as $61,837 in October 2021,
before tumbling last year as tech stocks were slammed by higher
interest rates. It has since made a partial recovery. Whatever
else there is to say, bitcoin behaves more like a tech stock than
a currency with gold-like qualities of inflation protection.
(Remember, much of the original hype about bitcoin and other such
cryptos is that they were a sort of digital equivalent to “hard
money.” How’s that working out?) Wealth managers can see the
charts for themselves, and perhaps they’ve concluded that they
want a longer record of calm behaviour before getting more
involved. I can’t say I’d blame them if that is the case.
It is probably true that with more awareness and a rising
generation of younger, more tech-savvy HNW clients and advisors,
the wealth management menu will ensure that cryptos/digital
assets aren’t just a side-dish, but a main part of the meal.
There are diversification
benefits, maybe. But given the shenanigans and struggles of
recent years, it is perhaps understandable that, as yet, there
hasn’t been a rush.
