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.