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The Sacrificial Asset Classes for Advisors' Growing Crypto Allocations

A survey reveals how private wealth managers are making room in investment portfolios.

A new study suggests more financial advisors are investing in cryptocurrencies and describes how they are making room for the new asset class in client portfolios.

Most financial advisors only invest in stocks and bonds; just 45% make allocations to alternative investments. Few invest in cryptocurrencies, although the number is growing. Only 9.4% of advisors were allocating to cryptocurrencies in 2020, up from 6.3% in 2019, according to a report published Tuesday by Bitwise Asset Management, a San Francisco-based cryptocurrency index and beta funds company and news website ETF Trends. 

“With less than 10% of advisors reporting allocations, this remains the domain of early adopters,” the report says.

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The benchmarking study surveyed 994 financial advisors in December, including independent RIAs, broker-dealer representatives and financial planners. It also surveyed employees of the so-called wirehouses: Bank of America’s Merrill, Morgan Stanley Wealth Management, Wells Fargo Advisors, and UBS Wealth Management.

RIAs accounted for nearly half of all respondents, followed by advisors at broker-dealers (25%) and financial planners (19%), similar portions to the 2019 survey. Many wealth managers bar their advisors from recommending  cryptocurrencies and there are few custody solutions for wealth managers

The average advisor had between $50 million and $100 million in assets under management, 45% had more than $100 million, and 9% had more than $1 billion.

Among advisors allocating to cryptocurrencies, 58% were RIAs and 78% plan to increase their allocations in 2021, according to the report. Low or no correlation to other asset classes, “high potential returns” and “something new to offer clients” were the top reasons advisors said they were investing. Twenty-five percent also cited “inflation hedging,” up significantly from the 9% that cited that reason in 2019.

Eighty-one percent of advisors have had at least one client ask about cryptocurrencies, according to the report. But with or without advisors, clients are investing in the new asset class. More than a third of advisors said they are aware that some of their clients are self-directed crypto investors. (And individuals appear to be slightly better than institutions at trading crypto, according to initial research.) 

Advisors had a clear view on allocations to crypto in December. Half said funding for it would come from an existing allocation to alternative investments, down from 57% in 2019. However, more advisors are considering dialing back allocations to equities and cash in favor of the new asset class. 

Despite the volatility of cryptocurrencies, 5% of wealth managers also said they would lower their allocation to fixed income in favor of the new asset class.

There are still many crypto naysayers; 71 of the 994 survey participants chose not to select any of the five proposed attractive features of investing in bitcoin and others. Instead, some offered their own.

“Not all advisors found positive things to highlight...Many of these advisors wrote in comments saying there was ‘nothing’ attractive about cryptoassets, with some noting that cryptoassets are ‘fake’ and others wrote that crypto is ‘too risky’ for their clientele,” according to the Bitwise/ETF Trend report. 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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