Flourish, a technology company best known for its cash management solution, has launched Flourish Crypto, a platform where RIAs can custody, trade, and directly manage cryptocurrencies on behalf of clients.
It’s the latest among similar new solutions that are in demand by private wealth managers. Financial advisors have struggled to incorporate cryptocurrencies into their investment management either because their company forbids it, they don’t feel knowledgeable enough about the new asset class, or they don’t have the software and systems in place to effectively support it. Consequently, the majority of wealth managers are not investing in bitcoin and other crypto.
In a 2019 survey of 994 wealth managers by Bitwise Asset Management, a San Francisco-based cryptocurrency index and beta funds company, more than 90 percent said they were not invested in crypto. But a more recent survey suggests the number has grow significantly. A report published this month by Fidelity Digital Assets, the investment firm's crypto custody business, found 43 percent of financial advisors were buying or investing in crypto at the end of 2020.
From 2019 to 2020, the number of institutional customers — hedge funds, family offices, RIAs, pensions, endowments, and corporate treasury departments — quadrupled at Fidelity Digital Assets, a Fidelity spokesperson told RIA Intel.
"Privately-held, smaller wealth management companies may have less 'red tape' to get through than other institutions and may therefore move quicker, which could explain the increase in family office investment. For financial advisors, it is likely that they are receiving direct requests from their clients to better understand digital assets and gain exposure through a familiar and trusted platform," according to Fidelity's 2021 Institutional Investor Digital Assets Study.
In another 2020 survey by Bitwise, 81 percent of financial advisors said clients asked them about crypto, up from 76 percent in 2019. The number of advisors allocating to crypto in client portfolios rose 49 percent in 2020, from 6.3 percent to 9.4 percent, according to the Bitwise study.
New platforms like Flourish Crypto could mean more advisors investing on behalf of clients, as investors are increasingly interested in the new asset class and or seeking advice on their crypto holdings.
“We built Flourish Crypto to give advisors a simple, secure, and compliant way of offering...a direct cryptocurrency ownership solution [to] their clients, but critically one that is built for advisors,” Benjamin Cruikshank, head of Flourish, told RIA Intel.
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In 2018, alternative investments firm Stone Ridge Asset Management created Flourish to build various services or “modules” specifically for RIAs. Its first module, a cash management solution called Flourish Cash, launched later that year, with much praise. In 2020, Stone Ridge sold Flourish to MassMutual, where it is still a wholly owned subsidiary of MassMutual operating independently from the insurance company’s other businesses.
Flourish Crypto is the latest module added to the platform and is easily accessible by 400 RIA firms with over $1 trillion in combined assets already using Flourish Cash.
Using Flourish Crypto, RIAs get custody, trading, reporting, integrations with financial planning software, and compliance solutions. It enables them to directly manage and charge their fees on cryptocurrencies just like they would stocks or bonds.
Clients invited by their RIA to use its Flourish Crypto can open an account in five minutes or less and start trading.
“We're not constrained by financial markets so [advisors] can trade 24/7 with $100 trade minimums and there's zero account minimum open their account with any balance. So, really one of the core goals was to make this incredibly simple, incredibly quick, incredibly easy, and really demystify the experience of crypto,” Cruikshank said.
Flourish Crypto integrates with reporting software Black Diamond, financial planning software eMoney Advisor, Orion Advisor Services, and Envestnet’s Tamarac. Advisors can white label client-facing parts of the platform, take discretion or offer as client-directed accounts, and have visibility into balances, statements, and 1099-Bs, Flourish said.
Clients pay a fee of 0.25 percent per trade and an annual custody fee of 0.65 percent. RIAs don’t have to commit any amount of client assets to sign up for Flourish Crypto and there is no minimum for individual client accounts. Those fees reflect the “real costs” of operating the business and are more affordable and straightforward than what investors pay using retail exchanges, Cruikshank said.
Flourish partnered with Paxos Trust Company, a crypto custodian with more than $12 billion in assets, and Compliance Solution Strategies, a compliance firm that supports financial services companies.
Trustworthy and regulator-approved custody, and clear compliance standards, are necessities for wealth managers. But historically, those have been dicey topics when it comes to crypto. The regulatory landscape is cloudy. U.S. regulators have fined crypto-related firms and individuals a total of nearly $2.5 billion, according to a report released by analytics firm Elliptic in June.
Two weeks ago, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler warned that cryptocurrency exchanges like Coinbase should register with the regulator. To date, the SEC has only issued guidance that bitcoin and Ethereum are not considered securities.
“That is incredibly important for advisors, because if this is not a security, it's much easier than for them to adopt. If it is a security, there's a whole new world of disclosures and regulations that the crypto industry broadly has not yet fully integrated,” Cruikshank said.
Advisors who want to invest clients in crypto have few options.
They can invest in trusts, such as the Grayscale Bitcoin Trust (GBTC), which has an annual fee of 2 percent, or crypto index funds, like the Bitwise 10 Crypto Index Fund (BITW) listed on OTC Markets Group’s OTCQX exchange, both with fees higher than many ETFs and mutual funds.
Alternatively, investors who want direct ownership over their coins can buy cryptocurrencies based on the recommendation of their advisors and hold them away with crypto exchange platforms like Coinbase, Gemini, or Kraken.
Morgen Rochard, founder of Origin Wealth Advisers, said most of her clients have 1 percent to 10 percent of their net worth in bitcoin, either through investment in GBTC or in direct ownership of bitcoin.
Direct ownership comes with a security risk for the investor and the advisors. Investors need to ensure they don’t lose or give access to their keys, the digital mechanism that authenticates, authorizes, and encrypts the cryptocurrency. Advisors need to ensure they don’t inadvertently gain access to their client’s keys or crypto exchange password.
An advisor with access to an investor’s private keys effectively has custody, Rochard said. To mitigate that risk, she helps her clients set up a hardware wallet with Unchained Capital, a third-party site that provides multi-signature cold storage for a client’s key — two held by the client and one kept with Unchained Capital — with two required to gain access to the cryptocurrency.
Flourish Crypto and similar platforms like Onramp Invest and Two Ocean Trust, a qualified custodian that services traditional and crypto assets, enable direct management like advisors have over other assets.
“The goal is pretty simple, make crypto looks just like any other asset class,” Cruikshank said.
Clarification: A previous version of this story referenced a 2019 Bitwise survey about cryptocurrencies and clients of financial advisors asking about the asset class. A 2020 survey was available and that data has been included in the story.
Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.