Journal of Financial Planning: January 2024
Christina Lynn, Ph.D., CFP®, AFC, CDFA, is a practice management consultant at Mariner Wealth Advisors. She specializes in the psychology of financial planning, divorce finances, estate planning, and digital assets. Her financial planning style can be described as holistic and evidence-based, with a focus on life-planning and innovation.1
The truth is that financial advisers are often blind to financial biases, which prevent us from achieving a neutral, clear perspective. In fact, many financial advisers have a dismissive attitude toward the developing trends in blockchain technology. These trends affect technology, investments, and financial planning—areas that financial advisers should be knowledgeable about. We can educate ourselves about Satoshi Nakamoto, blockchain technology, Lambos and unicorns, meme coins and alt coins, Operation Choke Point, and the degree of risk associated with all of it. This article is one financial planner’s perspective on current cryptocurrency trends, investor biases, and financial planner biases.
Investors Are Interested, Advisers Are Not
At first glance, it may seem like the crypto winter of 2022 marked the end of cryptocurrency. It led to a drop in ownership rates from 33 percent in 2022 to 30 percent in 2023 (Security.org 2023). However, the gloomy outlook on cryptocurrency investing seems to have been short-lived. About half of current investors plan to continue to invest even more in the short term, and almost half of non-crypto investors are considering purchasing crypto in the future (Security.org 2023).
It sounds like there should be a high demand for the assistance of a financial adviser. In fact, 90 percent of advisers receive client questions about cryptocurrencies. However, most advisers (59 percent) do not provide advice on it. It’s no surprise then that investors are making financial planning mistakes, as detailed below, that could be prevented with the help of a financial adviser.
Crypto Biases
Investor Biases
Retail investors make mistakes. Cryptocurrency investors struggle with the same behavioral biases as retail investors in the stock market, but the waters are choppier. They buy at higher highs and sell at lower lows. They try to time the market or capitalize on arbitrage opportunities, unknowingly generating a wake of taxable events. Retail investors pour money into unsafe investments, lured by the hype of social media influencers. Most are unknowingly at risk of permanent loss because they do not have sufficient safety protocols or fail to have a nuanced estate plan in place. Yet they seem to be blissfully unaware of the danger (Lin, Mottola, Valdes, and Walsh 2022; Security.org 2023). What causes so many mistakes? It could be one of the following.
Fear of rejection: A crypto investor may wish to avoid facing the disapproval or rejection of a traditional financial adviser’s reaction to an interest in or already-executed investment in cryptocurrencies. Traditional financial advisers may have a rigid mindset that resists innovation not originating from within their own office—which translates as being overly stiff and uninviting.
Availability heuristic: Investors tend to predict the likelihood of coin value increasing based on how easily we remember it rather than how probable it actually is (Tversky and Kahneman 1973). “Lambos” (Lamborghinis) and unicorns, the unofficial mascot of cryptocurrencies, illustrate its memorable nature. Crypto being top of mind may explain why some investors irrationally believe they will receive a high rate of return.
Overconfidence bias: Investors pour money into obscure cryptocurrencies with no track record, believing it will go “to the moon” (Rossolillo 2022). Many crypto investors appear to neglect the risk involved in boom-and-bust cycles and trends due to unreal expectations of growth. One study found that meme coin (e.g., Dogecoin) investors are not too worried about the risk involved, but rather are overly confident in their investment ability (Philander 2023). Inspired by the explosive growth of the random altcoins, the tamer returns of the equities market pale in comparison.
Mental accounting: Investors may irrationally compartmentalize their crypto investments, failing to account for their risk tolerance or goals (Shefrin and Thaler 1988). It would be no surprise that a financial planning analysis of portfolios containing cryptocurrencies would display incongruencies with core financial planning principles. The overly risky portfolios are willingly accepted by investors because they do not seem to apply traditional investment principles to crypto assets.
Adviser Biases
Retail investors are not the only ones tripping up. Advisers have their own set of behavioral biases when it comes to crypto. The following factors are identified as possible explanations for the lack of adviser engagement with cryptocurrency.
The juice isn’t worth the squeeze: Many of the core financial planning methods cannot be carbon copied to digital assets because of the nuanced differences in protocols. Rather, there is a steep learning curve to blockchain technology. Becoming proficient in cryptocurrency advisory services requires much more than an online tutorial. However, such a small portfolio allocation (e.g., 1 to 3 percent) may not seem to warrant the 12 hours or more of study that is needed to acquire even a baseline of foundational knowledge. Plus, vetting a new qualified custodian, integrating the new asset and advisory solution into existing reporting and fee systems, and ensuring all systems are compliant—it is enough to make most quit before even getting started.
Career suicide: Financial advisers work hard to establish professional credibility among their clients, community, and colleagues. Positioning cryptocurrencies as a viable asset class may seem like career suicide because of its inherent volatility, security concerns, the lack of track record, and its rebel image. It makes sense that financial advisers do not want to be the first adopter for fear of being wrong. Advisers have been indoctrinated, and rightfully so, to be skeptical of market fads. In fact, advisers spend much of their time educating clients on sound investment planning and to avoid chasing unicorn stock. After all, losing hurts worse than the chance of winning (Kahneman and Tversky 1979)—meaning, the off-chance of business growth from publicly endorsing digital assets as a valid asset class is not worth the risk of the reputational damage that could incur if it blows up.
Another reputational risk advisers face with blockchain technology is admitting they know little about this topic. Advisers are accustomed to being the smartest person in the room when it comes to investments. That position is turned on its head with blockchain technology. Suddenly, clients know more than the advisers. Naturally, it is uncomfortable and inappropriate for advisers to navigate an advisory relationship without being equipped to do so.
What you don’t know can hurt you: The nascence of the asset class induces reactions from the average financial adviser ranging from disinterest to highly skeptical. The lack of understanding of the technology, the absence of a proven track record, and difficulty in identifying reliable versus fraudulent actors stirs feelings of uncertainty. When you operate under uncertainty, you end up making inferior decisions—the theoretical name for this is “bounded rationality” (Kahneman 2003). Our adviser brains tend to jump to unlikely conclusions, such as the belief that the government will outlaw the use of cryptocurrencies, the value of bitcoin will go to zero, or the use case for blockchain technology will dissipate.
Real Concerns Regarding Crypto
Adviser reluctance to adopt digital assets is not all due to biases. There are various problems that plague blockchain technology due to its nascence. Financial advisers are rightfully concerned about regulation, long-term stability, high fees, and firm limitations when it comes to cryptocurrencies.
Regulatory heat: One of the top adviser concerns is the regulatory environment for cryptocurrencies. Rather than proactively providing laws and guidelines to follow, the Securities and Exchange Commission has been known to regulate by enforcement. The punitive, nebulous regulatory environment has been termed “Operation Choke Point” (Thompson, Ohlendor, Reeves, and Masterman 2023). There are frustratingly sparse guidelines for firms to follow (Pierce 2022), yet compliance protocols require updated, nuanced language to address the never-seen-before characteristics of blockchain technology. If no compliance protocol is set forth, how can firms act in compliance with U.S. regulation?
Firm handcuffs: Many advisers may not provide advice on or services for cryptocurrencies due to their firm’s compliance policies. These advisers have no choice but to decline requests for help. The safest route for them is to neglect to proactively inquire about clients’ existing cryptocurrencies investments.
High fees: The service fees are higher in administering and advising on cryptocurrencies investments. This is due to a greater time commitment and technical requirements that may operate off the rails of the planner’s current tech stack. For example, the Grayscale Bitcoin Trust fee is 2 percent (Grayscale Investments LLC 2023), compared to the average expense ratio of 0.05 percent or below for broad market index ETFs (Fredlick and Armour 2023). It is a challenge to justify the high fees to clients in an environment of fee scrutiny.
Tried and true vs. FTX: Advisers are trained to be cautious of any investment deemed unsafe. Doing otherwise would be like volunteering for an audit. Many financial advisers have the attitude that because cryptocurrencies and blockchain technology have not stood the test of time, they are not yet safe enough to include in client portfolios. Plus, security risks are high—consider the collapse of Celsius, Voyager, and FTX. Yikes.
Conclusion
Are these concerns enough to warrant avoiding providing clients with advice or investment assistance for cryptocurrencies? No. Ignoring cryptocurrency makes as much sense as a buy-high and sell-low investment strategy. What’s the worst that could happen if financial advisers continue to drag their feet with cryptocurrencies? They run the risk of being left behind. Blockchain technology is predicted to be as disruptive to the economy and culture as the internet was. Applications are envisioned in many areas of the economy, including e-health, governance, arts, culture, education, and electricity trading (Karthika and Jaganathanand 2019), to name a few. The financial services industry is no exception. Blockchain technology has the potential to enhance the speed and security of transactions. It introduces a host of new possibilities via smart contracts (Nordgren, Weckström, Martikainen, and Lehner 2019) and reduced costs. It provides transparency in a way never seen before (Reddy and Aithal 2020). While cryptocurrencies may appear to hold insignificant value in a properly designed investment portfolio, the Pareto principle suggests that even a meager 1 to 5 percent allocation may lead to shockingly outsized returns.
Emotion is what leads most of us to act irrationally—whether that be the client making unsound cryptocurrency investment decisions or the adviser neglecting the revolutionary change presented by blockchain technology. What is an adviser’s solution to the challenges plaguing the cryptocurrency investment scene? Here are some suggestions:
• Come to terms with the new terms. Learn about this new technology and new way of investing. We must get ahead of the curve, before blockchain technology outpaces us and renders our services obsolete. If we continue with a dismissive attitude toward cryptocurrencies, clients will continue to invest without professional guidance, and not only will their skills improve, but the technology catering to retail investors will also gain a competitive edge. Advisers would benefit from seeking out education to understand how blockchain technology works and its implications for business, banking, finances, and fintech. Check out the courses curated for financial advisers, such as pursuing the Certified Digital Asset Adviser designation (CertifiedDigital.org), administered by PlannerDAO, or earn a certificate in blockchain technology and digital assets from the Digital Assets Council of Financial Professionals. These courses will provide you the foundational knowledge of the technical aspects of cryptocurrencies as well as practical financial planning applications such as estate planning, compliance, asset allocation, asset location, risk tolerance, and practice management topics.
- Stick to the blue-chip cryptocurrencies. Regarding regulatory concerns, bitcoin and ether are commodities and are not in question about being securities (U.S. Commodity Futures Trading Commission 2023; Tarbert 2023). Sticking to advising on these two top coins should provide some protection from the regulatory uncertainty involving most altcoins, such as Solana, Cardano, and Polygon (Securities and Exchange Commission v. Coinbase Inc. 2023).
- Capitalize on the adviser alpha. Behavioral coaching is needed now more than ever when it comes to cryptocurrency investment choice, storage, estate planning, time horizon, and goal planning. Financial advisers can add meaningful value by addressing the financial planning needs of clients’ cryptocurrencies.
- Adopt a diplomatic attitude. The voice of those who have “gone down the crypto rabbit hole” is often contrarian or libertarian in tone and message, which does not suit the professional image financial advisers wish to emulate. Maintaining a respectful attitude toward both traditional finance and decentralized finance is a strategy that can help bridge the two schools of thought.
- Avoid crypto jargon. Just how clients get that deer-in-the-headlights look when you start using financial planning-specific terminology, fellow advisers also lose focus with crypto-lingo. If you are an adviser who is already fluent in the language of blockchain technology, be careful to translate esoteric crypto terms into more general financial terms so as not to alienate others.
Your clients do not expect you to become a crypto expert. Neither do your clients expect you to be ignorant of it. By committing to learn the basics of blockchain technology and how to guide your clients in sound crypto investment planning principles, you will serve your clients far better than remaining silent or being dismissive of cryptocurrencies. Your clients need your behavioral coaching for making sound crypto-investment choices. Paint a holistic planning picture of what a crypto investment should represent in their financial plan. Make sure they understand the risk involved, and that the investment matches their risk profile. If they would like to invest in crypto, coach them to invest a prudent amount and to do so by carefully following appropriate security procedures. Now is the time for financial advisers to get off the sidelines and learn this new asset class and infrastructure system. We need to be our clients’ go-to person for crypto, just as we are for the other areas of personal finance.
Disclosure: The information provided here is for general informational and educational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Investing involves risk, including the risk of loss.
Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
All products referenced herein are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security or cryptocurrency.
Digital currencies are highly volatile and not backed by any central bank or government. Digital currencies lack many of the regulations and consumer protections that legal-tender currencies and regulated securities have. Due to the high level of risk, investors should view cryptocurrency as a purely speculative instrument. Currencies are speculative, very volatile, and not suitable for all investors. Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held.
Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Please review the Investor Alert issued by the SEC’s Office of Investor Education and Advocacy for additional information and resources: www.sec.gov/oiea/investor-alerts-bulletins/investoralertsia_bitcoin.html.
Mariner Wealth Advisors (“MWA”) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training. MWA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you invest or send money.
Endnote
- Adam Blumberg, CFP®, CDAA, is credited for editing this article prior to submission to the Journal of Financial Planning. He is co-founder of Interaxis, which provides crypto education to financial professionals.
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