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Bitcoin ETFs are not winning the hearts and minds of financial advisors
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“It’s something I’m researching because I think I’ll recommend it eventually, I’m just not there yet,” Lee Baker, founder and president of Apex Financial Services in Atlanta, said in an interview. “For me and other advisors, if we get more track records, it increases the likelihood of it ending up in client portfolios.”
CNBC spoke to a dozen members of CNBC Advisory Council, which includes Baker, to find out why so many financial planners are still skeptical of bitcoin and bitcoin ETFs, and what might cause them to change their tune. It comes down to two main things: time on market and regulatory compliance.
“When [bitcoin] becomes more regulated, you’ll see more adoption,” said Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. “That said, even if there’s no regulation, if over time this can prove to be just as stable an asset as a technology company would be – because my view on this is that it’s about early technology more than money – you’ll see more adoption. “
Most advisors said they do not initiate conversations or answer client questions about ETFs – and most do not have more than one client who has made an allocation to the funds. Of these advisors, some are proactively educating themselves about bitcoin investing, while others – often those with an older, more traditional and conservative client base – are more dismissive.
Some of these advisors work with younger clients who have a greater appetite for risk and a longer investment horizon. They say their clients were already interested and educated about cryptocurrency exposure before this year, and that the arrival of ETFs didn’t motivate them to take action.
Performance evaluation
At 15 years old, bitcoin is in a stage of maturity comparable to that of a teenager: it has great potential but still has a lot of volatility. Bitcoin is up more than 59% this year and about 230% from its 2022 low, which worsened during the FTX collapse. In the last three, five and 10 years the cryptocurrency has gained 85%, 704% and 10,854% respectively. It has also suffered several 70% drawdowns over the years, which not all investors could stomach.
Many hope that steady flows into bitcoin ETFs over the years will reduce such volatility, but for now it is still a deterrent for some.
“Financial advisors now have a way to provide access to clients [to bitcoin] it’s safe, reliable and regulated,” said Bradley Klontz, managing director of YMW Advisors in Boulder, Colo. “I like … that it’s a tool in our toolbox for clients who want it. I just don’t see, right now, most firms recommending it because they don’t recommend any asset class, or any particular asset, that has that much volatility.”
Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, said that most of her clients prioritize long-term stability and growth over high-risk opportunities and that “the relatively early stage of bitcoin ETFs in the financial landscape and ongoing volatility associated with bitcoin” are the main factors keeping bitcoin ETFs out of his investment strategies.
Cathy Curtis, founder of Curtis Financial Planning in Oakland, California, said she doesn’t know whether bitcoin will ever be a stable asset class, but that she will consider adding it to clients’ portfolios if it shows stable returns for at least 15 years.
“If it proved to be a real diversifier at the equity level, for example, perhaps,” he said. “The history of that property hasn’t shown that to me.”
Apex Financial’s Baker pointed out that investors have decades of software and tools to show them how a certain percentage of a given bond, ETF or other asset in a portfolio could improve returns or increase volatility and more.
“As a group, we are quite conservative and somewhat risk averse,” Baker said. “We’re so used to pulling up the charts and [asking] how this thing has performed and across what types of markets – it’s almost how we’re wired.”
With a few more years in the market, investors may be able to build similar models with Bitcoin, he added, which will help advisors get excited about the funds. He also said that consultant buy-in is a question of when, not if.
“At this juncture… everyone should be convinced of this [bitcoin’s] here to stay, [they’re] we just don’t understand some metrics in terms similar to how we can look at and evaluate stocks or bonds,” he said. “We just don’t have that support, and that’s yet another reason why adoption is slow.”
“My guess is that adoption will be slow,” he added. “I firmly believe that we will start to see an increase or increase in the use of consultants somewhere in the next two to three years.”
Not regulated enough
While bitcoin ETFs now exist in the United States as a regulated investment vehicle, it’s still not always clear whether or when advisors can recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York City.
“A lot of this still has to do with compliance offices and what the broker-dealer will allow when it comes to advisors and ETF offerings,” he said. “Just because the ETF came out doesn’t mean the floodgates were open or that the ability for them to allocate to it is easy.”
Jenkin said some broker-dealers have approved the purchase of bitcoin ETFs but limit the amount of them that can be purchased, and other firms do not allow advisors to sell bitcoin ETFs at all.
Some argue this is due to cryptocurrencies’ infamous reputation for fraud, scandal and criminality – a situation that is being cleaned up a little more every year but which has undoubtedly left a scar on the industry. Other points highlight the industry’s lack of regulation, which increases the chances of consumer complaints, potential lawsuits against broker-dealers and potentially fines from the Financial Industry Regulatory Authority, or FINRA.
“Part of the reason this isn’t popular yet is that there are serious compliance issues within the industry,” Jenkin said. “Many firms are very nervous about financial advisor communications with their clients about digital assets, and none of them want to experience FINRA violations.”
“Most broker-dealers mitigate risk,” he added. “They want to empower advisors to do things for clients, but they certainly don’t want the spotlight on them to take more risks. That’s why you’re seeing there’s such slow adoption on this.”
Building trust
Bitcoin and its ETFs need more time on the market to gain trust and adoption from big players like Vanguard, which famously said earlier this year that it does not intend to offer them and will not change its position unless the assets do not change to become less speculative.
“It will come,” Boneparth said of customer confidence. It will come with “more time – moving from the early days to the more mature days. We are coming out of years of exchanges failing – it’s not the failure of Bitcoin, but it muddies the waters [and] the trust of the people.”
Until then, the best position advisors can be in is one in which they educate their clients, he added.
“While bitcoin ETFs may fundamentally represent a less risky and more regulated way to invest in digital assets… the association with bitcoin still tends to discourage [clients]”Dorsainvil said.
Advisors are likely to be even more put off by ether ETFs, given the added complexity of that cryptocurrency’s use cases and features. Last week the Securities and Exchange Commission gave the green light to listing on US stock exchanges Spot ETF on etherwhich many investors predict will also be successful, but perhaps a fraction of what bitcoin ETFs have enjoyed.
“ETFs have made things very easy for institutions, from pensions to large funds,” Boneparth said. “That’s really where we’re seeing most of the flows going into these bitcoin ETFs. … It’s still pretty complicated at the retail advisor client level.”