As bitcoin reduces the traditional use of financial advisors, their role may change to help facilitate wealth preservation.
Many Bitcoiners may have a sour taste in their mouths when they think of financial advisors. It may be because they repeatedly tell their loved ones that Bitcoin is a Ponzi scheme or worthless. Being wrong for years and refusing to admit it all the time makes Bitcoiners hesitant to think highly of advisors.
And to be frank, many financial advisors probably don’t have a very high opinion of Bitcoiners. Many advisors don’t buy into the HODL philosophy: “Think all you have to do is buy bitcoin and hold it for a decade and you’ll get fabulously rich? It can’t be that easy. I went to school and passed all these tests proving that this can’t be true!
But maybe it’s that simple for Bitcoiners. Prices of traditional financial assets have gone parabolic over the past 18 months and valuations are rising. Take a look at the broader stock market. Using the valuation metric known as the Shiller P/E ratio, stocks are the most expensive they have ever been, except for the months leading up to the Great Depression in 1929 and during the dotcom bubble. of 2000. Real estate finds itself in a similar boat of high valuations. And don’t even get me started on fixed income.
All of this and more could lead to the perfect investment case for bitcoin. Bitcoin, with a market capitalization of around $800 billion at the time of writing, is a puddle next to lakes and oceans of global assets. The number varies depending on who you ask, but let’s put global assets at $500 trillion (conservatively). With bitcoin being the best store of value the world has ever seen, it’s not crazy to think that it will continue to gain market share in its addressable market – its dollar price per coin increasing at an impressive rate in road course.
So what’s the problem ? Why does it seem that so few financial advisors are becoming aware of Bitcoin and telling their clients what action to take? Today, I’m going to discuss what may be holding financial advisors back and provide insight into the future of the financial advisor role in a hyperbitcoinized world.
What’s holding advisors back now? Check Incentives
Financial advisors manage approximately $90 trillion in global assets. The amount of such assets that fall under the bitcoin umbrella (or even the broader term “crypto”) are peanuts. In fact, I’ve heard anecdotally that many clients don’t even bother to tell their financial advisor about their digital assets. And why would they? According to the RIA Digital Assets Council, only 8% of financial advisors can properly explain these assets.
To explain this fact, you need to look at the incentives for a financial advisor to adopt Bitcoin in their practice. So far, there aren’t many.
- Existing practices work just fine without it
- The orange pill process is tedious
- Risks are involved when introducing a new volatile asset into the mix
A combination of stocks, bonds and a handful of alternative funds that track precious metals or real estate is a financial advisor’s business. And business is good. The industry has undergone a significant shift over the past two decades, charging its clients a percentage fee based on their assets under management (AUM), rather than charging commissions on each trade. As long as the markets continue to rise, so will advisor paychecks. Look back on the performance of the stock market and you will realize that having a successful financial planning practice has been very lucrative. As the old saying goes, if it ain’t broke, don’t fix it.
Think about your own rabbit hole experience. How many dozens or even hundreds of hours have you spent consuming bitcoin hardware? And you always don’t consider yourself an expert. Now think of an advisor trying to go through this process with an entire clientele. Advisor clients don’t need to be so orange that they insert laser eyes into their Twitter profiles, of course, but they also need to make sure their clients know enough about bitcoin to HODL their stack, and also refrain from threatening to sue when bitcoin inevitably enters a bear market. This is especially true if the customer was not fully “on board” in the first place.
Finally, the bridge for advisors to integrate bitcoin into their clients’ holdings is still under construction. There are plenty of plans out there and it seems like I regularly hear about more solutions. As things stand, it’s hard to buy real UTXO Bitcoin for a client and get paid for it as an advisor. I hope that will change very soon, which is encouraging.
Why the Demand for Financial Advisors is So High Today
In a fiat world of inflation, high taxes, and boom and bust cycles, you may need to be a professional to properly manage your assets or hire someone to do it for you. Bitcoin and a healthy monetary environment can drastically reduce the importance of being an expert so you don’t lose all your buying power before you die. This will force the financial advisor market to consolidate strongly.
Currently, financial advisors don’t have much opportunity cost to compete with. The opportunity cost, in this case, would be the cost of not invest in a “diversified portfolio”. Rather than investing, the other choice for millions is to keep their dollars in a bank account, with no volatility. Almost everyone knows that this is a losing strategy today, forcing the masses to invest in risky assets.
When this opportunity cost shifts from depreciating fiat to appreciating bitcoin, it will turn into a much more difficult cost-benefit analysis for advisors to overcome. A population that can simply hold its currency without worrying about depreciation has much less need for portfolio construction than those that are forced to invest their capital in risky assets just to beat the rate of inflation.
The Bitcoin-Bull Financial Advisor
The rent-seeking activities employed by many advisors will come to an end. Nihilistic index investing – throwing assets into a diversified portfolio aimlessly – will become less and less accepted. Buying bonds just because they are historically considered safe investments doesn’t make sense when most have a negative real yield. etc
But there are now some very good financial advisors, who offer value outside of the percentage return printed on their clients’ statements, who are thriving today and will continue to do so. These advisors not only know a thing or two about investing, but are also well versed in estate planning, various types of insurance, and tax mitigation.
This type of expertise is beneficial to the overall health of a financial plan. There’s no point in knocking your investments out of the park if you grope for a taxable event or if your assets don’t pass to the desired heir on death and the courts get involved. Great advisors work with their clients’ tax accountants and attorneys to make sure the plan is working at full speed.
I believe that financial advisors will play an important role in integrating the next tens of millions of users in the western world into the Bitcoin network. Advisors are the custodians of the majority of their clients’ assets. The asymmetric investment opportunity offered by bitcoin could be the perfect asset to complement – potentially even hedge – expensive equities and fixed-income securities.
Customers will start looking for advice on how best to use their bitcoin stack. Advisors will need to clearly demonstrate their knowledge in various areas:
· Does it make sense for clients to take out a mortgage using part of their stack as collateral?
· Will advisors assist their clients in multi-signature setups with a third-party vendor?
· Should clients participate in peer-to-peer lending protocols to earn additional return?
Which mobile or desktop wallet is best for them?
A few concepts that advisors and the general population will need to get used to in the future are satoshi (aka sats) denominated wallets, securities trading above Bitcoin and/or sidechains, and “money is a trash can” changing to “just stack”. sats”, to name a few.
And these are changes that, for my part, I am very happy to experience.
I owe a huge thank you to Andy Flattery for his comments on this article. He is one of the great advisers who will survive and prosper.
This article should not be construed as a specific recommendation or investment advice. Always consult your investment professional before making major investment decisions.
This is a guest post by Trent Dudenhoeffer. The opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or BitcoinMagazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.