LEVEL HEAD Keep­ing your clients grounded in a world of untested as­sets.

When your client asks you about bit­coin — or any other spec­u­la­tive in­vest­ment — re­mem­ber to con­sider that client’s long-term goals. There are ways to in­vest in the tech­nol­ogy in­di­rectly

Investment Executive - - FRONT PAGE - BY FIONA COL­LIE

bit­coin’s year of un­be­liev­able highs and dra­matic drops has aroused the cu­rios­ity and fas­ci­na­tion of in­vestors around the world, lead­ing some clients to con­sider in­vest­ing in this emerg­ing as­set class.

“Ev­ery­one knows some­one who has made a bunch of money [on cryp­tocur­ren­cies],” says Dave Nu­gent, chief in­vest­ment of­fi­cer and chief com­pli­ance of­fi­cer with Toronto-based Wealth­sim­ple Inc. “And, there­fore, I think cu­rios­ity nat­u­rally is go­ing to perk up and have peo­ple ask the ques­tion: ‘Is [cryp­tocur­rency] some­thing that maybe I should have in my port­fo­lio?’”

In fact, Wealth­sim­ple has re­ceived sev­eral in­quiries from clients about cryp­tocur­ren­cies as news about bit­coin, the best known cryp­tocur­rency, be­came more preva­lent over the past year.

Wealth­sim­ple was by no means the only firm to field ques­tions about cryp­tocur­ren­cies from clients. Ot­tawa-based MD Fi­nan­cial Man­age­ment Inc., an as­set­man­age­ment firm that works ex­clu­sively with physi­cians and their fam­i­lies, also has had to an­swer bit­coin-re­lated ques­tions from clients and fi­nan­cial ad­vi­sors.

This in­ter­est in bit­coin, which of­ten is com­pared to the “ma­nia” that sur­rounded other in­vest­ments trends, such as tech­nol­ogy stocks in the early 2000s and cannabis stocks to­day, gath­ered steam in the lat­ter half of 2017, when the cryp­tocur­rency’s price sky­rock­eted.

That story has been turned on its head in re­cent months, when bit­coin’s unit price dropped to be­low US$7,000 in early Fe­bru­ary af­ter hit­ting an all-time high of more than US$19,000 in De­cem­ber 2017. (The price has risen again, sur­pass­ing US$10,000 on Feb. 8.)

Al­though the price of bit­coin re­mains volatile, you must re­main stolid and level-headed when dis­cussing that cryp­tocur­rency — or any spec­u­la­tive in­vest­ment — with your clients.

Here are five points to keep in mind when a client asks you about in­vest­ing in bit­coin:

look at the big­ger pic­ture First, get a sense of the client’s un­der­stand­ing of bit­coin and cryp­tocur­ren­cies in gen­eral.

“We have a strong dis­cov­ery process,” says Jean-François Borde­leau, se­nior prac­tice man­ager, in­vest­ments, with MD Fi­nan­cial Man­age­ment in Ot­tawa. “That’s the first step for us be­fore we would en­gage any fur­ther in the dis­cus­sion.”

Ask your clients about what they know about cryp­tocur­ren­cies and where they found out about them. As well, dis­cuss your clients’ goals and how they be­lieve this po­ten­tial in­vest­ment would fit into both the rest of their port­fo­lio and their long-term fi­nan­cial plan.

IN­VEST A LIT­TLE Clients in­ter­ested in bit­coin may need to be cau­tious, but that doesn’t mean they can’t buy into it. Some­times, let­ting your clients in­dulge their cu­rios­ity is good, says Dan Hal­lett, vice pres­i­dent and prin­ci­pal with HighView Fi­nan­cial Group in Oakville, Ont. He sug­gests al­low­ing clients to in­vest “an amount of money that’s not re­ally go­ing to af­fect their life all that much if they lose it.” (See his col­umn on page 21.)

In an on­line ar­ti­cle Wealth­sim­ple pub­lished in De­cem­ber, the firm claims clients should “risk no more than 5% of [their] en­tire port­fo­lio” in any spec­u­la­tive in­vest­ment, in­clud­ing cryp­tocur­ren­cies.

Toronto-based 3iQ Corp. re­cently re­ceived reg­u­la­tory ap­proval for 3iQ Global Cryp­toas­set Fund, an in­vest­ment fund that in­vests in the world’s top cryp­tocur­ren­cies. Fred­er­ick Pye, the firm’s pres­i­dent, CEO and chief com­pli­ance of­fi­cer, says in­ter­ested in­vestors should have some level of ex­po­sure to this new as­set class.

“This po­ten­tially could be a very im­por­tant as­set class of the fu­ture,” Pye says. “So, your as­set al­lo­ca­tion [should be] greater than zero, that’s all.”

DON’T FOR­GET TO DI­VER­SIFY Bit­coin may be grab­bing all the head­lines, but it’s not the only cryp­tocur­rency out there. In fact, there are more than 1,000 cryp­tocur­ren­cies in ex­is­tence to­day.

As with bit­coin, the price of these as­sets can be volatile. Clients who are in­ter­ested in in­vest­ing in this space may want to con­sider diver­si­fy­ing their cryp­tocur­rency hold­ings.

“[If you’re] go­ing to build a cryp­tocur­rency port­fo­lio, make sure you get a lit­tle bit of ev­ery­thing,” Nu­gent says, “be­cause who knows which one [will] ac­tu­ally make it.”

Fur­ther­more, clients who have in­vested in bit­coin or other crypto-based as­sets al­ready should con­sider us­ing some of their gains to re­bal­ance and di­ver­sify their over­all port­fo­lio us­ing more tra­di­tional in­vest­ments.

CON­SIDER THE AL­TER­NA­TIVES Clients who are cu­ri­ous about cryp­tocur­ren­cies, but don’t want to in­vest di­rectly, may want to dis­cuss al­ter­na­tive ways to gain ex­po­sure to the as­set class.

One way to gain that ex­po­sure is to in­vest in blockchain tech­nol­ogy — the dig­i­tal, de­cen­tral­ized ledger that un­der­lies all cryp­tocur­ren­cies — by in­vest­ing di­rectly in com­pa­nies or sec­tors that stand to ben­e­fit from it. Blockchain tech­nol­ogy can be ap­plied to any kind of dig­i­tal con­tract or record, such as money trans­fers or health records. There­fore, there may be op­por­tu­ni­ties to in­vest in com­pa­nies that, in turn, are in­vest­ing in that tech­nol­ogy.

“You don’t in­vest in the head­line,” Borde­leau ex­plains. “You in­vest in the theme.”

When clients in­vest in cryp­tocur­ren­cies, they’re en­ter­ing un­charted wa­ters

KNOW THE LIM­ITS Re­mind your clients that when they in­vest in cryp­tocur­ren­cies, they’re en­ter­ing un­charted — and un­reg­u­lated — wa­ters.

At the mo­ment, there are few ways for Cana­dian in­vestors to ac­cess cryp­tocur­ren­cies through tra­di­tional chan­nels. 3iQ’s fund, for ex­am­ple, is avail­able only to ac­cred­ited and in­sti­tu­tional in­vestors.

As well, some as­set-man­age­ment firms have taken steps to launch bit­coin-based ETFs, al­though none has re­ceived reg­u­la­tory ap­proval. Clients who are keen to in­vest in cryp­tocur­ren­cies may find them­selves hav­ing to do so di­rectly — and on their own.

Borde­leau ad­vo­cates cau­tion when dis­cussing the prospect of in­vest­ing in cryp­tocur­ren­cies with your clients. Giv­ing ex­plicit ad­vice about these un­reg­u­lated as­sets may move you beyond the pa­ram­e­ters of what you are li­censed to sell or rec­om­mend.

“We have to be very, very care­ful about how we present in­for­ma­tion to the client so that we stay within the bound­aries of what our li­cens­ing al­lows us to do,” Borde­leau says. “There’s a will­ing­ness to help, but there’s a line that we just can­not cross.”

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