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
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.”