Hot new Bitcoin funds still awaiting buy-in from financial advisers
Bitcoin exchange-traded funds have drawn billions of dollars from investors since they launched in January, but their target market—financial advisers who oversee trillions in client assets—has remained largely out of reach.
Fans of the world’s largest cryptocurrency had hoped that the bitcoin funds would open the floodgates to a wave of new buyers, specifically U.S. financial advisers who collectively oversee $30 trillion in client assets.
Yet much of the buying activity so far appears to have been driven by individual investors. And skeptics say it is unclear whether those buyers are new to crypto or simply shifting their bitcoin holdings from more expensive products and crypto exchanges to lowcost and easy-to-use ETFs.
Investors have plowed more than $20 billion into nine new “spot” bitcoin ETFs since they started trading Jan. 11, while yanking over $10 billion from the Grayscale Bitcoin Trust, which converted into an ETF the same day. The Grayscale fund carries a hefty 1.5% fee, the highest among the 10 funds, versus 0.25% after a first-year fee waiver at BlackRock’s popular ETF.
Registered investmen t advisers, who are influential in directing capital to ETFs, have limited access to the bitcoin funds, for now. The wealthmanagement platforms at Morgan Stanley, Merrill Lynch, UBS and Wells Fargo offer the funds only on an unsolicited basis—advisers can’t actively pitch them to clients but can offer them to those who ask.
Morgan Stanley, for one, has been doing due diligence on the funds and is evaluating whether to add them to its brokerage platform, according to people familiar with the matter. Wealth platforms and financial advisers face reputational and legal risks in approving and allocating their clients’ assets to spot bitcoin ETFs, some analysts say. Bitcoin’s short history has been dotted with euphoric bull runs and devastating crashes. After its last peak in November 2021, bitcoin dropped more than 70% over the next year.
“If bitcoin was to crater and go towards zero, there can be some damage to their reputation because some clients might view allowing products on a platform as some sort of stamp of approval,” said Matt Apkarian, associate director of product development at research firm Cerulli Associates. “It definitely opens up advisers to more potential for lawsuits.”
Investment advisers who charge fixed fees work under a strict standard of customer loyalty, known as a fiduciary duty, that requires them to elevate the interest of their clients above their own. And brokers who charge commissions must reduce conflicts of interest when making investment recommendations to customers, under the Securities and Exchange Commission’s Regulation Best Interest.
Despite approving spot bitcoin ETFs, SEC Chair Gary Gensler has said investors should remain cautious about bitcoin and crypto-related products. Meanwhile, the Labor Department has expressed concerns about putting cryptocurrencies in retirement accounts.
“It’s not necessarily just the rules, but it’s also the regulator’s stance that often impacts how firms behave,” said Brian Hamburger, president and chief executive of MarketCounsel Consulting. “I think that’s also why firms are quite hesitant to expand the role that crypto has when it comes to these retirement accounts.”
The rules are less stringent at self-directed brokerage platforms where the banks don’t face significant liability by simply making the products available for purchase. Many of the bitcoin funds are available on Morgan Stanley’s E*Trade, Wells Fargo’s WellsTrade and Bank of America’s Merrill Edge, as well as Charles Schwab and Robinhood.
Vanguard, however, has said it has no plans to offer a bitcoin ETF and won’t offer crypto-related products on its brokerage platform. The assetmanagement giant called bitcoin “more of a speculation than an investment” in a recent blog post.
Blake Spencer, a wealth manager at the Pinnacle Financial Group, said his firm has seen a significant pickup in client inquiries about investing in bitcoin with the digital currency’s recent surge in price. Bitcoin has soared to a fresh record, trading above $73,000 early Wednesday. It is up over 70% in 2024. “Most clients I talk with don’t even know the ETFs are available,” Spencer said. “They are trying to figure out whether they should invest in bitcoin and how to get exposure to it.”
His firm, which is affiliated with LPL Financial, offers the Grayscale Bitcoin Trust, which was on the LPL platform before it converted into an ETF, Spencer said. He said he hopes to access cheaper alternatives for clients.
The funds are already available at some smaller registered investment advisers. Carson Group, with $34 billion in assets and about 500 advisers, has approved the spot bitcoin ETFs offered by BlackRock, Fidelity Investments, Franklin Templeton and Bitwise.
Grant Engelbart, an investment strategist at Carson Group, said his team evaluated the funds’ fees, spread, trading volume, asset growth, custodians, shareholder base, benchmarks and trading partners before picking the four funds for approval.
“We want to make sure that our advisers have all the asset classes at their fingertips, that they need to be able to allocate client accounts appropriately and appeal to all generations of clients,” Engelbart said.
Fee-charging advisers work under a customer loyalty standard that requires them to prioritize clients’ interest