Do Advisors Have a Fiduciary Responsibility to Offer Bitcoin?

Although cryptocurrencies have been in existence for nearly a decade, it is only in the recent past that they have come to dominate conversations among investors. Over a roughly two-year period, digital currencies have experienced a boom in interest and value previously unseen in the area. Now, hundreds of cryptocurrencies have followed in the footsteps of early leaders like bitcoin (BTC), and there are a similarly staggering number of new applications and projects making use of blockchain technology as well.

While digital currencies are undoubtedly incredibly popular, they remain a mystery in many ways. Of primary concern to many investors, analysts and advisors is the extreme volatility that the digital currency world as a whole has already exhibited. To take bitcoin as an example, the world's leading digital currency by market cap rose to prices of roughly $20,000 per token as of the last few days of 2017. It dropped significantly early in 2018 before climbing back up again earlier this spring. At its highest point during this upswing, BTC didn't even reach half of the value that it enjoyed just a few months prior.

As of this writing, BTC is hovering around $7,500. Still, investors who bought the cryptocurrency at this time last year are seeing their investments up by a factor of four, roughly. Approximately 5% of Americans, or about 16 million people, owned BTC as of the first months of 2018, according to Forbes. In this complicated investment scenario, what is the role of a financial advisor? (See also: Basics for Buying and Investing in Bitcoin.)

Many of the major brokerages, including JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), Morgan Stanley (MS) and Merrill Lynch, have all prohibited their financial advisors from recommending cryptocurrencies to clients. In late 2017, even as BTC was reaching ever higher to new record levels, Merrill banned trading of bitcoin futures and the Bitcoin Investment Trust, an investment product related to the cryptocurrency and offered by Grayscale. For its part, Wells Fargo has issued research primers on digital currencies, and it also lets its advisors present these documents to their clients. However, it stops there, not allowing advisors to make specific recommendations on account of the complexity and volatility of the space.

Why do these brokerages not allow their advisors to recommend bitcoin and other digital currencies? Certainly, the extreme volatility and unpredictability of the space is a primary concern. Beyond that, though, there is a sense of regulatory uncertainty surrounding the cryptocurrency space. Even now, as the U.S. Securities and Exchange Commission (SEC) has already worked to clarify aspects of the digital currency space, there remains a great deal that is uncertain.

For example, the debate continues on as to the exact conditions under which token can be considered a financial security. So far, a very small number of digital currency assets have been registered as securities, and yet the SEC has suggested that securities laws of various types may apply to the space. From the perspective of a financial advisor or brokerage, this is a dangerous place to be; if an advisor recommends that clients buy a particular digital currency and the SEC later deems that asset to be an unregistered security, that would mean trouble for all parties. (For more, see: How SEC Regs Will Change Cryptocurrency Markets.)

While many brokerages and advisors have chosen to remain out of the cryptocurrency fray, others believe that it is worth exploring. Former Merrill Lynch financial advisor and co-author of the book "Cryptoassets" Jack Tatar believes that big brokerages are doing clients a disservice by avoiding the digital currency space. "You're taking the ability of an advisor who has a lot of education and knowledge, and you're basically telling them they can't even discuss this with a client," he says, adding that "it's only a matter of time, maybe three or four years from now, when you'll have a number of cryptocurrency ETFs available. These firms will back-track their policies. But meanwhile, investors will have missed an opportunity for gains." (For more, see Why Buy This Expensive Bitcoin Trust Instead of Bitcoin?)

Tatar believes that digital currencies ought to be treated as an alternative asset class. He argues that "if the financial services industry had created bitcoin, everyone would have bitcoin in their portfolio right now." He continues by suggesting that products created by financial services, including collateralized mortgage obligations, volatility indices and similar products might otherwise not be considered suitable investments, and yet they are because of who created them. Essentially, he believes that big brokerages are avoiding digital currencies because they haven't managed to set themselves up in such a way as to profit from the space.

There are advisors who tell clients about cryptocurrency investment opportunities in spite of employer policies prohibiting this action. While brokers may not be allowed to execute a cryptocurrency trade, they can still tell clients to make a personal investment in the area, for instance.

Others, like independent financial advisor Ric Edelman of Fairfax, Virginia, aim for an approach somewhere in between the two extremes. Edelman does not proactively recommend digital currencies to his clients. However, if they ask about them, he offers advice. He tells them that "if [they] choose to invest, [they] should do so with no more than 2%" of a portfolio and that they should "be prepared to lose it all." For Edelman and others, caution is key, but it's also important to note that brokerages completely deny the existence of this new space. He suggests that "the industry is slowly changing, but [the big brokerages] remain unconvinced." (For additional reading, check out: The Future of Cryptocurrency.)