In today’s rapidly shifting financial landscape, it’s critical for investment advisors to fully understand their clients’ investments in digital assets.
With the popularity of digital assets and other digital assets on the rise, advisors are finding that digital asset knowledge is key to offering comprehensive guidance. Yet, many advisors face a significant visibility gap that limits their ability to assess these investments accurately, preventing them from delivering well-rounded financial advice.
ByAllAccounts, a financial data and account aggregator, has released a new white paper exploring why advisors need to understand their clients’ digital asset portfolios. The white paper outlines how enhanced insight into clients’ digital asset investments can improve portfolio management, tax planning, and estate planning, enabling advisors to offer more effective and tailored advice.
Advisors need not necessarily endorse or manage digital assets, but understanding their clients’ holdings has become essential. With many clients holding digital assets as part of their self-directed portfolios, advisors must be aware of how these assets impact retirement, risk management, estate planning, and taxes. Furthermore, as of January 1, 2024, new tax regulations require reporting for any business transactions involving $10,000 or more in digital assets, underscoring the importance of digital assets visibility for compliance.
The new white paper from ByAllAccounts explains why advisors, acting as fiduciaries, need to stay informed about client digital asset holdings, regardless of personal views on the asset class. It discusses the broader implications of digital asset investments and introduces tools that can enhance advisors’ visibility into these assets, enabling them to address associated risks and opportunities effectively.
Digital assets have shifted from niche investments to vital components in modern portfolios, reshaping traditional investment strategies. Research over recent years highlights the mainstreaming of digital assets, with increasing adoption by both institutional and high-net-worth investors. This evolution is particularly relevant as wealth transfers from baby boomers to millennials and Gen Z, who view digital assets as critical to their financial strategies. Advisors who fail to understand these assets risk losing relevance with a new generation of investors and may fall short of fiduciary obligations by overlooking this significant portfolio segment.
The demand for digital asset knowledge is clear. In a survey by Bitwise and VettaFi, 90% of advisors reported client inquiries about digital asset investments in the past year. Matt Hougan, CIO of Bitwise Asset Management, underscored this growing demand in a talk for the CFA Institute Research & Policy Center: “They need to learn about it because there’s a huge number of retail investors that have significant money in digital asset. They’re going to ask you questions. Maybe you don’t think digital assets are appropriate, and maybe you think it is. But you need good answers.”
Despite the high-profile collapses of 2022, such as FTX, North America remains the world’s largest digital asset market, with over $1.2tn received on-chain between mid-2022 and mid-2023, according to Chainalysis. Retail and smaller institutional investors continue to drive the market, and recent price surges in assets like bitcoin and ethereum only reinforce this trend. These dynamics, combined with the U.S. SEC’s approval of a bitcoin ETF in early 2024, are expected to sustain high investor interest in digital assets.
For advisors, effective risk management in digital assets is essential and distinct from traditional assets. Factors like asset location, liquidity, and unique technology risks can significantly influence portfolio strategies. Real-time digital asset wallet data is invaluable in understanding asset allocations and risk exposure, helping advisors guide clients through high-volatility periods and market events, such as hacks or regulatory shifts.
For more insights, download the white paper here.
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