Embracing Change of Digital Assets on the Wealth Management Industry

Wealth Managers find themselves at an inflection point in the evolving landscape of Financial Services, where the rising demand for Digital Assets among clients is reshaping the traditional advisory relationship. Digital Assets are on the cusp of becoming an integral part of diversified investment portfolios, and Wealth Managers must find ways to provide exposure to their clients. Given the anticipated level of institutional and retail adoption of Digital Assets, Wealth Managers currently doing nothing to ready themselves and provide solutions will lose out.

Digital Assets represent a paradigm shift that Wealth Managers are grappling to comprehend fully. Unlike innovations such as ETFs or Alternative Investments, the landscape for Digital Assets is multifaceted, encompassing not only the underlying asset class, but also various investment structures and the novel concepts of On- vs Off-Chain exposure (i.e. exposure to Digital Assets on the Blockchain vs. exposure through traditional investment vehicles). While ETFs required Wealth Advisors to educate themselves and their clients on how this investment vehicle worked, Alternative Assets required education on characteristics of a new asset class and how it sits within a wider client portfolio. With Digital Assets, Wealth Advisors must educate themselves and their clients on both the various exposure mechanisms available for investing in Digital Assets and the nuances of the underlying assets and asset class more broadly. This added educational burden only makes it more challenging for Wealth Advisors to bridge the education gap and offer informed advice to their clients.

While Registered Investment Advisors (RIAs) are likely to be the earliest adopters of Digital Assets due to their independence, broad based adoption will be dependent on the approval of Digital Assets exposure within strategic asset allocation models. This will require CIOs and Investment Policy committees at some of the larger platforms and wirehouses to buy into the benefits of Digital Assets in a well-diversified portfolio. Though some of the largest advisors have begun offering Spot ETF exposure to clients (e.g. Morgan Stanley offering Bitcoin ETFs to High Net Worth clients), we anticipate this approval process to take several quarters.

Despite these challenges, 2024 holds the promise of meaningful change for Wealth Managers in their approach to Digital Assets. Two key factors could pave the way for broader adoption:

Spot ETF Approvals – The recent approval by the Securities and Exchange Commission (SEC) of Spot Bitcoin and Ethereum ETFs further legitimizes Digital Assets as an institutionally investable asset class in the eyes of some Retail and High-Net-Worth investors. These investment products provide Financial Advisors with an easier mechanism for trading-in/-out of Bitcoin and Ethereum, all within the existing infrastructure available to them, allowing them to include Bitcoin and Ethereum easily and securely in their client portfolios alongside other investments, removing the friction previously embedded within the process of accessing Digital Assets.

Emergence of Digital Asset SMA Platforms – Digital Assets Separately Managed Account (SMA) platforms present another avenue for Wealth Managers to navigate the operating model nuances of Digital Assets, along with integrating multi-asset portfolios. These platforms offer Advisors the tools to decrease investment barriers, ensuring ownership of underlying tokens, facilitating fast liquidation of holdings if necessary, providing outsourced education and tax reporting, and allowing for the customization of investment strategies. Furthermore, these SMA platforms allow advisors to offer diversified exposure to Digital Assets (e.g. liquid tokens, Digital Assets funds, tokenized investment strategies, etc.), rather than just Bitcoin or Ethereum spot. As these platforms evolve and become more sophisticated, they could empower Wealth Managers to integrate Digital Assets seamlessly into their clients’ portfolios.

The anticipated change in 2024+ is not solely dependent on regulatory developments and investor-friendly exposure mechanisms. The retail demand for Digital Assets is a crucial factor that could drive Wealth Managers to reevaluate their approach. If price appreciation continues through 2024, Retail and High-Net-Worth investors may regain the confidence to demand exposure from their Wealth Managers. Failing to meet this demand could result in clients seeking alternatives outside traditional Wealth Management channels, further fueled by changing investor demographics.

As Wealth Managers navigate this complex landscape, adaptability, education, and a proactive approach to embracing emerging technologies will be essential for meeting the evolving needs of their clients. Client demand for Digital Assets exposure is forcing advisors to educate themselves on the asset class and the various exposure mechanisms, or risk losing clients to direct-to-consumer (D2C) solutions like Coinbase and Robinhood.