News
Bitcoin ETFs Fail to Win the Hearts and Minds of Financial Advisors
Omer Taha Cetin | Anadolu | Getty Images
A major thesis around Bitcoin ETFs were needed by financial advisors to steer their wealthy clients toward investing in bitcoin.
Nearly six months after these ETFs launched, there are few signs that advisors are clamoring for these funds. Many remain as hesitant about bitcoin today as they were before. That doesn’t mean ETFs have been a failed experiment, though. For one thing, bitcoin ETFs have been hailed as the most successful ETF launches in history, with BlackRock’s iShares Bitcoin Trust (IBIT) reaching $20 billion in assets under management this week, even with advisors sitting on the sidelines.
“It’s something I’m researching because I think I’ll recommend it someday, but I’m not there yet,” Lee Baker, founder and president of Apex Financial Services in Atlanta, said in an interview. “For me and other advisors, if we get more background information, it increases the likelihood that this product will end up in clients’ portfolios.”
CNBC spoke with a dozen members of CNBC Advisory Boardincluding Baker, to understand why so many financial planners are still hesitant about bitcoin and bitcoin ETFs, and what might cause them to change their minds. It comes down to two main things: time in the market and regulatory compliance.
“When [bitcoin] “If there’s more regulation, there’s going to be more adoption,” said Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta. “That being said, even if there’s no regulation, if over time it can prove to be as stable an asset as a technology company would be — because my view on it is it’s more about cutting-edge technology than it is about monetary value — there’s going to be more adoption.”
Most advisors said they don’t initiate conversations or respond to client inquiries about ETFs — and most don’t have more than one client with an allocation to the funds. Of those advisors, some are proactively inquiring about bitcoin investing, while others — often those with older, more traditional, and more conservative clientele — are more dismissive.
Some of these advisors work with younger clients, who have a greater appetite for risk and a longer investment horizon. They say their clients were already interested and informed about cryptocurrency exposure before this year, and the arrival of ETFs has not motivated them to get started.
Performance Review
At 15 years old, bitcoin is in a phase of maturity comparable to that of a teenager: it has great potential but remains very volatile. Bitcoin is up more than 59% this year, and about 230% from its 2022 low, which was deepened during the FTX collapse. Over the last three, five, and 10 years, the cryptocurrency has gained 85%, 704%, and 10,854%, respectively. It has also suffered several 70% drops over the years, which not all investors could withstand.
Many hope that steady flows into Bitcoin ETFs over the years can reduce this volatility, but for now it remains a deterrent for some.
“Financial advisors now have a way to provide access to clients [to bitcoin] “It’s safe, reliable and regulated,” said Bradley Klontz, managing director of YMW Advisors in Boulder, Colo. “I love it … it’s a tool in our toolbox for clients who want it. I just don’t see most firms recommending it right now because they don’t recommend any asset class, or any particular asset, that has that kind of volatility.”
Rianka Dorsainvil, co-founder and co-CEO of 2050 Wealth Partners, said that most of her clients prioritize long-term stability and growth over high-risk opportunities, and that “the relatively early stage of Bitcoin ETFs in the financial landscape and the ongoing volatility associated with Bitcoin” are the main factors preventing Bitcoin ETFs from being part of her investment strategies.
Cathy Curtis, founder of Curtis Financial Planning in Oakland, California, said she doesn’t know if bitcoin will ever be a stable asset class, but she would consider adding it to clients’ portfolios if it shows stable returns over at least 15 years.
“If this stock turned out to be a real diversifier versus stocks, for example, that might be the case,” she said. “The history of this asset has not shown me that.”
Apex Financial’s Baker pointed out that investors have had software and tools available for decades to show them how a certain percentage of a given bond, ETF or other asset in a portfolio can enhance returns or increase volatility, etc.
“As a group, we’re pretty conservative and somewhat risk averse,” Baker said. “We’re so used to showing charts and [asking] “How did this thing work and in what kinds of markets? It’s almost the way we operate.”
With a few years of market presence, investors might be able to do similar modeling with bitcoin, he added, which will help advisors get interested in the funds. He also said that advisor adoption of the funds is a matter of when, not if.
“At this point… everyone should be convinced that [bitcoin’s] here to stay, [they’re] “We just don’t understand some of the metrics in the same way that we can look at and value stocks or bonds,” he said. “We just don’t have that foundation, and that’s another reason why adoption is slow.”
“I think the adoption of these services will be slow,” he added. “I honestly believe we’ll start to see an increase in the use of advisor services over the next two to three years.”
Not regulated enough
Even though Bitcoin ETFs now exist in the United States as a regulated investment vehicle, it’s not always clear if or when advisors can recommend them, according to Douglas Boneparth, founder and president of Bone Fide Wealth in New York.
“A lot of it depends on the compliance offices and the permissions that brokers are going to give to advisors and the ETF offering,” he said. “Just because the ETF came out doesn’t mean the floodgates were open or that the ability for them to allocate money to it is easy.”
Jenkin said some broker-dealers have approved the purchase of bitcoin ETFs but limit the amount that can be purchased, and other firms do not allow advisors to sell bitcoin ETFs at all.
Some say this is due to cryptocurrencies’ notorious reputation for fraud, scandals, and crime—a situation that’s gotten better every year but has undoubtedly left scars on the industry. Others point to the lack of regulation in the industry, which increases the risk of consumer complaints, potential lawsuits against brokers, and possible fines from the Financial Industry Regulatory Authority, or FINRA.
“It’s not very popular yet, partly because the industry is facing serious compliance issues,” Jenkin said. “A lot of firms are very concerned about the communications that financial advisors have with their clients about digital assets, and none of them want to run afoul of FINRA.”
“Most brokers are risk buffers,” he added. “They want to allow advisors to do things for their clients, but they certainly don’t want the spotlight on them to take on more risk. That’s why we’re seeing so little uptake of this.”
Developing confidence
Bitcoin and its ETFs need more time in the market to gain trust and adoption from big players like Vanguard, which said earlier this year that it had no plans to offer them and would not change its stance unless the asset changed to become less speculative.
“It’s going to happen,” Boneparth said of customer confidence. It will come with “more time — coming out of the early days and into more mature days. We’re coming out of years where exchanges have failed — it’s not the failure of Bitcoin, but it’s muddling the waters.” [and] “People’s trust.”
So far, the best position advisors can be in is educating their clients, he added.
“While Bitcoin ETFs may fundamentally present a less risky and more regulated way to invest in digital assets…the association with Bitcoin still tends to be a deterrent [clients]”, said Dorsainvil.
Advisors are likely to be further dissuaded by ether ETFs given the added complexity of the cryptocurrency’s use cases and features. Last week, the Securities and Exchange Commission gave the green light for U.S. exchanges to list them ETF spot etherwhich many investors believe will also be successful, but perhaps a fraction of the success that Bitcoin ETFs have enjoyed.
“ETFs have made it a lot easier for institutions, from pension funds to large funds,” Boneparth said. “That’s really where we’re seeing the bulk of the flow going into these Bitcoin ETFs. … It’s still pretty complicated at the retail advisor client level.”