As a financial adviser, it’s easy to discuss investments with clients when markets are going up. It’s the discussions when the markets are selling off that can be intimidating — but they don’t have to be. In fact, when done well they can strengthen the relationship.
As we write this on Wednesday, May 19, Bitcoin (BTC) is down 8% in the last 24 hours and 30% in the last week, and ether (ETH) is down 20% and 39% in the same time frames. Financial advisers with clients who have invested in crypto-assets lately may be fielding nervous phone calls and find themselves unsure of how to answer these questions and address their clients’ concerns.
The truth is, when addressing sell-offs in crypto-assets, advisers should have the same conversations they would as if it were the S&P 500 or Nasdaq.
BEGIN AT THE BEGINNING
Before we discuss what to say to clients during a bear market or sell-off, it is important to revisit the importance of the conversations financial advisers should have with clients before making an initial investment, especially in crypto-assets.
An important primer for investing in crypto-assets, like Bitcoin and ether, is a discussion about the volatility of the asset class. In its 12 years of existence, Bitcoin has crashed between 70% and 80% four times. Clients should understand the asset’s history and be comfortable with the possibility of similar crashes in the future.
In addition to discussing the risk, advisers should also make sure their clients understand what they are investing in, just as they would with any other investment, by educating clients on crypto-assets. Finally, advisers should discuss and update their clients’ investment policy statements and financial plans to show how an investment in crypto-assets fits into their overall plan.
By taking these actions prior to investing, recommending or advising clients on crypto-assets, financial advisers will make the conversations during a sell-off easier and more productive.
Then, when a time like this week comes, here are a few talking points:
THE BENEFITS OF DOLLAR-COST AVERAGING
When it comes to dollar-cost averaging, investing in crypto-assets is no different than any other asset class. If ongoing contributions are being made, or there is an opportunity to make a lump-sum contribution, advisers should remind clients of the benefits of dollar-cost averaging. Clients understand this with traditional investments and they should view crypto-assets in the same light.
The IPS AND FINANCIAL PLAN
The updated investment policy statement and financial plan will remind clients how crypto-assets fit into their portfolio and coordinate with their financial plan. It will also allow the adviser to remind her clients of past discussions around the portfolio, expectations and risks. Reviewing the IPS gives the adviser the opportunity to review the amount of the portfolio allocated to crypto-assets and the other asset classes in the portfolio, and continue the ongoing client education around portfolio construction.
WHY THE INVESTMENT WAS MADE
Many investors have allocated to crypto-assets without consulting a financial adviser. For these investors, the “why” behind their investment may be as simple as fear of missing out, or FOMO, or following a hot tip from a loved one or friend. These scenarios provide a tougher challenge for advisers because the investment was made without their consultation.
By having a conversation with their client about why they invested in crypto-assets, the financial adviser has an opportunity to educate her client, gain more insight into the client’s behavior and strengthen their relationship by helping the client work through their concerns and even update their financial plan. This would also be a good time to discuss the crypto-assets held by the client. Not all crypto-assets are the same and many are questionable and speculative in nature.
If the adviser was a part of the investment decision, she can explain why the crypto-assets were included in the portfolio and the case for keeping the investment for the future, and revisit the conversations that preceded the investment.
If clients are distraught and the steps above fail to calm their concerns, it might be time to have a conversation about their risk tolerance and develop a plan to lessen the allocation to crypto-assets in a responsible manner, possibly taking advantage of the current absence of the wash-sale rule.
Although crypto-assets are relatively new to financial advisers, they should treat them like traditional investments but be mindful of a distinct difference — the crypto-asset market never sleeps. It is open 24/7, which means there is always information to look at, always news being made and plenty for clients to get distracted by (sometimes even on Saturday night).
The best way to combat this is for advisers to empower their clients through exposure and education in order to help them view crypto-assets as they would any other asset class in their portfolio, setting the tone for future conversations to follow the ones they’ve been having for years about traditional asset classes.
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.