Why Your Financial Advisor Will Not Likely Recommend Cryptocurrency Anytime Soon.
Currently, Bitcoin is hovering around $29,000, still very high, but around a 54% drop from its height a little over a year earlier. This volatility makes crypto a potential fortune game-changer (we have all heard the story of your friend who bought Bitcoin in 2013 for $13.30 and made millions), yet that same volatility comes with very aggressive and risky downside. This is just one of the reasons your Registered Investment Advisor (RIA) will likely not recommend you make cryptocurrencies part of your investment portfolio.
The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) do not regulate cryptocurrencies. These are the agencies where most RIAs get their education and guidance before bringing investment recommendations to their clients. While cryptocurrencies are not yet regulated by the SEC or FINRA, these agencies do not prohibit advisors from selling or recommending cryptocurrencies, but many firms just won’t take the risk. Most firm’s compliance departments are not willing to allow their advisors to recommend investments purely on speculation and extreme risk, even if it comes with a potential huge upside. These recommendations could risk a client’s entire investment. It could be wiped out and deemed valueless in a day (see the list of all of the Dead Coins, and the latest and largest victim in 2022, Terra).
Aside from the volatility and the lack of commissions, compliance departments are unwilling to allow their RIAs to make cryptocurrency recommendations because RIAs are fiduciaries to their clients. This means that your RIA must be completely honest with you, avoid negligence, be loyal, and put your interests above all other interest. But its so much more than that. RIAs have a duty to:
- Give advice that is completely disinterested;
- Provide thorough written disclosures of potential or actual conflicts of interest;
- Maintain strict confidentiality; and
- Refrain from engaging in fraud and other misconduct.
If you are an RIA or another category of financial advisor in Minnesota, you have long been required to act as a fiduciary to your clients. Minn. Stat. § 45.026 provides that “A person who, on advertisements, cards, or in any other manner, indicates that the person is a ‘financial planner,’ ‘financial counselor,’ ‘financial consultant,’ or ‘financial advisor,’ or any similar designation is considered to be representing that the person is engaged in the business of financial planning,” and “[has] a fiduciary duty to persons for whom services are performed for compensation.”
The basic fiduciary duties of an RIA stem from the duty of loyalty and duty of care. These include, among other things, the duty of good faith, the duty of disclosure of material facts, the duty of obedience, the duty to put the client’s best interest first, the duty to act with prudence, that is, with the skill, care, diligence, and good judgement of a professional, the duty not to mislead clients—provide conspicuous, full and fair disclosure of all important facts, etc.
If an RIA charges a fee for his services based on assets under management, this is considered to be a conflict free form of revenue, because the RIA’s pay is not determined by his investment recommendations. If, however, the RIA charges a “level fee”, the RIA will have enhanced disclosure and documentation requirements under the new rules. It is no longer good enough to merely act in the “best interests of your clients.”
In addition, RIAs must completely understand their clients, including their time horizons for their investments, risk tolerances, cash flow, retirement age, and investment preferences, so on and so forth. RIAs also need to put in the time and work with their clients to create a comprehensive investment policy statement and investment plan. Even if RIAs put in the work and completely understand their clients, taking a risk on cryptocurrency recommendations is one they are not willing to take. Losing a client’s entire investment in a few hours is too risky no matter how many disclosures the RIA provides the client. It is too risky and opens the RIA up to situation in which they simple cannot provide enough disclosures, warnings, notices, etc.
Mr. Kibort practices in business and commercial litigation, defending and prosecuting financial advisors, financial planners and investment advisors, financial planning firms, investment firms, hedge funds, and brokerage firms, including SEC and FINRA investigations, FINRA arbitrations and mediations. This blog entry is not legal advice and does not create an attorney-client relationship; it is merely an example to provide some legal education. It is simply intended to provide general information. Each case is fact specific and requires its own unique solution. It is strongly recommended that you seek the advice of a qualified attorney to help you with any questions you have. We can handle your matters in Minnesota, Wisconsin, Iowa, North Dakota, California, and Washington D.C.
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Are you a Registered Investment Advisor, Financial Planner, Investment Advisor, Financial Planning Firm, Investment Firm or Brokerage with a legal question regarding duties, employments, investigations, suitability recommendations or regulations? Give Jesse H. Kibort, Esq., of Parker Daniels Kibort a call at 612.355.4100.