How financial advisors should talk to clients about the crypto crisis

FTX founder Sam Bankman-Fried's arrest and Wall Street Journal headlines about "The Crypto Crisis" make the present a less-than-ideal time to talk with clients about digital assets.

Financial advisors fielding questions from investors amid the fallout from the bankruptcy case of cryptocurrency exchange FTX and ongoing regulatory uncertainty about laws governing digital assets should start with the basics and think of the longer-term lessons, according to a panel of experts at this week's Financial Planning's INVEST: Cryptocurrency for Advisors conference.

"Does it fit in your overall financial plan? What is your risk tolerance? Is it suitable for you? You have to have these conversations before you even really introduce the asset class to them," said financial advisor Pamela Sams of Herndon, Virginia-based Jackson Sams Wealth Strategies. Planners should then explain the underlying technology, such as blockchains, and determine whether the client views the investment as "a fly-by-night, flash-in-the-pan versus a long-term strategy," she added. "Every asset class doesn't fit in every client's financial plan, so really taking that assessment and having an intelligent conversation on exactly why they want representation in the space."

The advisors can encourage clients to look beyond the blaring headlines of the day to certain "silver linings" that may not seem as clear in the present, said Vikram "Vik" Sasi, the managing director of digital assets at Los Angeles-based alternative investment manager and private wealth firm Manhattan West. Sasi counts himself as a strong advocate of crypto investing but admitted that "the last few months have been particularly challenging for our industry" in terms of "the reputational and almost assuredly regulatory damage."

"One year ago, two years ago, it was really interesting to go to a party or to tell your friends, 'I'm working in crypto,'" Sasi said. "Now it's like extremely, extremely uncool, and everyone assumes you're bilking people out of their money, you're robbing people of their life savings and so on and so forth."

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Regardless, he identified three potential positive effects emerging in the wake of the FTX crisis. First, Sasi predicts "thoughtful regulation and much more clarity in the U.S. to come out of these recent events," he said. Second, he noted that "public blockchains," such as the ledgers powering Bitcoin and Ethereum, and decentralized finance protocols that "verifiably disclose their inner workings," such as asset holdings and liabilities, are "operating as smoothly as ever." Third, exchanges like Coinbase, Binance and Kraken "are now heavily incentivized to self-regulate through radical transparency," he said.

"Crypto ledgers can't really lie," Sasi said. "I tend to think, along with a lot of others, that competitive pressures are likely to motivate many others, too, which we think will thereby benefit the whole industry."         

That outlook could give advisors and clients a different way of viewing the asset class in general, according to Eben Burr, the president of Toews Asset Management. He pointed out that it wasn't too long ago that exchange-traded funds appeared to be a fad. Now, ETFs traded on U.S. markets have more than $5 trillion in assets under management, according to ETF.com. 

"We're always learning about new asset classes," Burr said. "ETFs were a big deal, right? Oh, well, are they safe? Are they okay? To even think that that's the way it was at one point seems weird. But new asset classes will continue to arise, and it's part of our responsibility to learn about them and address them in a safe and conscientious way."