Crypto and digital assets: How to think about clearing, customs and brokerage

Michael Diamond, Product Area Leader, Core Investments, Fidelity; Maxwell Lane, Head of Product, Flourish

Transcription:

Justin L. Mack: (00:08)
Please welcome to the stage Tobias Salinger, chief correspondent for financial planning, Michael diamond product area leader, core investments for fidelity and Maxwell lane. Head of product at flourish.

Tobias Salinger: (00:22)
Thank you so much, Justin. And thank you all for being here, we've got a very exciting panel. And we're taking a little bit of a different look at it from the perspective of the role of brokerages and custodians. We've got a couple of great guests here, so I'm just going to jump right in. I am Tobi Salinger. I'm the chief correspondent of financial planning. And with us, we have, Michael Diamond of Fidelity and Maxwell Lane of Flourish. I wanted to just start we've had a lot of discussion about financial advisors needing to avail themselves of crypto and the digital asset conversation. So I wanted to ask each of you, Mike, why don't we start with you? What are you hearing from financial advisors about crypto investing right now? What are the most common topics they're bringing up to you?

Michael Diamond: (01:29)
Yeah, It is a lot of questions about how to get more educated on this topic, how to think about portfolio construction, how to start dipping their toe in this space there's a lot of different avenues that clients can go from doing a wrap product, doing a features based product or going directly into the asset. But for the most part advisors, aren't the ones that we are speaking to aren't yet ready to go into that level of the conversation. It's bringing it up a level from there, which is what is this and how do I need to think about it and bring it into my, into my business. So with fidelity we've been really working and partnering where we have an affiliated group called fidelity digital assets where we trade in custody Bitcoin we've been working with our clients and with that digital assets team to help educate our clients to come up with thought leadership. I know Rick Edelman was here earlier today. We did partner also with his organization that DAC FP to provide to fidelity clients, discounted, membership to their program for their certification program. So if you are a fidelity client, if you haven't spoken in your relationship manager about that you certainly should, but that's really what we're hearing now mostly is a lot of questions about how do I think about this? what's the impact to my business. If I start to think about adding these products in and what type of products should we be thinking about?

Tobias Salinger: (03:06)
I see, and max, how about you? What are you hearing from advisors?

Maxwell Lane: (03:09)
Yeah, at flourish we're talking to advisors on a daily basis. And as, Ben mentioned in the previous panel, our average AUM of the firms we're working with is about a billion and a half. And so these are relatively large firms that we're talking to in the country. The conversations evolved over the years, but broadly what we're hearing now is advisors are being asked about crypto from their clients, which is driving advisors to get educated and start looking for solutions. So a couple of stats, some of them Ben mentioned in the previous panel, 94% of advisors have been asked about crypto. Another survey reports that 22% of advisory clients already own Bitcoin, but only three and a half percent of those of those clients bought Bitcoin through their advisor. Now here's the kicker. 73% of those clients said they would move the Bitcoin with their advisor if they had the option. So just like it was said in a previous panel, clients are going to do this with, or without their advisor. The good news is they want to do it with their advisor. As Ben mentioned, the previous panel as well on the qualitative side, we had a, a firm that mentioned they had clients that were embarrassed to talk about crypto with their advisor as a wealth manager, anytime your client is embarrassed to talk to you about something of thefinancial lives, you're doing something wrong now is not the time to be ignoring the asset class. Now is the time to be getting educated. As Mike said, looking for solutions and opening up the conversation with your clients.

Tobias Salinger: (04:34)
And especially now is the time to buy the dip. That's what I'm hearing on all of my text chains right now. But let's get into a little bit more specifics in terms of the product shelf, what are the types of solutions that are available right now, whether in terms of directly investing in crypto or just products that are, that are tied to them, max, why don't we start with you this time?

Maxwell Lane: (05:02)
Sure. I'd say relative to what's available on the retail side, advisors and wealth managers have fewer options than when it comes to crypto. That's changing with advisor centric products like flourish crypto but before flourish, historically we saw three main options that advisors were choosing from one was they could ignore crypto entirely and hope that it went away. That view admittedly is starting to get phased out the second, which Mike mentioned, there's a series of fun vehicles. These tend to be fairly complex. Often have high fees, have some tracking error, but they were being used because often they had tickers, they were accessible within the brokerage account. And then number three is we were seeing advisors send their client to an exchange like a Coinbase. Those are easy products, easy to get started. But as an advisor, you've then just created a held away asset. That's siloed you cannot bill on it. You cannot report on it. You cannot see if your client's putting in a thousand dollars or a hundred thousand dollars. So that's not how you wanna operate with the introduction of products like flourish, which are advisor centric. You now have solutions that are integrated into your practice. You'll have the ability to take discretion. You'll get monthly statements, you'll get 10 99's. You'll have all of that data flowing into Tamarac, emo, Orion, et cetera, and you'll have education materials and compliance materials that help your compliance officer understand how to incorporate this into your practice. How do you update your ADV? How do you update your risk disclosures? So there are solutions out there again. Now is the time to get educated, start opening up the conversations.

Michael Diamond: (06:37)
And to be clear. So you can't hold digital assets in a brokerage account. You need to open up a separate custodial account to hold the digital assets, which is why there's some been some hesitation from the advisor standpoint, amongst other reasons to go directly into, into holding the digital assets, which is why we're seeing more of these other products, which could be like max said it could be the futures based products or the close end type products that have tracking errors that either trade at a premium or discount, which is especially, you know, troubling it during this time where hopefully this is the bottom of that dip but I guess we'll see and then additionally, there was also private placement products, right? Because the spot Bitcoin ETF is hasn't been approved yet by the SCC.

Michael Diamond: (07:23)
I'm sure there's been some discussion about that in these sessions so, fidelity does have a product, a private placement product, obviously it's private placement. I can't talk much about it, but we are seeing some advisors start to allocate that to that. And then there's the products that allocate to this space, but aren't directly, going into a digital currency. So for instance, fidelity launched an ETF that's that's crypto industries and digital payments. We're not the only one. So it's more like the gold miners type of products that are out there that also gets some level of exposure to this asset class while not providing into the direct vehicle.

Tobias Salinger: (08:05)
Excellent. And just a quick follow up in terms of we've, we've heard a lot of speakers talking about the underlying technology are there products that are, focused on the technology as opposed to a, a specific asset class?

Michael Diamond: (08:22)
Yeah, I think so like the ETF I mentioned, right. That's where you're starting. And again, I don't want this isn't a product push, right? There's a lot of product, there are other products out there, other product manufacturers out there, but I think that's the other piece is this is if you believe this is going to be an extremely disruptive technology and that what are we called crypto? We we've been calling it more digital assets because the last panel we heard some of the issues. I agree with calling it a currency, cause I think that's a misnomer. I think that if you believe that that really is gonna fundamentally has the potential to fundamentally change the economic system of this country, right. Or of the world I think there's, there are ways that you can allocate to that asset class and not sit on the sidelines but again, like what Rick was saying earlier, it doesn't need to be a huge percentage of your portfolio to be able to potentially take advantage of the upside there.

Maxwell Lane: (09:20)
Yeah, and just to add to that, even with the ETFs that are supposed to be baskets of companies that give you exposure to mining or blockchain with anything, make sure you're doing your due diligence, looking at them. Some of these are owning companies like eBay. When we think of eBay, do we think that's a good way to get exposure to the crypto asset class? Maybe, maybe not, but just make sure you're not just looking at the title of the ETF that says, blockchain, innovation fund, whatever they're called and buying it blindly. You do want to understand what you're holding to make sure this fits into your client's, risk profile fits into their target objectives.

Tobias Salinger: (09:54)
Absolutely. We are all about a comprehensive, portfolio and due diligence here and in that spirit can we just get a little bit even more practical since we're talking about brokerages and custodians there are a number of options for advisors out there. There are a number of necessities that as Mike was talking about earlier what are the kinds of firms that advisors need to work with, to tap into this and how can they kind of evaluate their options? Can you start on that one, max?

Maxwell Lane: (10:36)
Sure. So I think we've Mike and I touched on a bit in the previous questions you've got a, a series of options. You have, you have the funds could be OTC, could be private placement, I think the things to think about from a category perspective is not entirely dissimilar to how you'd evaluate a custodian or provider of traditional assets. So yes, there's going to be crypto specific aspects of evaluating a solution, cold storage, hot storage. You will need to get educated on that, but there's a lot that looks like things you'd look at at a traditional custodian, a couple of categories to keep in mind, certainly custody, right? So what are the implications of custody? Are you the advisor deemed to have custody or are you working with a qualified custodian? Is that provider meeting all the requirements of being a qualified custodian pricing, not just the explicit fees of what they're charging you for transaction fees or for custody fees, but also the hidden fees. A lot of these solutions out there are charging pretty healthy spreads. When it comes to transactions, you as a fiduciary, you have an obligation to understand the true cost of any product you're bringing to your client. And number three, again, would be the operational efficiency. Are you able to take discretion as an advisor? Does the solution flow back into your reporting system, not just for you, but for your operations team, your compliance officer? I think we'd all agree. Happy compliance officers makes for happy firm. Nobody wants an angry, compliance officer and then tax reporting is the last one I'd call out. Is the solution gonna give your client a 10 99 at the end of the year? Or is your solution gonna print a CSV and say, good luck, figuring this out with your accountant. These are things you need to be considering when you're evaluating these different solutions that are out there.

Michael Diamond: (12:15)
Yeah, and I would just add on, I agree with everything you just said. I would add on there. Thinking about the overall ecosystem that you as an advisor use today, whether it be from a planning portfolio, construction, performance reporting to statements, right? Like, how does whatever provider you're using plug into all of those components and how easy is that for you? Because I think, we keep we're thinking of it at least at fidelity as it's really, and we've heard talking to advisors as another asset class, so yes it can't be held into a brokerage account, but that doesn't mean that's not the way you should be thinking about it when planning for an investor's portfolio.

Tobias Salinger: (12:55)
Great, really good. And, in the audience, please feel free to raise your hand at any time. And, we already have a question right there from the gentleman, yes. and anyone else, I've got a few more questions that I wrote down. I've got plenty of questions, but let's bring the audience in where we can, yes sir.

Speaker 5: (13:18)
So Maxwell, thank you for bringing up the point on the friction of the cost of transaction. For example, even if you're a retail buyer, if you buy, let's say Bitcoin, which is the most rated crypto it's about five to 8%, like in terms of your, you lose the spread plus the transaction fee. So where do you see that going in the future? Do you think that's something that's gonna go down or is it something that's gonna stay overall, at least for the top three or four cryptos like Bitcoin and Ethereum?

Maxwell Lane: (13:46)
Yeah, I think it's gonna go down over time it's gonna have to but as you're seeing, if you look at some of these crypto, these pure crypto companies, so not fidelity but looking at some of the pure crypto companies, certainly the ones that are public you, we can all see how much of the revenue is driven by trading volume. They're not gonna let that go too easily, but I think as we see more consistent regulation coming in here, I think we'll see more oversight market market pressures as more solutions come into the space. I think, especially in the wealth space where we all are used to paying close to zero transaction fees, you're gonna see different models appear market forces. I think with increased regulation are gonna have to bring prices down.

Michael Diamond: (14:31)
Yeah, I would agree with that I think also the spot ETF is gonna sort of be an anchoring price as well for some folks, right. Cause if clients are thinking about accessing Bitcoin and there's ETFs out there that truly get to the spot product, right. That's gonna be an anchoring point that you're gonna have to compete with as potentially as custodian, obviously that just Bitcoin and whoever else knows what's coming do you guys do beyond, is it Bitcoin, Ethereum, Bitcoin, Ethereum. Yeah, Which is really, we didn't really talk about that, but you know, we did some we've done focus groups with our clients asking them what they're interested in and by and large it's Bitcoin and Ethereum, right. A few of them have said, Hey, we would love to have more than just Bitcoin Ethereum. And then we say, well would you do anything beyond Bitcoin Ethereum? And the answer is typically no, right. And if you look at beyond Bitcoin Ethereum, the next eight top digital assets or cryptocurrencies that by market cap that's changed just over the past couple of years and continues to change. So, I think from an advisor standpoint, we're really focused on Bitcoin and Ethereum as providing the access there.

Maxwell Lane: (15:41)
I think that's a great point. Mike made about the tokens beyond Bitcoin and Ethereum. And again, we're not pushing any, any tokens here, but the rate of change in the top 10 market cap is a great signal. We don't even have to go back to 2017. We can go back six months and see Luna was in the top 10. Yeah, and it's not there anymore. So really get educated, don't paint a broad stroke. That crypto is one big thing and everything, everything in it is the same. There are real distinctions between Bitcoin, Ethereum, and then everything else. So make sure you're getting educated, understanding all of that.

Michael Diamond: (16:15)
Yeah. There's also more regulatory clarity that Bitcoin Ethereum are not securities. That's why you can't hold in a brokerage account. There's still, I think some lack of clarity in everything and a lot of the other securities that a lot of the other products that are out there.

Tobias Salinger: (16:29)
Yeah and speaking of regulation and clarity, what is the main area that you're watching right now from a regulatory perspective and what is the impact of kind of waiting to find out what those rules are going to be Mike, can you start with that?

Michael Diamond: (16:51)
Yeah. I mean, there's, the new Senate bill that just was, came out last week if anyone that was at, I don't know if anyone spoke about that, there was a conference down in Austin, the consensus conference. Were you guys at that as well? We weren't at that. Oh, okay. So, there was the consensus conference there Lumis Jill and brand were both on a panel talking about that regulation that's coming in and basically, first of all, from a regulation standpoint, a legislation standpoint, they thought most aggressively that something could be done potentially by the end of this year and focus only on stablecoin right. That, that is really what they view as sort of, that would be great if we can have stablecoin, you know, clear regulation on stablecoin by the end of this year, everything else is up in the air a little bit and for us, I think the biggest area of clarity that we can get is really from the sec around that ETF, I think that'll sort of really hopefully open up the space and open up access to a lot of clients that may not feel comfortable opening up a new relationship with another provider.

Maxwell Lane: (17:57)
Yeah. I think to add onto that, what Mike said a minute ago and what was touched on in the last panel, the sec has come out and said, Bitcoin and Ethereum are not securities. And so I think there's a feeling at times that as we're hearing about the LUS and Gill a brand bill, that we all have to wait until this is all settled. Every aspect of crypto is regulated before we can do anything. And we just don't feel that as the case, the SEC again has come out and said, Bitcoin, Ethereum are not securities. You as an advisor, you should apply the same compliance, rigor and scrutiny you would to any other traditional asset class, look at the qualified custodian role. Look at the advisors act. It can look a lot like things you already do. Mike brings up good points. Okay, You can't buy it in a brokerage account, but now we're talking about technology and operational issues. We're not really talking about regulatory issues. So get educated, understand where there's guidance. Of course, like everybody else will be watching what happens with Congress. We're also in an election year. So I don't, I'm not sure I believe at the end of the year, we're gonna get any guidance here, but we'll see what happens.

Tobias Salinger: (18:59)
Yeah. Well, you never know with a lame duck session coming up how many different things can pass toward the end of the year? Sorry, Mike did I cut you off you?

Michael Diamond: (19:07)
No, I think you got it all. I think the other pieces, when you start to think about what you just mentioned, which is, you know, looking for the qualified custodians also, and I think you mentioned this earlier, your updating, your ADV or your E&O insurance, your cybersecurity coverage, right? So there's things that beyond just accessing a new provider that you need to be thinking about will going directly to digital assets.

Tobias Salinger: (19:34)
Now, what about the volatility? Because we've talked about it a little bit. We've touched on it but certainly it's, it's top of mind whenever we see you know, assets that are down for the year to date at such a significant level how are you kind of helping advisors help take clients through that and putting it in the context is it a question of handing them Rick Edelman's book or what are the strategies to kind of help clients understand that and understand not to react to a huge headline about how everything is down and the shot and Freud of people who are very much against, digital assets who are dead set against it, how should they kind of navigate that discussion, max?

Maxwell Lane: (20:35)
Yeah, It's a good question. I think we spend a lot of time trying to educate advisors that their clients are already here. And it's a bit of a unique situation in that. It's, it's probably the only asset class where maybe the client knows more than the advisor right now. And that's a bit of a strange situation for advisors and so what we see is from the based on the activity we see from our clients, the clients don't seem to have as big of a problem with the volatility based on the activity. I'm talking about accounts, getting open funding, trading, et cetera. I think advisors seem to think if the price goes down, that means we cannot, we can't have a conversation right now. We have to wait for prices to rebound. And so I think advisors keep in mind that your clients really are here. Mike and myself. We're not, we're not making it up. They're here. We can see the accounts it's time to have that conversation, open it up, get started. As Ben mentioned, the last panel, average age of our clients is 48. So it's not just your young clients that you think are interested. It's probably a bigger swath than you're anticipating have the conversation. You might be surprised that they might be less concerned about the volatility than you think, and they want to get something open. Get started again, we're talking 1%, 2%. We're not talking about betting the farm on crypto. This, they might see this as a good buying opportunity. You might be surprised. Yeah.

Michael Diamond: (21:54)
I think, clients probably more concerned about the volatility in their equity portion of their portfolio than the one to 2%, whatever it is in the digital asset portfolio. Right. If, and that's why we're saying, Hey, you know, get educated and then if you're gonna allocate it, just like you do with everything else, make sure it's part of the plan, right. And, I'm sure financial advisors do this all the time, which is, Hey, we have a plan. Let's stick through the plan, regardless whether it's volatility in the digital assets market or in the equity market or fixed income markets

Tobias Salinger: (22:24)
Now and moving over just because fidelity is represented on this panel obviously it was a big piece of news a few weeks ago with fidelity making crypto available through, certain 401ks what do you think is the significance of that announcement to this discussion?

Michael Diamond: (22:49)
Yeah, I think the reason behind it was we heard demand from our plan sponsor clients in that space. This is not my area just for the record, but we heard the demand that some firms were looking to go and just like everything else we do. And we heard demands from our clients, we've looked to see if we can meet that demand. And that was the solution that we went with in order to meet the demand. I think it was mentioned on the last panel as well, which is opening up asset classes where it's appropriate to clients that may want to invest there. Right. We're not, we're not the ones necessarily recommending it, but it's making that available. And it's really the plan sponsors, the fiduciary kind, make that decision for themselves. And then obviously the participant as well.

Maxwell Lane: (23:33)
Yeah, and I would just add on, one commending fidelity for being a forward thinking firm and making that decision.

Michael Diamond: (23:39)
Was it me again?

Maxwell Lane: (23:40)
Yeah. Commending Mike personally but Fidelity's one of the biggest 401k providers in our country. If fidelity is adding Bitcoin, that is a clear signal that crypto adoption is only going one way, and you're gonna get more questions from your clients, cuz it's not gonna be long before one of your clients is working at a company where fidelity is the plan sponsor and they have Bitcoin on the table as an option. And they're gonna ask you, should I put Bitcoin in my 401k? So those questions are coming again and again, and again, we're sounding like broken record, get educated, have the conversation it's the crypto adoption is only going one way. You're gonna get more questions, not less in the future.

Tobias Salinger: (24:19)
Okay. We've got about five minutes left. Do we have any other questions from the audience or should I quiz them more about this Senate bill? which to me is very interesting because you know, I'm interested anytime the Senate is actually going to do something definitely So, Is it a bipartisan, bill and exactly how would it regulate stable coins?

Michael Diamond: (24:47)
Do you wanna take that one? Yeah, I was hoping you would, I don't want to talk on that any great. I don't know if you wanted to max it on that.

Maxwell Lane: (24:56)
I don't want to speak on the specifics of the bill, but I think as as Ben touched on in the previous session and, and we do not have a stable coin product, we do not offer stable coin product. So I have no incentive to push stable coins here there are, stablecoin also is not one category. Luna, what was known as what was called an algorithmic stablecoin others like from our partner Paxos is not an algorithmic stable coin. It looks a lot more like a money market fund where it's pegged to the dollar and backed by dollars in a bank. Those are two very different things. I suspect that bill is going to try to get closer to the peg to the dollar sense than the algorithmic stable coin, which was certainly an economic experiment, not to say there's no room for experimentation, but when you're experimenting with people's life savings, I don't think that is a good thing. I don't think any of us in this room think that's a good thing. So, I think the bill is trying to solve for that. It leaves some room for experimentation, but not in a completely unregulated way in the market.

Michael Diamond: (25:58)
It seems like there's some level of, tension between whether it's the fed or ledges Congress that's gonna come out and really come out with the regulations around how to monitor stablecoin. So I think that's, that's a little bit of the Congress trying to get ahead of that as well.

Tobias Salinger: (26:17)
I see and then just in terms of the dip and the outlook do you all expect that to trend with stocks and see kind of a ricochet effect with the larger economic concerns? or do you expect that to go in a different direction? When do you expect it to obviously we don't know exactly, but do you expect it to rebound over the long term maps?

Maxwell Lane: (26:53)
Yeah, I would say I'm not an economist nor do I know what Bitcoin's gonna do tomorrow. If I did, I'd probably be a much wealthier man, but what I will say is, as a technologist, I am very bullish on the promise and the potential of crypto and blockchain technology in a number of areas, not least of which being crypto tokens as an asset class. And then as a financial professional, I believe we are all witnessing the formation of a new asset class, and that doesn't happen that often. And so I think on the technology side, seeing all the building and investment that is happening in the ecosystem encourages me that we are going to have better products and services in the crypto space, in the wealth industry, in the future that is going to increase adoption. And then as the asset class, this is not the first time Bitcoin has had extreme volatility has had a dip, will it come back? And when I do not know, I believe it will come back. I believe this asset class is resilient and will be more resilient over time. This volatility is healthy in a way, the longer it can continue to survive. The more likely it is to survive in the future without knowing what the price is gonna do tomorrow, Toby. And so, yes, I'm bullish. I think it's gonna have a place in people's financial lives, in their financial plans. We, as the wealth industry need to be able to service our clients and, and be crypto conversant.

Michael Diamond: (28:15)
Yeah. I'm with you max. I have no idea where, the price of Bitcoin is going. I wish I did. I wouldn't have been so long if I had some foresight into that but I do think a couple things which we've talked about here, which is it doesn't matter what we think it's right. You as the advisor, right? You're really gonna be the fiduciary. You need to help make that decision for your clients. And the best thing you do is get educated fidelity has launched. We have a white paper on our site just helping it's specifically targeted advisors to help understand Bitcoin and digital assets. In general. We also have an ebook that's specifically looking at the intersection between wealth management and digital assets. So, you know, those, and there's plenty other materials out there. So I don't know where it's going, but I would recommend that everyone just hopefully either check out our materials, or certainly, as I mentioned earlier we did do that partnership with the DAC FP as well. Yeah.

Maxwell Lane: (29:15)
I think to add to that, whether it's through fidelity, flourish, whoever, whoever you want to use there are resources out there. I firmly believe every firm in America needs to be thinking about this. You need to be talking to your compliance team, your firm leadership. What is our approach going to be? Even if the answer is no, that's fine, but you need to have an educated reason as to why it's no, again, fidelity flourish, others. We have materials, have education resources on the regulatory side, on blockchain, 1 0 1, get in touch, get educated. You don't have to go through this alone.

Tobias Salinger: (29:49)
And there you have it folks white papers, eBooks financial-planning.com all good sources of education educational courses, certification go that route. Don't go with the influencers and, and TikTok and the memes and take it from there. So, one more round of applause, please for our guest Michael Diamond and Maxwell Lane. Thank you.