Where do Wealth Managers stand on Crypto?
The new opportunity for the wealth management industry.
What is (crypto) wealth management?
Wealth Management is the art of managing the family wealth so that it is preserved and built for the future generations. The customers of wealth management firms are typically ex-entrepreneurs, who sold their business and want to secure steady income for them and their children. They are called High-Net-Worth Individuals (HNWIs), when their wealth exceeds 1mn USD and Ultra-High-Net-Worth Individuals (UHNWIs), when the wealth exceed 30mn USD.
The typical investment portfolio of HNWIs consists of mostly of equities and fixed income with some alternative investments in real estate, art or commodities. And recently also crypto.
75% of HNWIs already invested in crypto, according to 2021 Capgemini World Wealth Report
Wealth Manager manage the investment portfolio of their HNW clients on a daily basis to make sure that it is protected agains the market changes and it benefits from the new trends. Unlike asset managers or fund managers, who offer investment into their financial products, wealth managers do not only manage the assets, but are also trusted advisors to their clients and optimize their financial planning for personal goals and interests (e.g. university tuition for children, philanthropy or horse collection).
The new trend are crypto wealth managers, who specialize only in the management of crypto-assets. Crypto wealth managers have access to client wallet and invest on the client behalf in various tokens, staking, yield farming and other DeFis. Crypto wealth managers have both deep investment and technical knowledge, as they are able to differentiate between various crypto-currencies, tokens and DeFi protocols and to identify the most profitable and secure opportunities.
Crypto is a new asset class
Various studies have shown that crypto-currencies are not correlated with any other asset class. Crypto-assets are neither currencies nor commodities.
There are over 10'000 crypto-currencies (check other blogs posts to know why), but crypto “opportunities” do not limit to just buying and holding.
Staking is a form of “freezing” your crypto-currencies for given period of time in exchange for a fixed return. During this time your tokens are being used to improve the crypto-currency (e.g. ETH staking, Polkadot staking). Staking is not totally (but mostly) risk free and not all crypto currencies offer it (e.g. there is no Bitcoin staking).
DeFi stands for Decentralized Finance and describes all financial innovations build using the blockchain technology. DeFi is so revolutionary because it allows to provide the financial services without any centralized intermediary (such as a bank, a depository, an issuer etc). Simply, the counterparties (e.g. borrowers and lenders) interact directly with each other via computer programs called smart contracts. The next article will explain how DeFi works in details.
Crypto adoption by Wealth Managers
Total market capitalization of all cypto-assets today is $2.5tr, which is less the total assets of the largest wealth managers — UBS — $2.6tr. However, it is the incredible growth of crypto-asset (from just 0.1tr in 2019) that makes them so interesting.
77% of family offices is interested in crypto, according to BNY Mellon Wealth Management
However, the crypto-adoption is relatively low:
Only 15% family offices invested in crypto so far, according to the Goldman Sachs report
According to Justin Castelli, Chief of Staff at Onramp Invest, “The popularity of crypto has created a unique situation where many clients know more about the asset class than their financial advisor — advisors are playing catch-up.”
The major reasons hindering the wider crypto adoptions are regulations and infrastructure. The regulatory aspect of crypto-currencies, not mention DeFi is not clear, the same applies to taxes. The professional crypto-investments require the new infrastructure — blockchain wallets, which is typically not provided by the private banks, which which wealth managers (and their clients) bank.
Next steps for Wealth Managers
There are many reasons why wealth managers should be interested in crypto and the major one include:
- HNWIs are keen on crypto
- Crypto is a new asset class, which along with DeFi, provides new diversification and revenue opportunities
- Crypto is a source of new assets that can/should be actively managed
How crypto wealth managers can get into crypto?
- In-directly via ETFs that gives then exposure to crypto
- By teaming up with crypto wealth managers that already have the technical expertise
- Building in-house crypto knowledge and managing the clients crypto wallets directly
The future will show, whether the crypto and traditional wealth management converge or diverge. The HNWIs would like to have one trusted advisor to consult both on traditional and crypto assets. But will it be possible to offer expert advice in both areas by one wealth manager? Please share your views in comments.
Stay tuned for the next article series, which step-by-step explain how toset-up and manage crypto wallets.
Crypto Wealth Management article series:
- Where do Wealth Managers stand on Crypto?
- How Crypto elevates Wealth Management
- Behind the scene of Defi. Introduction for Wealth Manager
- From TradeFi to DeFi? Getting-started Guide for Wealth Manager
Stablecoin article series:
1) Capgemini, 2021, World Wealth Report
2) BNY Melon Wealth Management, 2022, Shifting Horizons: Insight into how family offices are responding to rapid economic & social change
3) Goldman Sachs, 2021, Crypto: A new asset class?