Cryptonite
As of this week the S&P500 is up 40% over the last year, and in the same time period Bitcoin is up over 300%. Why aren’t we all investing in Bitcoin? The recent volatility has shown us that it’s not a suitable investment for every portfolio. Part of Bitcoin’s recent wild ride can be attributed to Tesla, which announced in March that it would accept Bitcoin as payment for its vehicles, and also that it was buying a billion dollars’ worth of the cryptocurrency. Bitcoin jumped 10%. In May, Tesla CEO Elon Musk announced via Twitter that it would no longer accept Bitcoin as a form of payment due to its poor ESG profile (environmental, social and governance factors – Bitcoin mining is not very sustainable at this point). Bitcoin dropped rapidly, eventually falling over 50% since the highs of early April.
Currency, including cryptocurrency, can be defined as a medium for exchange of goods and services. Such a medium of necessity should be a stable store of value. Paul Donovan of UBS noted that Bitcoin is remarkably sensitive to Mr. Musk’s tweets, and that “If one person can dramatically alter spending power, the ‘stable store of value’ criteria of a currency is not met,”
It’s worth noting that investment advisers are increasingly allocating to cryptocurrency. According to Bitwise Asset management, a survey of 400 financial advisors indicated that more than twice as many were planning to put cryptocurrency in client portfolios last year than the year before. The number jumped from 6% in 2019 to 13% in 2020. While some advisers are attracted to the low correlation of cryptocurrency returns to equity returns, the main reason advisers cite for embracing this highly volatile asset class is “clients are asking for it.”
Is that a good enough reason?
Many advisers have found themselves in a situation where clients were asking for an investment we don’t recommend. For example, while we currently maintain well-diversified, low-cost portfolios which are screened for Environmental, Social and Governance factors (ESG), we were not always able to offer this to clients. In the early days, we called this approach “Socially Responsible Investing.” Initially, funds that were socially screened tended to be expensive, poorly diversified and often under-performed the market. We couldn’t offer such funds to clients in good conscience, and in accordance with our investment suitability criteria. Some clients threatened to leave if we didn’t come up with a social portfolio. We had to ask for their patience while the marketplace evolved, and today we are able to offer balanced, thoughtful, low-cost ESG portfolios, using the many exchange-traded funds now available which are screened for ESG. Some clients were willing to wait, and some weren’t, but in any case we didn’t violate the sound investment principles that are the foundation of our investment strategy: low cost, broad diversification and reasonable volatility.
Clients hire financial advisers to help them make good investment decisions and avoid bad ones. Our role is as much guide, teacher, coach and counselor as it is investment manager. Our job is to assist the client in interpreting developments in the financial markets, including legislation, taxes and other issues, and apply these to the client’s specific situation.
When clients want things that are clearly in their best interests, advisers should assist them in finding the best investment vehicles to support their goals. When the client wants something that’s not likely to facilitate achieving their overall goals, the adviser has an obligation to push back against the client’s speculative urge.
Sure, it’s the client’s money and they have a right to invest as they wish. At the same time, an adviser has a duty to assist in choosing suitable investments based on their knowledge of the client’s goals, risk tolerance and time horizon. Ideally, the client will respect the adviser’s judgment and accept limits on speculative investments. If not, both client and adviser should consider whether their relationship is a good fit.
