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It’s hard enough to select a financial advisor who suits your needs and circumstances, but the increasing popularity of cryptocurrency can make it even harder.
Crypto’s rise lengthens the list of financial instruments investors need to understand, and it poses the same challenge for advisors.
Whether an advisor is only helping you navigate cryptocurrencies and other digital assets or the advisor is helping with your entire financial life, there’s no substitute for guidance that’s personalized to your goals, time horizon and risk tolerance. This means there are a number of considerations every investor should take into account before choosing a crypto financial advisor.
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Understand Crypto Investing Basics
When it comes to investing in crypto, start at the beginning. If you don’t understand much about cryptocurrency yet, here are the first steps you should take:
- Learn the basics of blockchain technology, cryptocurrency and decentralized finance.
- Familiarize yourself with key terms, technologies and market dynamics.
- Recognize such factors as market volatility, regulatory hurdles and technological advancements.
David Waugh, business development and communications specialist at Coinbits, an app that helps people invest in Bitcoin, says, “Bitcoin, the original cryptocurrency, has a 14-year history and is an alternative to government currencies worldwide, implying that it can provide meaningful diversification from the traditional financial system.”
Determine Your Objectives
Defining your objectives narrows your search, allowing you to target advisors specializing in your area of interest. You may want to ask yourself the following questions before approaching any financial advisors concerning crypto assets:
- Are you an institutional investor eyeing large-scale crypto investment or an individual aiming to have a bit of Bitcoin as part of your retirement portfolio?
- Do you need assistance with estate planning that takes crypto into account or just basic advice on buying and storing it?
“Not all cryptocurrencies are created equal,” Waugh says. “When exploring diversification via ‘crypto,’ advisors should ask ‘What is the cryptocurrency’s purpose? Why does it have a token?’”
Credentials Should Be Non-Negotiables
In the financial realm, certifications aren’t alphabet soup. Professional certifications can help you understand an advisor’s prowess.
These credentials can help you make sure that whichever advisor you choose has the right skills. Ask which credentials your prospective advisor holds and how they would pertain to your needs.
The certified financial planner, or CFP, certification indicates that a U.S. advisor has achieved a certain level of financial planning expertise. It is conferred by the CFP Board.
Additional certifications can indicate skill in individual categories as well. One of these additional certifications is the certified digital asset advisor, or CDAA, indicating proficiency in the crypto space. This certification is overseen by PlannerDAO.
It’s always a good idea to check the Financial Industry Regulatory Authority BrokerCheck report to research and verify a broker’s professional background.
If you can’t find an advisor in BrokerCheck, you can also check with state authorities. Advisors who have less than $100 million in assets under management register with the regulator for the state where the adviser has its main place of business. You can find out how to contact your state regulator at the North American Securities Administrators Association website.
Beyond the Bull Runs: Experience vs. Hype
Although it is exciting, the crypto domain is notorious for its volatility.
Bull runs tend to breed a slew of self-appointed experts who might talk up their supposed successes. However, it is during market slumps that true expertise is ascertained.
You may want to ask advisors who you interview if they have managed crypto portfolios through both bull and bear markets? And if so, do they have clients whose circumstances and digital assets match yours?
An advisor’s history of managing portfolios across diverse market phases can offer valuable insights into their competence.
The decentralized and digital nature of crypto means risks are not only market based. Hackers and cyber-criminals seek vulnerabilities at every turn.
A seasoned crypto financial advisor must be an expert at digital asset security. This includes following best practices, staying up-to-date on security protocols and understanding how to use techniques such as cold storage, hardware wallets, multi-signature setups and two-factor authentication.
Cryptocurrencies are digital bearer assets. That means you’re often responsible for the security of your own assets. You can’t count on a financial firm to do it for you. “This makes it essential that financial advisors be well-versed in cryptocurrency custody, choosing a quality custodian for their clients or assisting them with a secure self-custody solution,” Waugh says.
Clarity in Fee Structures
You should also ask a prospective advisor how they would be compensated.
Some crypto-savvy advisors charge traditional fees based on a percentage of your assets that they manage—known as a percentage of asset under management, or AUM. Others charge flat or hourly fees or performance-based incentives. Many advisors charge a mixture of fees.
Whatever the fee structure, make sure you understand what your costs will be. Demand transparency. A clear understanding of the terms at the outset prevents future disputes and ensures that the advisor’s interests align with yours.
A Holistic Financial View
Cryptocurrency doesn’t exist in a vacuum. Advisors with a comprehensive approach to asset management should be adept at weaving crypto into the broader tapestry of your financial blueprint, which might include stocks, bonds, real estate, commodities, fine art and other investment vehicles. An integrated strategy tends to yield superior risk management and growth prospects.
“It’s imperative for a financial advisor to be well-versed not just in portfolio management but also in the nuances of crypto taxation,” says David Kemmerer, co-founder and CEO of crypto tax software provider CoinLedger.
Also ask if the advisor is adept with tools and strategies for crypto tax-loss harvesting. “An advisor’s grasp of such specifics can be a game-changer in maximizing returns and ensuring compliance,” Kemmerer says.
Navigating the Regulatory Rapids
Cryptocurrency regulation is a shifting landscape. It’s essential for your advisor to remain up-to-date on rules governing crypto investments.
A well-informed advisor will not only guide you through the existing regulatory maze, they will also keep an eye on potential legislative shifts and regulatory changes as well as reporting requirements and the implications of cross-border crypto transactions, helping you remain compliant and assuring that you sidestep legal pitfalls.
Testimonials and References
You should also request testimonials from actual clients. A reputable advisor should have no qualms about providing references from other clients.
Client references offer raw insights into an advisor’s working style, reliability, ethics and effectiveness.
References can also help you gauge your prospective advisor’s real-world performance.
There’s No Substitute for Your Instincts
Beyond data and testimonials, your personal comfort level with an advisor should be the ultimate reason you decide to go with them. All the research, interviews and reference checks aside, don’t ignore your gut feeling. Financial discussions require trust.
Financial advising is a relationship. In addition to trust, comfort and clear communication are crucial. If an advisor seems dismissive, overly aggressive or non-transparent, consider that a red flag. Even if it’s something you can’t quite put your finger on, but it feels off, continue your search. Your intuition can and often must be the determining factor in whom you’ll choose.