Journal of Financial Planning: June 2021
WHO: Ric Edelman
WHAT: Founder, Edelman Financial Engines and RIA Digital Assets Council
WHAT'S ON HIS MIND: “Internet 3.0 is the internet of money—the ability to connect with money on a global scale.”
You’ve said that traditional training for financial services professionals teaches them to distrust digital assets. Why is that and how can planners overcome?
Most advisers have 10, 20, 30 years of experience and one or more professional designations. They have college degrees in finance, economics, or business. And all that training tells them that bitcoin seems to look like a fad or fraud. So it has been very easy for advisers—especially during bitcoin’s early history—to be very dismissive. It’s very easy for a respected traditional financial adviser to say to their client, ‘Stay away; it’s dangerous.’
Unfortunately, that dismissiveness is not in the client’s best interest. The only way to understand that, however, is to look deeper—to look beyond the headlines, to look past the price volatility at the underlying technology of blockchain, also known as distributed ledger technology. Once you delve into the technology, you begin to realize that this innovation is likely to prove to be the most important technological innovation since the invention of the internet itself. And it’s going to change commerce on a global scale.
The impact of this technology is hard to over-emphasize. Internet 1.0 connected people—think Facebook where people were able to connect online. Internet 2.0 was the internet of things, devices talking to each other—think Bluetooth where your coffee maker can talk to your phone. Internet 3.0 is the internet of money—or the ability to connect with money on a global scale.
Just one simple example: if you want to move money from one person to another and those two people live in different countries, it takes five days in our global banking system to move that money cross-border, and it typically costs 8 percent in commissions and fees to do it. With bitcoin, you can do it in 10 minutes, virtually for free. You can do it faster, cheaper, and more safely. This is why 90 percent of the world’s banks are developing blockchain technology. This is why every government on the planet is exploring Central Bank Digital Currencies as an addition or replacement to their paper currencies. It’s hard to overstate the incredible impact that this is going to have on commerce.
Advisers have to realize that unlike Tulip Bulbs and Beanie Babies—which are pretty to look at and cuddly to hold—Bitcoin offers fundamental uses in commerce that make it revolutionary, and that’s why it’s not going away.
In a recent podcast, you talked about how you believe that the SEC is moving closer to approving a Bitcoin ETF. What would that mean for financial planners?
We are experiencing a change in leadership in Washington. One of the top five campaign contributors to Joe Biden’s election is a billionaire who built one of the largest bitcoin exchanges. Former SEC chair Jay Clayton was not supportive of a bitcoin ETF, but the new chair, Gary Gensler, taught Bitcoin and blockchain at MIT. And key House and Senate committees now have members who are strong proponents of digital assets.
For the first time, the highest levels of government include people who are very strong supporters of blockchain and digital assets.
There are eight applications on file with the SEC for bitcoin ETFs—including one from Fidelity. Prior applications came from companies that most investors have never heard of (for example, Bitwise).
Mass Mutual recently invested $100 million in bitcoin and made a major investment in the New York Digital Investments Group. The CEO of New York Life just joined NYDIG’s board. Morgan Stanley, Goldman Sachs, and BlackRock all say they’re going to let clients invest in bitcoin. University endowments already do. We’re seeing mainstream corporate America engaging in this new asset class in ways that were unheard of three years ago. For that reason, there is increased hope that the SEC will act favorably on these applications this time.
In light of all of that, do you think financial planners might be open to learning more about digital assets?
Surveys of financial advisers say that 80 percent of them are receiving questions from clients, so advisers are discovering that they have no choice but to learn about this asset class because their clients are demanding it.
The big challenge for advisers is twofold: number one is understanding this technology to be able to effectively serve their clients; and second, how to incorporate digital assets into client portfolios in the absence of an ETF. Advisers are struggling to provide their clients investment opportunities.
Historically, there have not been many avenues [to invest in digital assets] readily available for financial advisers. The typical way that somebody would buy bitcoin would be to either mine it—which is very expensive and time-consuming—or they open an account at an exchange like Coinbase, Gemini, or Kraken. These are not household names. It’s cumbersome, awkward, and a bit intimidating. It’s [neither] something that many consumers have experience doing and advisers are not able to assist, nor can advisers incorporate those accounts into the rest of the portfolio. This means advisers can’t rebalance or provide tax reporting and record-keeping assistance. Nor, in many cases, can advisers even get paid on those assets, which itself is a big detriment to adviser adoption.
It has been cumbersome at best, impossible at worst, for advisers to add digital assets to their portfolios in a manner that satisfied their regulatory and compliance obligations. This is why many advisers dismissively said, “I’ll just wait for an ETF.”
Once an ETF comes onto the market, advisers can provide their clients with a bitcoin ETF the way they provide all the other ETFs in their portfolio. If they do it in the brokerage account, they can rebalance it, [and] they can handle the tax management and record keeping. They can do their job as simply and easily as with all the other assets they manage. The problem is that the SEC is proving to be very sluggish in allowing a bitcoin ETF to come onto the market. It’s going to be at least six [months], nine months, 18 months, or longer for such products to be available to advisers.
As advisers wait for the SEC, their clients are missing out on tremendous opportunities. This is forcing advisers to consider alternative ways that they can engage in this space, without having to continue waiting for a bitcoin ETF.
The good news is there are increasing opportunities. There are now four Canadian ETFs that are available to U.S. investors. There are trusts that trade OTC as securities that advisers can incorporate into their portfolios. There are private placements, hedge funds, limited partnerships, venture capital funds, and private equity funds available to accredited investors, which many advisers routinely use for their high-net-worth clients.
Advisers need to learn what these opportunities are so that they don’t find themselves forced to wait for an ETF, which may not be coming for a long time.
You began investing in bitcoin and ethereum as an educational experience. What did you learn from that experience?
I was first introduced to bitcoin in 2012. I attended Singularity University’s executive program, which was a deep dive into exponential technologies broadly … including blockchain and bitcoin. This was 2012, when bitcoin was selling for under $100. I didn’t understand what they were describing, but I found it intriguing.
I spent time learning more and researching these technologies, trying to understand the implication and potential of bitcoin and blockchain technology. So I opened an account and began buying bitcoin. When ethereum became available in 2015, I began buying that as well. I’m as excited about ethereum—perhaps even more so—as I am about bitcoin.
I’ve learned two facts in my research and conversations with the folks who are building this technology. First, blockchain technology is the most impactful innovation for global commerce since the internet itself. Second, a majority of financial advisers don’t know this.
I created the RIA Digital Assets Council (RIADAC) to serve as an educational forum to teach financial advisers about blockchain and digital assets, help them understand the technology, and learn about ways they can incorporate it into their practice management in a manner that allows them to serve their clients’ best interests—which may include telling the client not to invest.
Advisers know their clients. They know when a client is suitable and not suitable to invest in digital assets, the degree to which they should engage, and how best to do so. By providing advisers with this knowledge … they’ll be able to do a better job for their clients.
Tell our readers about the RIADAC certification program and how FPA members can take advantage of that.
As part of our efforts at RIADAC, we frequently do webinars, we have a lot of educational content on our site, and we have RIADAC TV where we interview some of the luminaries in the digital asset space. But one of the most important things we’re doing is the Certificate in Blockchain and Digital Assets—an opportunity for financial advisers to obtain the knowledge they need through an online self-study course. It’s 10 modules, self-paced, with a quiz at the end of each module. When you’re finished, you will receive the Certificate in Blockchain and Digital Assets, allowing you to demonstrate to your clients that you’ve obtained this knowledge and that you are staying at the cutting edge of investment management and able to provide advice and recommendations that are in their best interests. There’s nothing like this program anywhere.
We’ve built a world-class faculty. We are producing the certification program in partnership with the New York Institute of Finance. NYIF was created by the New York Stock Exchange 99 years ago and is the preeminent education resource for the financial services industry. They train more than 50,000 people a year in dozens of courses in financial services and we’re very excited to be working with them. And thanks to our partnership with the Financial Planning Association, the certification program is available to FPA members at a substantial discount.
You’ve said before that financial planners should educate themselves on digital assets, so they know why they hate them—and that in educating themselves, they’re actually going to end up liking them. Can you expand on that?
During the first several years of bitcoin’s existence—even as recently as three years ago—it was easy for an adviser to wave their hand and with a dismissive tone tell a client who asked about Bitcoin to, ‘Ignore it; it’s a fad. It’s a fraud. Stay away.’ The adviser didn’t have to know much more than the client. But that’s no longer enough.
Bitcoin is increasingly in the news. You have mainstream companies engaging in big ways. Dozens of the world’s billionaires are making announcements that they’re buying digital assets. We have the nation’s leading university endowments all disclosing ownership of bitcoin. It’s no longer enough for an adviser to be dismissive of bitcoin.
The analogy that I offer are annuities. Love them or hate them, every adviser has a strong opinion. It’s well known that I’m not a fan of annuities. However, I’m an expert on annuities. I can tell you in great detail how they operate and why I don’t like them. Other advisers who are big fans of annuities can do the same.
That’s my challenge to financial advisers: get the knowledge about blockchain and digital assets that you need in order to effectively articulate your like or dislike about this new asset class. I believe that the more knowledge you obtain, the more favorable you will become about this asset class—which was my journey.
Outside of digital assets, what are some trends in investing that you’re seeing?
There are three major movements in the marketplace right now: ESG, exponential technologies, and bonds.
ESG is gaining a lot of attention because people increasingly want to invest their money in a manner that is consistent with their values. Increasingly, corporate boards are striving to operate their businesses in a manner that scores well on E (environment), S (social), or G (governance). It’s very difficult for any company to score well on all three, but it’s relatively easy to score well on one of the three. ESG is capturing a lot of attention and increasing amounts of assets.
Second are exponential technologies—robotics, artificial intelligence, biotech, bioinformatics, nanotech, and more. That’s how we got the COVID-19 vaccines. Never before have we been able to go from zero to a vaccine in nine months. That is astonishing and it’s all thanks to exponential technologies. Self-driving cars are on the horizon. Electric vehicles are upending the entire automotive sector. Green technology, cybersecurity, water technologies—these are changing virtually every aspect of life on the planet and it’s the basis of my most recent New York Times bestseller, The Truth About Your Future, which is an explanation of these exponential technologies and the impact on personal finance and investment management.
These asset classes are about investing for the 21st century, instead of investing for the 20th century. The best illustration of this: back in 1925, the average Fortune 500 company lasted 65 years. Today, they last 15 years, which means by 2030, half of the S&P 500 will be gone because of obsolescence. An illustration of this is Kodak—a company over 130 years old, with a couple hundred thousand employees—one of the best-known brands worldwide. In 2012, Kodak went bankrupt because of a newfangled technology called digital photography. The year Kodak went bankrupt, Instagram was 18 months old with 13 employees. Instagram, which uses technology Kodak invented, was sold for $1 billion. If you look at some of the biggest, most successful companies today, most of them did not exist 20 years ago. Many of them didn’t exist 10 years ago. So exponential technologies are a huge theme for investing.
Last, bonds interest rates are at historic lows. We are experiencing a generational shift. Starting in 1982, interest rates began to drop. Mortgage rates peaked at a high of 18 percent. Today, mortgage rates are around 3 percent, and they have been steadily dropping for the past 45 years. We know that as interest rates go down, the value of bonds goes up. Now that we are near zero on interest rates, the question becomes: what will happen to interest rates going forward?
If over the coming decades interest rates rise, bonds will lose value—something that no investor alive today has ever experienced. If you’ve been an investor since the 1980s, you’ve generally only experienced declining interest rates. Most investors think bonds are safe because they’ve never experienced a rising rate marketplace on a sustained basis.
The bond market is proving to be a very difficult marketplace right now and for the foreseeable future. It raises the question about the fundamental 60/40 portfolio that many advisers use as the basis of their portfolio management. Does it make sense to have a substantial portion of clients assets in a diversified bond portfolio in an environment of rising rates? This is a very dicey question that advisers are being forced to confront for the first time in their careers.
Is there anything we didn’t ask that you’d like to include?
Most advisers are very successful. They’ve been advisers for decades and have developed a strong roster of clients—and they’re managing a significant amount of money and running effective, successful practices. What advisers have to realize is that what got you here isn’t going to get you there. The way you’ve been running your practice is not necessarily the way you’re going to be able to continue to operate your practice to enjoy the level of success you’ve created today.
Advisers who rest on their laurels—who coast and continue to operate the way they’ve always operated—are going to discover a challenge in attracting and retaining their clients and assets. This is why advisers have no choice but to continue learning about these new opportunities to determine how best to integrate them into their practice management. That’s what RIADAC is all about—to help them do that.
Learn More: FPA and RIADAC Partner to Educate Financial Planners on Digital Currencies
As blockchain and digital assets become more mainstream, now is the time for financial planners to build competency in this transformational asset class. To this end, FPA and the RIA Digital Assets Council (RIADAC) are partnering to provide education on the application of blockchain and digital assets. FPA members now have access to a wide range of content, a 50 percent discount on RIADAC’s Certificate in Blockchain and Digital Assets, an FPA blockchain and digital assets community, thought leadership content in the Journal of Financial Planning, and more.
