It is no longer a secret that bitcoin has been the best-performing asset of the decade.
Clients are hearing about it every day in the news and from other investors. That said, bitcoin and digital assets can be a challenging asset class for RIAs and independent financial advisors due to compliance, education, and the scarcity of appropriate investment vehicles. Allocating to this new asset class involves some key considerations, including:
- Does the advisor believe that bitcoin and digital assets are an investable asset class?
- What investment, regulatory, and compliance diligence must be conducted by the RIA firm to offer a solution to their clients?
- How does the firm go about allocating to this asset class and executing an investment for their clients?
Historically, there were only a few options for an advisor to help a client allocate to bitcoin and digital assets. One of the first options was simply telling a client to invest by using a retail exchange (e.g. Coinbase). This was not a viable option for advisors to recommend to clients because it is expensive due to transaction fees, creates concerns around asset security, and has the undesirable effect of the client moving assets away from the advisor.
The second option was putting the client in an OTC-traded, closed-end public trust. This option is expensive and has issues with premiums, discounts, and tracking error. However, this option was easy for advisors, as it allowed them to add bitcoin and digital assets to client portfolios, while keeping those assets under management. Currently the options are limited and range from waiting for an SEC-approved vehicle (and the massive inflow of capital that will follow) to investing in a vehicle that trades alongside penny stocks on the pink sheets.
The third option that emerged was the creation of private funds and LP structures that invest in bitcoin. This option can be more cost-effective than the previous two in terms of the management fees charged, but have major operational, liquidity, and performance integration issues for the RIAs and advisors.
All these options come with limitations and are not specifically tailored for the advisor and the clients they serve.
A Better Solution: Bitcoin and Digital Asset SMAs
As the market and technology has evolved, a new option for advisors has come to market, incorporating the recent advancements made in infrastructure, custody, and security. Eaglebrook Advisors launched the first Bitcoin and Digital Asset Separately Managed Account (SMA) Platform, combining all the benefits of the other products, while eliminating most of their drawbacks.
Eaglebrook’s SMA Platform was launched in November 2020 with the support of Mariner Wealth Advisors, the fourth largest RIA in the U.S. In a very short time, these bitcoin and digital asset separately managed accounts (“SMAs”) have become the trusted solution for allocating client assets to the emerging asset class.
The Benefits of SMAs
The biggest difference between SMAs and private funds or public trusts is the fact that investors have direct ownership of the bitcoin and digital assets. The assets are held in the client’s name at a qualified custodian, which increases asset security and reduces counterparty risk. By owning the bitcoin and digital asset directly through Eaglebrook’s SMAs, the client can optimize their investment by taking advantage of the following benefits:
Daily Liquidity: The client can buy, sell, or rebalance same day. Private funds offer anywhere from weekly to quarterly liquidity, and redemption documentation to sell. This is extremely important in a market with high volatility.
No Minimums: There is no minimum investment required to open an account.
Portfolio Customization: Advisors and clients can work with the Eaglebrook Investment Team to build a customized portfolio of bitcoin and digital assets based on the clients’ preferences and investment objectives. Eaglebrook also offers professionally managed portfolios..
Tax Optimization: Owning the bitcoin or digital assets directly enables opportunities for tax-loss harvesting. Private funds and OTC trust do not allow for tax optimization or tax-loss harvesting because you own a share of a commingled fund and do not own the asset directly. This tax optimization can have a major tax benefit and impact on client portfolios.
The Eaglebrook Advantage
Security and Compliance: The most important consideration when RIAs are deciding on an investment solution for bitcoin and digital assets is security of client assets and compliance. Eaglebrook is also an RIA, so we have the same compliance requirements and regulatory structure as our RIA partners. We continue to closely monitor the evolving regulatory requirements for RIAs who advise on bitcoin and digital assets.
Eaglebrook conducts thorough and ongoing due diligence on the qualified custodian where assets are held, and its security protocols for bitcoin and digital asset custody. We also work with our RIA partners on ADV language, compliance requirements and procedures, custodian due diligence, and client suitability. Advisors can also now advise on bitcoin and digital assets that were previously held in retail exchange accounts (e.g. Coinbase).
Portfolio Integration: Eaglebrook’s platform is deeply integrated with all the major portfolio management and reporting systems used by RIAs. This allows advisors to report, bill, and advise on these assets within a secure, unified system.
Seamless Client Onboarding: Eaglebrook’s proprietary SMA platform has simplified the client onboarding process. It takes just a few minutes to open any of the following registered accounts
- Limited Partnership
- Individual Retirement Accounts (IRAs)
It is now clear that bitcoin and digital assets are not going away and will become a very important part of the digital economy. RIAs and independent financial advisors need to get in front of this trend now. If advisors do not offer a comprehensive solution for investing in bitcoin and digital assets, they risk losing clients and AUM to competitors with greater knowledge of, and access to, this emerging asset class.
Eaglebrook was built by leading financial advisors, portfolio managers, and thought leaders in the digital asset market to provide financial advisors and RIAs with solutions that are specifically tailored for their clients’ needs and will grow and differentiate their practices.
About Eaglebrook Advisors
Eaglebrook Advisors is a tech-driven investment manager that provides independent financial advisors with streamlined, secure, and compliant access to bitcoin and digital assets. The firm has created the first bitcoin and crypto separately managed accounts (SMAs), which are designed to seamlessly integrate with an advisor’s current portfolio management systems and workflows. The company is backed by leading wealth management executives and financial institutions.
For more information, please visit www.eaglebrookadvisors.com and follow us on LinkedIn.