Ric Edelman, founder of Edelman Financial Engines, and Matthew Kolesky, president at Arbor Capital, discuss the state of Bitcoin adoption amongst financial advisors, who control $5 trillion in investor wealth. In this episode, they talk about:

  • their background and why they got into crypto (1:25)
  • how most RIAs (registered investment advisors) view digital assets and the hassle of buying crypto on a client’s behalf (8:59)
  • what percentage of financial advisors have already invested in bitcoin and how many more will come into the space by next year (18:20)
  • how RIADAC — the RIA Digital Assets Council — is educating financial advisors about crypto (21:59)
  • their favorite methods to explain Bitcoin and other digital assets (25:22)
  • the different ways financial advisors are getting bitcoin/crypto exposure for their clients (35:32)
  • why RIAs use investment vehicles to purchase Bitcoin rather than spot-buying the actual asset (39:58)
  • why GBTC is trading at a deficit to the bitcoin price and their thoughts on a bitcoin ETF (44:40)
  • the percent allocation to crypto they feel comfortable with for their clients (54:26)
  • how they rebalance crypto holdings, whether they use yield-bearing crypto products yet, and projections for 2021 (57:35)

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Episode links:

Ric Edelman

Matt Kolesky

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Transcript:

Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to youtube.com/c/unshaved podcast and subscribe today.

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Laura Shin:

Today’s topic is personal finance and crypto. Here to discuss are Ric Edelman, founder of Edelman Financial Engines and founder of the RIA digital Assets Council, and Matt Kolesky, president of Arbor Capital. Welcome Ric and Matt.

Ric Edelman:

Good to be with you. Thank you, Laura.

Laura Shin:

Ric, let’s start with you. Why don’t you tell us about yourself and how you got into crypto?

Ric Edelman:

Well, I’ve been a financial advisor for 36 years now. I’ve always been looking forward — like we all do as financial planners. What’s coming? Where do our clients need to be planning for the future as opposed to focusing on the past? And so in 2012, with the help of Ray Kurzweil, who’s the co-founder of Singularity University. He encouraged me to go to the Singularity’s Executive Program, which I did. And that was where I first heard about Bitcoin along with all the other exponential technologies. AI and robotics, 3D printing, big data, nanotech, biotech, bioinfomatics, FinTech, ed-tech… all that kind of great stuff that is just revolutionary in their designs and innovations. And when I heard about Bitcoin and the blockchain, I didn’t get it. But it really intrigued me. I didn’t dismiss it out of hand.

I decided to learn more about it. And so I spent 2013 doing that and then began investing in Bitcoin in 2014, largely as an experiment, just to understand the environment: what’s involved in opening an account and buying it and wallets and keys and all that kind of good stuff. And the more I spent time with technologists and experts in the field, I began to realize that there’s a there, there: that this technology is revolutionary and has the potential to transform commerce on a global scale. Not only did I realize that, I realized something else: the vast majority of financial advisors don’t understand this. When you first look at Bitcoin, it violates all the stuff we’ve been taught as financial planners, all the education, we have all the professional designations, all of our years of experience of investment management, Bitcoin violates all those rules.

So it’s easy to dismiss Bitcoin out of hand as a fad or a fraud, like tulip bulbs or beanie babies. And it’s just easy to throw it away as silly. And that’s a big mistake. And so what I realized is that financial advisors need to understand this because the crypto community, even though they’re doing really cool stuff, they’re building really nifty whizzbang products and services that are a value to advisors and their clients, the crypto community, Laura, is not very good at explaining this to financial advisors. They don’t understand the advisory community. Many of them didn’t even realize that there was an advisory community. They’re trying to sell their investment products and other services directly to investors, not even realizing that advisors serve as a gatekeeper. We control $5 trillion in investor dollars.

So I created RIADAC the RIA Digital Assets Council to serve as an educational forum for financial advisors to teach them about blockchain and digital assets, to help them understand the space and learn how to talk about it with their clients, whether they want to say yay or nay, understand what you’re talking about, as opposed to just a wave of the hand, dismiss it as a fraud, as a fad. And so we’re launching our certificate in blockchain and digital assets, a 10 module online self study course for financial advisors. So they can learn what they need to know about this new space and understand how to incorporate it into portfolio management for their clients.

Laura Shin:

Yeah. This is an area I’m very interested in. I don’t know if all the listeners are aware, but I covered personal finance for, oh, shoot, I think maybe four or five years before I got into crypto. So quite a while. I agree with you about how the crypto community and the personal finance community are sort of like oil and water. They don’t really talk well to each other. And so it’s interesting to me to see that you’re trying to bring the two together. All right. So Matt, tell us about you as well and how you got into crypto.

Matthew Kolesky:

I first got into Bitcoin back in 2010. I was reading about it online and just became very fascinated by it. I’ll say it right: I fell down the rabbit hole early. To Ric’s point and even your point, there is no way to bridge the worlds. I started as a financial advisor in 2000 at Charles Schwab. So let me back up there and then left Schwab in 2004 and joined Arbor. So, fast forward to 2010 and was just super excited about this, but like Ric, I wanted to learn about it. I wanted to see what this was about. And I was like, well, this is really cool. We can send money and value instantly. We’ve been communicating instantly for years and years. And so I just spent time learning about it. I downloaded some mining software. I actually was mining Bitcoin on my home computer back when you could do that and then I took a break from it.

I did have a Mt. Gox account. So I experienced that and it was certainly a personal experience that I carry with me to this day as the compliance officer. Then I followed Ethereum’s launch. And of course, Litecoin was in there. I just was really excited about the asset class as it continues to grow and mature. But as I said, there is no bridge. As a financial advisor, I felt really strongly that, hey, I really want to get clients exposure to this, but there’s no way to do it. In hindsight. I probably could have custodied it myself on a thumb drive, but if the auditors came in said, what are you doing? Where’s your Bitcoins? So what’s on this little thumb drive here. Here’s the private keys. The IRS would be like, well, what is that?

So that really wasn’t a good solution for my firm. And then in 2018, we started to really craft our investment thesis around this. Grayscale came out with their products, obviously in that timeframe. And we started to say, well, let’s really look and see what this would look like if we got our clients exposure to this asset class. We did it through our alternative sleeve, which is where we feel that this fits. We did, about two years ago, purchase the Grayscale product on the open market, not through private placement. We wanted all of our clients to have exposure to this. I feel that’s kind of a reflection of the culture of Bitcoin or blockchain itself. There’s lots of hedge funds doing this, but we have qualified and accredited investors. We wanted to bring this to all of our clients.

And so that was about two years ago. And then in 2020, I talked to Coinbase and Fidelity and everybody, looking for a solution where we could own digital assets in a client account, in a sub-account for them that we could professionally manage. And I ran across an article about a tech platform called Blockchange, and it was interfacing with Gemini and was immediately taken by that and said:that’s exactly what I’m looking for. And so we started onboarding our own clients several months after that. There was definitely a lot of compliance work that needed to get done. And then we successfully began onboarding our clients in Q4 and then pivoted to launch an SMA or another advisory product to other advisors. We quickly realized that, like Ric said, a lot of advisors are excited about this. They want to have exposure to it, but they may not know how to access it. So now we’ve created some portfolios. I know you’re going to talk about that in a bit, but that’s kind of been my journey with digital assets. So I was really excited when my professional world and one of my personal passions finally came together.

Laura Shin:

Okay. Yeah. And for listeners who don’t know, an SMA stands for a separately managed account, which we’ll dive into those issues later. But I actually just want to dive into what the problem is. We’ve kind of talked about it in various ways. You’ve touched on a number of different things just in the brief time that we’ve been talking, but let’s maybe even just take a step back and just talk about perception. So what would you say is generally the opinion most registered investment advisors, or any kind of a personal finance advisor, like a CFP, certified financial planner, or whoever, what attitude do they typically have of digital assets? And then on the flip side of that, how easy is it for everyday investors to invest in crypto and have that managed by their financial advisor?

Ric Edelman:

Well, I can talk about the first part, and Matt can do that in the second part probably better than me. Advisors, first and foremost, Laura, are concerned about reputation. I don’t want to do anything that’s going to damage my reputation. I certainly don’t want to do anything that  will get me in trouble with regulators. And I don’t want to do anything that might harm a client. So we’ve got the fact that most advisors have been doing this for more than 30 years. The average CFP in this country is 62 years or older. And they’ve been doing this for more than 20 years, most more than 30 years. So we go back a long way, and we’ve been through it all. You know, everybody remembers the crash of 87. You remember the dot com bubble. We remember 9-11. You remember, ‘08. We remember the recession of the seventies.

We remember the recession in the nineties. We’ve been there, done that. And of course this past year with the pandemic. In the midst of all that, we’ve seen fads come and go. A lot of us remember portfolio insurance of the eighties. We remember all the promises of hedge funds and many of them not having delivered on those promises. We’ve seen annuity products come and go. We’ve seen non-traded REITs. We’ve seen it all. And through it all, if you just focused on a diversified portfolio of stocks and bonds and held it for the long-term rebalancing it along the way, your clients would have done just fine. It’s a low cost long-term investment strategy. It’ll all work out. Why do the exotic, why do the new thing on the block? Why play a game? All that might do is get you in trouble with either your client or the regulators.

Why take the risk? You’ve got a good practice. You’ve got a lot of happy clients. You’ve got assets that are constantly rising. Life’s good. You’re playing golf a day or two a week. Why mess it up? So what’s the incentive for the advisor to turn to this new fangled thing called Bitcoin, when it is rife with stories like Mt. Gox and Silk Road, where you’ve got four crashes that were very huge in the news where it rises to $20,000 in 2017 and then crashes to about three or four grand within a year of that. Why would you want to subject yourself and your clients to that kind of nonsense? Advisors just dismiss it out of hand and leave it at that. What advisors don’t realize is that this is an emerging new technology that is going through the growth pains that are very similar to every other new technology.

If you look at the history of Apple, of Amazon, of Microsoft, you see that they had very same experiences with their stock prices in their early years, and look where they are today because it’s a fundamental technology that itself is revolutionary. It’s not just a beanie baby, pretty to play with and pretty to look at. And it’s not just tulip bulbs, which was the most unsophisticated thing in the world from the middle of the 1600s. Please, do we have to compare ourselves with something from the middle ages? We need to recognize that advisers have a fiduciary obligation to go beyond the headlines, to go beyond the superficial examination, to examine the question: is there a, there, there? Until you can conclude that there is no, there, there you don’t have the right to say to a client, don’t deal with it. It’s something for your teenagers to play with.

It’ll get you in trouble. That’s ridiculous. You’ve got to do your job even if your conclusion is you don’t want it fine, but give me a better reason than tulip bulbs and beanie babies. And that leads us to the second half of the issue, which Matt will get into, which is once the advisor says, okay, I do want to do this. Now you’ve got challenges in how, because at the end of the day, Bitcoin is not a security. You can’t buy it like in shares of IBM or your favorite ETF. It becomes cumbersome and difficult and complicated to deal with. How do you overcome it? And many advisers would say the heck with it. It’s not worth the trouble because I’m not going to put all that much money into it in the first place. You know, I’m not going to do 25% of my client’s assets.

I’m not even going to do 10%. Many aren’t even going to do 3%. So why bother, if it’s such a small allocation, to go through the hassle of figuring out how to do it, manage it within my practice, explain all this to clients… why bother? I’m just going to buy an ETF and call it a day. And this is why we need simpler, easier solutions to incorporate this into practice management for advisors. If they can’t do it logistically, then their clients are going to be left out in the cold. And that’s why solutions that Matt is familiar with and has developed themselves are really answers that advisors are looking for.

Matthew Kolesky:

So a lot of good points there. The solution that we’ve created for other advisors is something that they’re already familiar with, or a lot of them are already familiar with. That’s the SMA or even a TAMP, a turnkey asset management platform. They are for advisors that have outsourced various portions of their asset class management, you know, like large-cap or bonds. This fits right in with that. So it’s something that advisors are used to experiencing. And so for those folks, it’s been a really good conversation that we’ve had in saying, hey, this is just another SMA or TAMP that you can access to provide an allocation to digital assets for your clients. There’s a lot that we can discuss around compliance because that is, as Ric talked a lot about, you know, what the reputational risks, the compliance risks around it, and those are real.

And that was something where we felt, hey, let’s, let’s step out into the space and really do the homework on the compliance side. And, as advisors, we have to custody our client assets with qualified custodians. There’s a lot of work that had to get done, and is still getting done, on what that means for a company like Coinbase or for Gemini. The SEC has not necessarily weighed in on that. What they have said is that advisors, it’s up to you to do your due diligence and your homework and do deep dives into these companies, if they are going to be custodying your client assets. And so that’s ongoing. We are currently working with Gemini as a custodial solution right now.

Ric Edelman:

And it is getting easier and easier as these products and services are coming online. You’ve got GBTC and ETHE and BITW. You’ve got these trusts that exist in the marketplace, that trade as securities in the open market, like an ETF trades — with daily liquidity. There are premiums or discounts or fees. You’ve got to understand how these products work like any other product, but they are available for anyone to buy. You can also now access ETFs that have been launched in Canada. They’re available to U.S. investors. Fidelity makes them available. Other custodians will as well on, on-demand. We have JP Morgan and Goldman both saying they’re going to offer products available to their clients because of demand. So they’re getting better and better. And we’ve got continuing applications at the SEC for more ETFs in the U.S., and we’re waiting for the SEC to finally say okay, because this is what advisors are clamoring for.

This is what ultimately everybody wants because everybody’s familiar with ETFs. We can incorporate it into the portfolio seamlessly. Clients are familiar with our structure. It’s simple, clean, easy, cheap, and liquid. And, in the meantime, high net worth advisors have a lot of products available through private placements, limited partnerships, hedge funds, venture capital, and private equity. So that’s great if you’re a high net worth accredited investor, but it doesn’t really serve the masses, which is really what we need to include because the whole point of investing these days is democratization. That’s what’s making Robinhood famous and Acorns. We need to make this available to everybody everywhere. PayPal is doing it already, but is that what the SEC wants? People buying Bitcoin in a PayPal account? Do they really think the consumers are better served by doing it there instead of Merrill Lynch. So we need to figure out how to get us to the next level. In the meantime, advisors need to know there are solutions available today. You don’t need to dismiss this waiting for an ETF because by the time the ETF comes about…what will the price of Bitcoin be? It’s already north of $40k, it may be north of $50k. By the time the ETF comes to market, will Bitcoin be worth a hundred thousand? To what degree is your inconvenience factor going to prevent you from doing what you need to do to serve your client?

Laura Shin:

That’s actually what I wanted to ask about. I know you guys were talking about the fact that there are these solutions available, but I was wondering what percentage of RIAs do you estimate are actually investing in crypto for their clients? I imagine that’s quite a small percentage. My CFP is younger than me. He’s a millennial, and he kind of just very sternly gave me this little talk, like we don’t do the risky thing. I don’t remember what the wording was, but I was like, I don’t think you have been paying attention to the space. That was my take on his response. And he’s like half the age of the average RIA. So what percentage do you think are actually investing? And then what percentage do you think are at least interested or attempting to understand it?

Matthew Kolesky:

I’d say it’s very limited right now. I think there are people that are starting to pay attention and starting to wake up. They’re getting asked about it, for sure. I’ve seen several studies on this and Fidelity Digital Assets does a good one. They looked at European as well as U.S. advisors and family offices and hedge funds. And I want to say it was, it seemed high. It was like 40%. And in my experience with dealing with other advisors, it’s nowhere near that. We’re trying to like get up off zero, right? Like, let’s do something here. Ric talked about this, you know, PayPal, right? You’ve got hedge funds that can do this. Individuals are doing it.

Advisors are getting asked by their own clients. I, even a couple of years ago, told one of my clients to go open an account somewhere and do this yourself. I feel that strongly about it, but that’s not a good solution because they may just open it, kind of move on, and forget about it. Even those that are doing it to Ric’s point, it was like, you know, 1%, 2%, 3%%, 4% tops. The calls that I’ve had — there’s almost zero exposure from what I can tell.

Ric Edelman:

And according to the Bitwise survey that was just done recently, Laura, about 9% of financial advisors say that they are currently allocating digital assets to their client portfolios today. Another 20% say that they’re planning to do so in 2021. So it is increasing in its adoption. I agree with Matt completely that it’s largely because advisors are finding that their clients are asking for this. And if I don’t say yes, then they run the risk of losing assets as clients shift assets to Gemini and Coinbase and Kraken and other platforms where they’re going to buy it on their own. And, even worse, clients that might end up in an environment where they are doing something dangerous that they shouldn’t do. You know, not that there’s a Mt. Gox there anymore.

Who knows, maybe there is, it is still to some degree, a wild west because there is a not as stringent level of regulation. The fact that you can be an exchange, not regulated is itself a little scary. That there are foreign companies that are engaging in the space. So at least if the financial advisor is involved, we can help ensure that our client is dealing with a qualified custodian — that we’re dealing with grownups in the room and help our clients avoid getting scammed or ripped off in the course of their activity, to help them implement and manage their enthusiasm. We can also help the client avoid investing too much more than it is prudent for their own sake. So the advisors need to be involved. There has to be a platform that allows the advisor to be involved, and that way everybody can win.

Laura Shin:

And Ric, you briefly mentioned earlier, RIADAC, the Registered Investment Advisor Digital Assets Aouncil, can you give us an overview of what it is that RIADAC does and how it attempts to address these issues?

Ric Edelman:

RIADAC is strictly an educational forum. That’s what’s really lacking. The only place where advisors learn about this is the same place everybody else learns about this, which is going onto the internet, surfing the web, word of mouth, and hearing from the companies themselves that are manufacturing these products and services. That means you’re listening to a salesman because they’re trying to sell you whatever it is, the widget. So there’s no unbiased, purely educational resource designed by financial advisors for financial advisors. And that’s what RIADAC does. So we, with the knowledge that I’ve got, and my colleagues in the organization and the extensive contacts we have in the crypto community, were able to put together the very best minds in the digital asset and blockchain space and bring them to financial advisors. And so we do a lot of webinars. We have a lot of content on the RIADAC website: riadac.com.

And we have semi-annual, day-long events. We just completed one in March where Hester Peirce, commissioner of the SEC, was our keynote headliner and a lot of top experts. And we’ve created the certificate program with some of the top faculty from MIT and from the Fed and from leading universities and major attorneys and accountants in the space to give financial advisors the knowledge and education they need. And advisors know that can come to the space at RIADAC. They’re not getting sold anything. They know that it’s coming from me and I have a pretty strong reputation in the advisory community. Advisors can feel comfortable that the information and content we’re giving is legitimate —that it’s unbiased, that it’s objective, and  that we’re not trying to get them to buy anything. The support is coming from the digital assets community. They’re paying for all this, so that the content we’re providing is for free. The certification program advisors enroll for it’s $549 for the 10 module course, it’s online self study at your own pace.

It’s a very deep dive into this area and allows advisors to say, I’m setting myself apart. I’ve taken the time to get this knowledge, this education, I’ve got the certificate to demonstrate that. So when I talk to you about digital assets and blockchain, I know what I’m talking about. I kind of have like the good housekeeping seal of approval on that. And we’re providing the certificate holders with a wealth of information and access that’s not available elsewhere, such as the yellow pages directory that we’re creating of all of the vendors in the digital asset and blockchain space. The companies that are building exchanges, custodians, and software companies being able to serve you in building client portfolios, tracking those portfolios, tax reporting, and record keeping. Everything that you need as a financial advisor to integrate this into your practice management so that it’s easy and seamless. What advisors want is easy, so they can spend their time with their clients and not spend their time fussing with all this back-office stuff. So RIADAC is really fundamentally focused on all that. We’ve got hundreds of advisors already enrolled in the certification program, and it’s brand new, and it’s proving to be really, really popular.

Laura Shin:

And earlier you mentioned how difficult it was to explain digital assets to this community. We were talking about the tulip bulbs and the beanie babies. I just wondered, in your attempt to explain the potential and the opportunity in crypto to RIAs, are there any particular explanations that you’ve found speak to them or tend to give them a light bulb moment? Like, what are your favorite ways of describing this to that community?

Ric Edelman:

Matt alluded to one, and I’ll steal his thunder a little bit. The internet was originally designed to connect people. Think of Facebook. The second layer of the internet was the internet of things. That connected things to each other, think of bluetooth — your phone connected to your car or your coffee pot connected to your email. So the first level of the internet connected people together so they could communicate. The second level of connected things so they can communicate together. The third level of the internet is the blockchain, and that is allowing the connection of money so that we can move money as easily as we are moving emails, as easily as we are moving with bluetooth, we can do that with money. Until the blockchain came along, until Bitcoin came along, for you to transfer money from one country to another, say, you have family in the old country, as my grandmother used to call it, she would send money back. She would go to Western Union. It takes five days and costs 8% to send money from one country to another. With Bitcoin, you can do it in 10 minutes, virtually free. This is the instantaneous movement of money. The potential for improvements in global commerce, the amount of money we save, the increased efficiency, the improved security, the greater transparency… this is the greatest invention in commerce since the internet itself.

Laura Shin: (26:52)

And Matt, what about you? Are there any favorite explanations you have?

Matthew Kolesky:

I agree with everything that Ric said. But with advisors, one of the things that I bring up, and this is a word that’s come up already, is fiduciary. We have a fiduciary obligation to talk to our clients and put their interests above our own. That’s what it means. And when I think about the technology and how it hasn’t infiltrated the current financial infrastructure… there’s so much potential there for all the reasons we’ve already talked about to make it more efficient, to make it more accessible. Another reason I think advisors are struggling is they’ve spent their entire careers thinking about the current financial infrastructure in one way and here comes this thing out of nowhere, that is literally at the intersection of technology and money and finance.

And it’s like, oh my gosh, what do I do with that? It’s such a powerful thing. But as a fiduciary, I have been saying to folks, other advisors, like, look, there’s another thing that’s coming, right. It’s going to be very disruptive to the businesses that you may have built, to the infrastructure that currently exists. What we’re managing is our client’s money, right? It’s their labor, their life savings. We take that to heart. It’s like, well, maybe we should put something outside of this traditional infrastructure that I think we’d all agree is starting to show major cracks as technology starts to bump up against this infrastructure that’s 40, 50, 60 years old. And so that’s resonated with folks. And then just saying, look, let’s have an allocation here. Let’s get some small footprint outside of this traditional world. I’m not here to make the past wrong. Right? The traditional financial system has done an amazing job of creating wealth and distributing things. But there’s something that looks like it could do it even better. So let’s have some exposure there. And as a fiduciary, those are things that we’re starting to talk with with our clients and with other advisors.

Ric Edelman:

Let me build on that fiduciary theme because that’s really important, what Matt is saying. Advisors have traditionally taken the attitude that because I’m a fiduciary, I’m not going to recommend Bitcoin… even though they don’t know anything about it. I’m pretty well known in the advisory community for the fact that I don’t like annuities. I’m pretty well-known for a bunch of other things too, but that’s a big one. I talked on my radio show about why I’m not a fan of annuity products, et cetera. But guess what? I’m an expert in annuities. I can go into great detail for you as to why I don’t think it’s in your best interest to buy an annuity. And that’s my challenge to financial advisors. If you’re telling me that you’re not recommending Bitcoin to your clients, you need to tell me how you reached that conclusion using your fiduciary obligation: what is the basis for saying no, don’t invest? Most advisors can’t offer that because they haven’t studied it. And so that’s my challenge to advisors. Learn about this space, become knowledgeable about it, just like you are about other investments that you don’t like, to explain why you don’t like them. And I’m convinced that once you go through that process, you’ll change your mind because you’ll discover that this isn’t what you thought it was. Use your fiduciary obligation to challenge yourself, to do the job that your clients are expecting you to do.

Laura Shin:

Yeah, I agree. I saw Dave Portnoy of Barstool Sports was on Twitter with a little video saying that because he’d sold the coin at a lower price, he realized he was wrong now than it was at this higher price. And I tweeted basically saying, hey, if you think that you were wrong, simply because other people bought Bitcoin, then that means you still don’t get it. It has to be that you understand the value, and no matter how many other people sell or buy or whatever, you still have that conviction in it. I don’t have anything against him, but I just thought, okay, like now you think that you were wrong in the past…  like, no, you still you’re still understanding. In a moment, we’re going to talk a little bit more about explanations but also move into some of the different types of investment vehicles that are available. But first, a quick word from the sponsors who make this show possible.

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Laura Shin:

Back to my conversation with Ric and Matt. So one last thing I wanted to ask about the explanations was: are you able to go beyond Bitcoin to explain things like Ethereum or DeFi? And if so, what explanations have you found that are effective for these kinds of more exotic crypto assets than just Bitcoin?

Matthew Kolesky:

Yeah, we’ve had a fair amount of success talking to other advisors about that. We start with Bitcoin. That’s the first place for advisors to start, or even for anybody to start, when they’re kind of beginning their digital asset journey. Although I think a lot of people are getting exposure through NFTs now, but that’s a different discussion. DeFi, decentralized finance, I think is another way, if people can wrap their head around Bitcoin, they can see the benefits of DeFi. With real-time settlement, real-time access to things ,decentralization, and accessibility for folks. They can start to see the value that the DeFi ecosystem can bring, not just as an investment, but also just being, like I mentioned, being accessible for other people. So that’s a really good one.

The other one, is the use cases around utility tokens. There are browsers, there are virtual private networks that people can use and participate with. They all have a token mechanism in there. They’re already using these services anyway. And so if you can introduce it to them and it happens to exist on a blockchain and has a token feature with it, I think that’s something that people can get on board with. I host an investment club for some college kids and I’m like use, you know, use Lolli, use Brave, just to experiment with and see what it’s like to feel, hey, I’m earning Bitcoin by buying things or I’m earning tokens just by surfing the web — things you’re doing already. And it gives them just another way to interact with digital assets.

Laura Shin:

Yeah. That’s a great suggestion. So now let’s talk about investment vehicles because I think that this is a landscape that is literally changing as we speak, in the last few weeks. So, you know, up until recently, I would say, it probably was that most RIAs were giving their clients exposure to Bitcoin in particular through a traditional investment vehicle such as GBTC. But I did wonder also, were they just buying spot Bitcoin or crypto? How were you seeing most RIAs choosing to give their clients exposure?

Ric Edelman:

But in our experience at RIADAC, when we talk to advisors about how they’re engaging, we get three answers, and they’re all birds of a feather. The first is, even though there were 5,000 coins out there, how do you sort through them? How do you pick among them? We have to remember that Bitcoin is what, 80%, 90% of the total market cap of the entire space. Many are simply buying Bitcoin. And the most convenient, easiest, painless way is GBTC. And I didn’t say cheapest, but it’s easiest and most painless. Many are simply doing that as a way to give their client’s exposure. Bitcoin is the best known, clients have certainly heard of that more than anything else. The second is to recognize that this space is more than just about Bitcoin, and Bitcoin has its limitations, which is why Ethreum is popular.

If you understand smart contracts, Ethereum as the next protocol in the evolution of this space makes a lot of sense. And Ethereum today is 5% or 10% of the marketplace. So between those two coins, you’ve got like 95% of the entire digital asset space. Some advisors are buying GBTC for Bitcoin, ETHE for Ethereum, both of them offered by Grayscale, and calling it a day. Others are however saying, wait a minute, I’m a fan of diversification. That’s what I tell my clients to do all the time. You know, we own thousands of stocks and thousands of bonds, and we have lots of asset classes. Why are we buying only Bitcoin and Ethereum, even though those two are the biggest and the oldest, that doesn’t mean that they’re going to be the fastest-growing. So maybe we should go beyond the top two. And that’s where BITW comes in. The Bitwise 10 Crypto Index Fund, which is a cap-weighted fund, rebalanced monthly of the top 10 digital assets by market size.

And as you would expect between bitcoin and ether are about 70% of that fund. The other eight coins represent the other 30% or so. So you get more diversification. It’s professionally managed, just like any mutual fund or ETF is, where they buy the securities and the coins for you. They do the rebalancing, they do the reporting. It’s no muss, no fuss. So you have those three choices. Bitcoin alone, bitcoin plus ether, or the top 10 crypto fund from Bitwise. Most advisors are doing some combination of those three, in our experience. When you’re dealing with higher net worth clients, you have a much broader array of investment opportunities because most of these products are available for accredited investors only. There is a huge array of really nifty products from SkyBridge Capital and Galaxy and Pantera and 10T and a wide variety of other vendors as well that are worthy of advisors to look at. But most advisors are dealing with small allocations, small amounts of investments. And GBTC, ETHE, and BITW are very, very popular. Though as a disclosure, I’m an investor in Bitwise. I’m a big fan of what Hunter and Matt are both doing there. And so those three are very popular.

Laura Shin:

Yeah, that’s Hunter Horsley, the CEO, and Matt Hougan, who I think is the chief investment officer. And also disclosure, Bitwise has invested in my shows in the past. And just out of curiosity, so why are RIAs investing in these particular investment vehicles rather than buying spot crypto? Because as we know the price of GBTC and ETHE can vary from the price of the underlying. So why are they…?

Ric Edelman:

There’s no question that the premium discounts scenario is an issue with these products. No doubt about it. There’s a trade-off, they’re convenient, they’re simple, they’re easy. They’re familiar to investors because they can buy them in the same brokerage account they’re buying all their other mutual funds and ETFs. It allows them to rebalance along with the other securities. It allows them to debit their fee on a quarterly basis, along with the rest of the assets. From a practice management perspective, it’s very simple, very easy — it is seamless. From a client perspective, it’s equally easy and innocuous. So the issue of a discount or premium is a thing, no question about it, and advisors need to understand this — they need to consider it in their evaluation. And that’s why to Matt’s point, an SMA or a TAMP product may be a superior move. And smarter investors, as they gain more experience, they’re beginning to realize, Oh, I can do that as an alternative. And that’s why the SMA and TAMPs are increasing their popularity at a rapid pace, thanks to companies like Blockchange, which provides that foundation. They’re doing a really great job and making this more accessible to advisors on a more broad scale.

Laura Shin:

And before we get into the SMAs and TAMPs, I also wanted to ask about this trend where public companies, and also private companies, are allocating to Bitcoin in their corporate treasuries. Have you seen that RIAs now are turning to investing in those public companies’ stocks with exposure to Bitcoin as another way of giving their clients exposure to Bitcoin?

Ric Edelman:

I have not seen it. Have you Matt?

Matthew Kolesky:

I can answer that. I should probably explain, Arbor Capital manages traditional assets for investors. And then we launched Arbor Digital. In Arbor Capital, we have an investment committee and we actually own individual securities for our clients. And we have been actively looking and investing in companies. A disclaimer here, these are things that we’re long on, including Bitcoin and Ethereum and everything else we’re talking about — with things like PayPal, things like the CME group that are trading Bitcoin and Ethereum futures. So our whole thesis is as these walls come down, it’s going to come down from both sides, right? The bridges are getting built from the traditional world, and they’re getting built from the digital world. And so we want to kind of position folks at that intersection. We think there’s a lot of potential value to be captured there.

Ric Edelman:

I would argue that that’s a broader investment play. In other words, if you’re going to invest in companies that are buying Bitcoin or making Bitcoin available to their own customers, which is essentially PayPal’s play, that is really the DeFi space. I think that’s really the broader echo space of how mainstream publicly traded companies are engaging in this. That’s not the same as saying, I want to own Bitcoin. Buying Microstrategy or Tesla because you want to buy Bitcoin… you might as well just buy Bitcoin.

Matthew Kolesky:

I know Michael Saylor has been a guest on your show, and it’s been a very interesting journey watching his approach to digital assets, specifically with Bitcoin as a treasury asset. And one of the things that I thought was really powerful that he said was if I have cash sitting on a balance sheet, and I need to be using that cash in a year or two or three for projects to hire developers, you know, what’s the inflation rate of their wages for these projects. It’s not 1% or 2%. Now what he’s done is taken a pretty substantial position and issued debt to do that. Tesla’s a little bit different. So there’s been varying reactions from different corporations. And of course, Square, I think, was interesting because they published the paper and kind of open-sourced their thinking on how do it for other corporations, which I thought was a really interesting way to approach it.

And again, to the culture of what blockchain is, and the accessibility, not centralized permission blockchains, but open source and permissionless blockchain, that’s at the heart of what this is about. And so I did want to say that since you’re talking about the investment side. I did want to say this, and I feel really, really passionate about it: this is not a zero-sum game. The old Wall Street/traditional firms, “I win you lose,” and we need to go talk about a hedge fund that’s going to be long something, something else is going to be short. The culture of this asset class just feels and looks so much different. There are hedge funds that have open-sourced their investment committee meetings and we get to participate with them. And they’re literally saying: we’re not experts here and nobody is because this is evolving so quickly. Advisors should just be paying attention and learning as much as they can about this very, very quickly evolving asset class. They should have an opinion about it for sure.

Laura Shin:

Yeah. Speaking of quickly evolving, I wanted to ask about how GBTC and in recent weeks has actually begun to underperform the underlying. And I wondered how that affected RIA interest in investing in GBTC.

Ric Edelman:

Well, investment advisors hate premiums. So if it’s trading at a discount, hey, what a buying opportunity, I can buy a dollar for only 85 cents. Let’s do it. So it’s an opportunistic play and advisers who are able to be that agile on behalf of their clients are probably excited about it.

Matthew Kolesky:

I think the premium discount, especially with GBTC, has been quite compelling over the last few weeks. It’s gone from traditionally a premium to now a discount. Whether that was a case because, as Ric mentioned, the Canadian ETF getting launched with lower fees, maybe that has something to do with it. That’s, I think, maybe in anticipation of the ever coming bitcoin ETF in the United States. I don’t know. It just seems that as more on-ramps get built… it was expected to see some premium compression to go to discount. I think it is interesting.

Laura Shin:

And have you seen uptake of the Canadian bitcoin ETF?

Matthew Kolesky:

I personally have not.

Ric Edelman:

We’re hearing, anecdotally, of advisors expressing interest in it because it is available from some U.S. custodians. I think it’s all a prelude to ultimately the SEC saying, okay, everyone’s kind of hopeful that the SEC will overcome its concerns and say yes. In the coming months who knows when, who knows if, but, when, I’ll use that word, when that happens, these other products are probably going to become obsolete because the ETF will be so much cheaper and always trading evenly— no premiums and discounts. So I think everybody realizes that. I think that’s why Grayscale is planning to get into the ETF game as well because that is the future long-term. Just think what happened when there was the first gold ETF: GLD raised $2 billion within a couple of weeks. Imagine what’s going to happen when an American ETF comes onto the marketplace.

Laura Shin:

Yeah. Just to go back to GBTC, I do wonder about people who bought it when it was at a premium and then now see it go below. I do think that once an ETF comes, I’m not sure how much interest there will be. So when the SEC does finally approve a bitcoin ETF, which I think we all know probably will happen, especially with Gary Gensler likely to become the SEC head, what would you expect to happen at that point? And how would you believe that would affect RIAs perceptions about Bitcoin?

Ric Edelman:

I think that’ll take away the last level of excuses. And I think the conversation will shift from why did you buy Bitcoin for your client to why didn’t you? If it is available so easily and innocuously as an ETF, why don’t you have it in the portfolio? If you truly believe in diversification, that doesn’t mean you only buy asset classes you like… you buy every asset class. I’m sure if you are a true believer of diversification, you have small-cap, mid-cap, and large-cap in your portfolio. You have growth in value. You have U.S. and foreign. You have emerging markets. I’ll bet you don’t like all of them, but you’ve got them. I’ll bet you’ve got short-term and long-term and intermediate-term bonds, U.S. and corporate, foreign and domestic. I bet you’ve got high yield and high quality. I bet you don’t like all of them, but you believe in diversification. So what’s your excuse for not adding 1% or 2% into the portfolio of digital assets. I’m not saying you got to like it. Just acknowledge it’s aiding the diversification. So the fact that it’s hard and cumbersome and awkward and unfamiliar is a good excuse why I’m not going to do it today, but when the ETF is available, what excuse do you have left?

Laura Shin:

So speaking of the hard and cumbersome, we’ve touched on some of these issues before, but I just wanted to ask more specific questions. Earlier, when we talked about separately managed accounts, can you just kind of break down what it is that those enable advisors to do that they can’t do with traditional investment accounts. Also, maybe fill out a little bit more about these TAMPs, the turnkey asset management programs, and what problems those solve for advisors…

Matthew Kolesky:

The first problem that it solves in terms of the first question is that we couldn’t buy Bitcoin at a Charles Schwab or Fidelity, even today for RIAs. Fidelity does have a digital assets group, but that’s more for institutions right now. Maybe it’s going to be coming to their retail side. So we wanted to own not just Bitcoin, but Ethereum and have access to other assets. And what’s important is it needs to be titled in the client’s name. It needs to be in their own segregated sub-account. We can’t pool assets together, well we can, but you can get in trouble. You have to make sure your regulatory filings are correct.

Laura Shin:

And why is it that you can’t just have a Coinbase account for them that you manage for that client? Or something similar?

Matthew Kolesky:

Coinbase won’t allow us to come on there and advise and manage it for them. I literally had that conversation with them last May or June. I was saying: this is what advisors need. And they said: not yet. And it was later a couple months later when I ran across, I think Ric had mentioned, Blockchange as this technology partner that is building this. They are custodial agnostic, but they are building it right now with Gemini. And eventually when the API is live, they’ll be able to intersect with them with other custodians. And so that, to me, is really important. We want to be able to have you know, individual client accounts. Then they can own the Bitcoin. It’s on an exchange or custodian, we don’t need to get in the hole, not your keys, not your crypto, but it is titled in their name. So they’re literally opening an account at Gemini, and Gemini is allowing us to come on and manage assets, just like Schwab does, just like Fidelity does, only the Schwab and Fidelity do that for traditional assets. Stocks and bonds. In terms of the TAMP, your question was, could you repeat the second question there?

Laura Shin:

Oh, just what problems do those solve for RIAs?

Matthew Kolesky:

Well, it solves the problem of accessibility. I’ll be honest, if you just want Bitcoin for your client, just Bitcoin, we’re probably not the solution. We’re looking to add other assets to the portfolio. We want to be diversified, not just by having Bitcoin, but looking at all of the digital assets that are available for folks. The other problem it solves, as I think I may have touched on before, it’s a solution that advisors are comfortable with and familiar — this TAMP idea or an SMA. Other firms can hire another firm to manage the large-cap stocks or low duration bonds or whatever it is. And that’s traditionally been outsourced by a lot of folks, and this is just the same thing. So we’re taking a product that that advisors are used to and now just applying it to the digital asset class.

Laura Shin:

So another thing I wanted to ask about was a few years ago I came upon this Bitcoin IRA. It enables you to hold actual Bitcoin in an IRA. However, I remembered the fee, and this was three years ago and I haven’t looked into what Bitcoin IRAs look like right now, but the fee for being able to put actual Bitcoin your IRA, was 15% of all the Bitcoin you were moving into the account, which, to me, was like highway robbery, basically. So I just wondered, is that still the kind of fee that we’re seeing or is that changing?

Matthew Kolesky:

That definitely changed. Wow. That’s really high. That hearkens back to the days of upfront load funds type of a thing. They’re still around, but they’re going away. The fees have come down dramatically. Just to be frank, Arbor’s fee to manage is 1%. There is an additional Blockchange charge. And then Gemini has a transaction fee. Those are not zero, like the traditional world where all the commissions have gone to zero. But to your point with IRAs, we actually do have an IRA custodial solution, and their fee is $300 per year — just to do the paperwork and file all the necessary IRA disclosures to the IRS and to the different agencies.

Ric Edelman:

And I’ll mention Kingdom Trust, another company I’m invested in. They’re $20 billion in size and they clear everything through Fidelity Institutional Digital. They allow you to open accounts and manage them as IRAs and the fees are radically less than what you described. The fees are higher than what you’re going to find at Vanguard or Fidelity, in the ETF world, because it is still relatively new. There isn’t yet all that much competition. The fact is that fees are coming down — we’re starting to see a price war in this space — that will continue as more and more competition and more and more products come online. It’ll eventually get as low as it is in the ETF world. And let’s keep in mind, paying a 1% or 2% or 3% fee… if you’re expecting a 3x or 4x or 5x return, who cares.

Laura Shin:

So I also now want to talk about something that’s again, come up a little bit here and there throughout the show, with the caveat that nothing said on any of my podcasts or videos is investment advice of any sort and with the understanding that everybody’s individual financial situation is different. I did want to ask: what do you generally recommend in terms of portfolio allocations for people of different risk tolerances, or time horizons? What are you seeing that a lot of investment advisors are recommending?

Matthew Kolesky:

Yeah. Disclaimer as well. Yes. I’m a financial advisor, but nothing here is financial advice. It’s very individualized. We sit down with each client and have a conversation about what this is and what this asset class is. And even in our disclosures, this is speculative, right? That the approach we want to have with folks in the conversations we’re having. And so from there, we explain the risks, we explain how to access it, and what’s appropriate. And, you know, 1% to 3% is about where we’re comfortable in talking to folks about it. I’ve been on calls where people like, well, can we get access to the ICO as well? I’m like, no, this is not what we’re doing. This is an asset class that we want to have exposure to that as fiduciaries, we feel strongly it should be a part of your portfolio. But let’s be prudent with how we allocate it.

Ric Edelman:

Yeah. There are two kinds of people who are interested in this space: the get rich quickers and those who are asset allocators. The get rich quick, you know, it’s like gold people. We get a lot of phone calls in our office when gold is rising. That’s when people want to buy. Whenever anything is going up, that’s what they want to buy. And because they just want to get rich quick. GameStop, what a wonderful example. And so these people have no idea what they’re doing, and it’s always going to end badly. So we just dismiss them out of hand by saying, you really shouldn’t do this until you learn a lot more of what you’re talking about, because you’re setting yourself up for failure. But those who are recognizing that this is a new asset class, it’s a new opportunity for diversification.

There’s a potential for reducing the risk of the overall portfolio and improving its returns. Maybe it makes sense for a small sleeve. And I’m the guy who created the 1% allocation strategy several years ago. And I’ve got the data, go to riadac.com, and you’ll see the one page chart I’ve got on it that shows a 1% allocation has the potential for materially improving the return of the portfolio. But if it goes bad, as Matt said, it’s speculative. We don’t know what’s going to happen tomorrow. If it goes bad, a 1% loss, if it’s totally worthless, isn’t gonna interfere with your future financial security. So the good news is it could help. The bad news is it isn’t going to hurt. And a 1% allocation for most folks is plenty. If you want, and you really are into the space, you really understand it greatly, and you know, the ins and outs, yeah, knock yourself out, go 2%. Or as Matt says, 3%. Most folks aren’t going to bother, and it’s not necessary for most folks to do this. Get off zero.

Laura Shin:

And then how often would you recommend rebalancing given that in not too long of a time period, somebody’s 1% allocation….this would be across probably a few years… but it could go to, you know, like 50% or something of their portfolio. Along the way, would you rebalance like what every three months, six months, a year? Or are you gonna hit keep it at the 1% consistently throughout?

Ric Edelman:

What we do is rebalance, my preference is that you rebalance frequently, meaning you look at it on a regular basis to protect yourself from having an over-weighted portfolio. If you wanted a 1% allocation and it doubles, you should probably rebalance back to the 1%. I wouldn’t let it go to 10% or 20% or 30%, as much fun as that would be because bad things can happen.

Matthew Kolesky:

We did just that when we added GBTC into our alternative asset class two years ago. It was significantly lower than where it is now and as it continued to rise, we wanted to maintain that 15% weighting in alternatives. And so our average client had between 10% to 15% in alternatives. And so as GBTC and Bitcoin would just rise, we would keep selling it back. And then last year, when it fell in March, when it collapsed, that gave us an opportunity to go in and buy it back. So our idea is to rebalance periodically — at least quarterly. This is such a volatile asset. It requires constant monitoring and, well, not constant rebalancing, but you need to really be paying attention. And it trades 24/7, obviously. So it provides more opportunity for management.

Ric Edelman:

Kind of the fun part of it is that, whereas a typical advisor would off the cuff say, oh, it’s too volatile, I’m afraid of it. They forget that someone who engages in rebalancing — that volatility works to your advantage. And so for someone to say, I don’t want to buy it because it’s volatile — they really don’t understand what they’re saying,

Laura Shin:

But what about taxes? Because I would imagine if you’re rebalancing, something that’s fairly volatile — doesn’t that complicate the tax situation? So how do you try to minimize the tax impact?

Matthew Kolesky:

Yeah, that’s a good question. And it has to do with just, honestly, knowing the client’s individual circumstances. It comes down to being a financial planner and as a financial advisor, knowing if they’ve got other things that they can use to offset gains. We’re not just managing Bitcoin, we’re managing other equities and other things that can create capital losses or capital gains. And so when we’re managing the whole relationship, it makes it a little easier to have that conversation. And, of course, at the end of the day, if you’re saying, yeah, well, you made money on this… it’s sometimes okay to pay taxes. If you’ve done really well, like Ric was saying, if it goes up 5x or 10x, which we’ve had that experience, it’s not always a bad thing.

Laura Shin:

And one of the newest trends in crypto has been earning yield on these assets. Are RIAs in a position to take advantage of those products?

Matthew Kolesky:

Not yet. That’s where there’s not a lot of regulatory clarity. We are actively working in that space right now. Coinbase and Gemini have, Earn and Yearn, different products around that. But it creates a very different structure. What I was saying before about having an account in somebody’s name with Bitcoin and Ethereum in it. A lot of those products, those earning products, you’re taking those out and lending them outside — not necessarily locking them into a DeFi protocol, but lending it out to other things. It’s similar to margin. We’re still exploring and working on it. But the answer right now is no. This gets to the broader point: it’s coming. And we want to be at the front of this and learning and working with regulators and working with the custodians to build and make sure we’re doing things in the proper way.

Ric Edelman:

Well said. There are some pretty terrific companies like Celsius, which does this. You can earn 5%, 6%, 7%, 10% in yield, but it is risky because you’ve got counterparty risk involved. It is a largely unregulated space. Imagine engaging in this with your baseball cards or comic books. It’s largely unregulated. It’s not like margining your stock account at Goldman Sachs. You have to ask yourself, why is it I’m buying Bitcoin in the first place? I’m trying to earn a 5% yield? Most folks are gonna say, I’m trying to get a 5x return on this. Does the 5% yield really matter all that much in the scheme of things. So you’ve got to ask yourself, why are you doing this? What’s the strategy you’re trying to engage in? Then do due diligence, very, very carefully on the companies you’re going to engage with.

Laura Shin:

Okay. So if you were to take out your crystal ball, how would you project the personal finance industry’s attitude toward crypto or adoption of crypto will have changed by year’s end?

Ric Edelman:

I don’t know about the year’s end. I think the real key is going to be the launch and availability of an ETF. I do think it is going to be coming within the next couple of years. And I’ll tell you what I’ve been saying for the last five years: which is that we’ll have an ETF within 18 months. I’ve been saying that for five years. I do believe that once we have that available I think that virtually every financial advisor will be using this in client portfolios. It’ll be as routine as a large-cap growth stock.

Matthew Kolesky:

I agree. If there’s an ETF that’s launched, if there’s more regulatory clarity around the custody issue, around the trading, best bid, best execution, and all that stuff. If we can get some more regulatory clarity around that, I don’t see why it wouldn’t be more almost a hundred percent adoption. The ETF is definitely a big one because, as Ric said earlier, that’s easy. Our advisors already manage client accounts and they can just go buy an ETF just like they would go buy a stock.

Laura Shin:

Yes. Yes. I agree. I guess the big question is just when will this happen? All right. Well, it has been so fun talking with both of you. Thank you both so much for coming on Unchained. Where can people learn more about each of you and your work?

Matthew Kolesky:

I’m on Twitter at @mkolesky. If you want to reach me personally, it’s info@arbor.capital and also digital.arbor.capital, a website where you can learn more about what we’re doing in the digital asset space.

Ric Edelman:

And you can learn about the work we’re doing at RIADAC, including our webinars for our certification program at riadac.com.

Laura Shin:

Perfect. Well, thank you both so much for coming on Unchained.

Laura Shin:

Thanks so much for joining us today. To learn more about Ric, Matt, Edelman Financial Engines, Arbor capital, and the RIA Digital Assets Council, check out the show notes for this episode. Don’t forget: you can now watch video recordings of the shows on the Unchained YouTube channel. Go to youtube.com/c/unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss and Mark Murdock. Thanks for listening.