Friday, March 1, 2024

Some IBDs Limiting Advisor Use of Bitcoin ETFs -Dlight News

Last week, the Securities and Exchange Commission approved 11 proposals for spot Bitcoin ETFs, in a significant shift for the industry’s relationship to cryptocurrency.

The ETFs may be approved, but some independent broker/dealers have put restrictions in place for their affiliated advisors, in many cases not allowing advisors to recommend them to clients and only taking orders if the client asks first.

“The approvals are not really an indication of the SEC’s feelings about whether or not these fit a portfolio for a client,” said Adam Handler, vice president of product management at Axtella (formerly SPS Family), the parent company of two independent b/ds and one registered investment advisor. “It’s more around following suit with what they’ve done with other securities to make sure there’s surveillance against fraud and other market manipulation capabilities and there’s volume and a tradable market for them.”

Axtella, which has more than 700 advisors, does not currently allow the products on the platform. Handler says the firm will consider in an upcoming product committee meeting whether advisors will be allowed to make unsolicited trades on behalf of clients in the future.

“Best interest” doesn’t apply for broker/dealers when a client makes an unsolicited request for an investment, but even in the case of an unsolicited request, a fiduciary standard may apply on the fee-based side of the platform, he said.  

“When you take on an asset under the advisory side of the business where you’re charging a fee, you have the fiduciary responsibility now to make recommendations on that asset, and holding it in a portfolio—even if it’s a discretionary account where you’re not formally going to a client and communicating with them and saying ‘Hey we need to sell this, or buy this,’ just holding it in a portfolio and charging on ongoing fee is the equivalent of a hold recommendation,” Handler said.

The Grayscale Bitcoin Trust (GBTC), which was converted into an ETF, has been the most requested bitcoin product by Axtella advisors, and it too is not allowed on the platform.

“It’s very difficult to justify from a diligence standpoint to say that, ‘Hey I’ve researched what you’re investing in enough to tell you this is a good investment for you.’ These vehicles as they stand today are purely speculative,” Handler said.

Axtella expects to educate its advisors on the products, so that clients who come to them wanting to invest understand what they’re buying. But the firm does not plan to put a formal training program in place.

“As it stands right now, I’m not sure I understand what I would put into a formal training program around these assets. That’s one of the big problems,” Handler said.

Cambridge Investment Research is restricting its 3,800 advisors from buying the funds, until they go through a training program which the firm is currently creating, said Seth Miller, president of advocacy and administration and general counsel. Once they go through the training, advisors will be able to access the ETFs.

We understand and agree with the regulators that these are complex products, and in order to be able to recommend that complex product, the financial professionals really need to understand how the product works, what the risks and benefits are, so that they can make a best interest recommendation to the client,” Miller said.

Some 250 advisors have requested the training, with 74 of them having completed the training as of Thursday morning. The training consists of 51 slides, with no audio, and includes several “Knowledge Check” questions throughout. The program was developed by RegEd, the firm’s education and training provider for compliance education, product training and annual compliance programs. 

Prior to the SEC approvals, Cambridge was allowing advisors to use other bitcoin products, including those from Grayscale and Bitwise Asset Management. But advisors had to adhere to the b/d’s guidelines limiting the concentration of “complex products” in a client’s portfolio. Advisors who use the ETFs will also be subject to those concentration guidelines and exposure will count toward the aggregate limit across all complex products.

“If they are already hitting our threshold or our ceiling on complex products and they want to buy one of these new ETFs, they wouldn’t be able to,” Miller said.

Cetera Financial is currently developing a policy around advisor use of bitcoin ETFs, and expects “a prudent embrace of these new offerings” by the end of the first quarter, said Matt Fries, head of investment products and partner solutions at Cetera, in an emailed statement.

“With 46 million Americans already owning a share of bitcoin, more investors are exploring incorporating cryptocurrency into their investment portfolios,” Fries said. “We are working to provide our advisors with the education and guidance to help their clients potentially invest in these products. We are thoughtfully adjusting our existing protocols for new products in the market, and our investment products team is developing a comprehensive policy on bitcoin ETFs for our advisors.” 

Commonwealth Financial Network is also not currently allowing its more than 2,100 advisors to recommend the ETFs, nor to discretionarily add them to client portfolios, according to a source close to the IBD, who declined to be named. Advisors are limited to accepting only unsolicited orders for the products.

A spokeswoman for the firm declined to comment.

The source said the ETFs are in a similar situation to the marijuana ETFs that first came to market in 2015. Because a lot of the marijuana-related businesses inside the ETF deal in a product that is still federally illegal, many IBDs only allowed advisors to accept unsolicited orders for them. They weren’t allowed to provide any sort commentary or guidance on investing in them whatsoever, he said.

Handler said his firm had a full prohibition on those ETFs when they first came out, and there are still some restrictions in place because the underlying product is still federally illegal.

LPL Financial said GBTC is currently the only bitcoin ETF approved for use at the nation’s largest independent broker/dealer, with some 22,000 advisors. The firm will not immediately make the new ETFs available, but it is conducting diligence to do so later, with the appropriate controls in place, said Kate Winters, senior vice president of wealth management services.

“The firm will follow its existing diligence process for approving ETFs,” Winters said.  

But the firm’s advisors must complete required training and meet additional account-level requirements to place orders. Once they meet those requirements, advisors are allowed to solicit purchases in both brokerage and advisory accounts, and they are allowed to use discretion with available ETFs in advisory accounts.

LPL will not be limiting trades to only unsolicited orders, as some others have.  

“LPL believes providing advisors with investment product choice is essential for advisors in addressing their client’s needs and wants,” Winters said.

Spokespeople for Osaic, Atria Wealth Solutions, Kestra Financial, Raymond James Financial and Edward Jones declined to comment on the availability of the Bitcoin ETFs on their platforms.

Vanguard made it clear that spot Bitcoin ETFs would not be available on its platform, with a spokesperson saying the firm has “no plans” to offer the ETFs or other crypto-related products, according to Bloomberg.

The ETFs are available to trade on Schwab’s platforms, and UBS said it was offering some of the ETFs to clients with who approached advisors without being advised to invest in them. Merrill Lynch has also said the ETFs will be available to “eligible” clients, referring to ultra-high-net-worth customers with $10 million in assets. 

Wells Fargo is also moving to provide access to the spot Bitcoin ETFs, with a firm spokesperson saying they are “available for unsolicited purchases through an advisor with Wells Fargo Advisors” or via the firm’s online WellsTrade platform.

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