By James W. Melhuish DipPFS EFA
Director, Pocknells Wealth Management
Crypto is becoming increasingly difficult for financial professionals to ignore.
The FCA’s decision to allow retail access to crypto ETNs has brought the subject further into the mainstream, and it is increasingly likely that accountants, financial advisers and other professional advisers will have clients asking questions about Bitcoin and other digital assets.
What is an ETN?
Cash has a purpose
One of the conversations I regularly have with clients is around the amount of cash they hold.
For business owners in particular, it isn’t unusual to see substantial amounts sitting in company or personal bank accounts.
Sometimes there is a very good reason for that.
Cash provides liquidity, certainty and accessibility. If money is required for tax, a house purchase, business investment or expenditure in the relatively near future, those characteristics can be extremely valuable.
The problem arises when long-term capital remains in cash simply because nobody has stopped to establish what the money is actually for.
Inflation can gradually erode its purchasing power and, over longer periods, the opportunity cost of remaining entirely in cash can become significant.
But recognising that doesn’t mean the answer is to jump immediately to the highest-risk investment available.
There is an entire investment universe in between
Before moving from cash to crypto, investors should understand the other assets available to them.
That might include fixed-interest investments such as government and corporate bonds, diversified multi-asset portfolios, global equities, property-related investments and a range of tax-efficient structures depending on the investor’s circumstances.
Each carries its own risks and potential returns.
More importantly, they can be combined.
That is the part of investing which I think sometimes gets lost when a particular asset class is receiving significant media attention.
Investing doesn’t have to be an all-or-nothing decision.
A client doesn’t necessarily need to choose between £100,000 sitting in cash and £100,000 sitting in Bitcoin.
They might need £20,000 readily accessible, another portion invested relatively cautiously for medium-term objectives and the remainder invested for long-term growth.
And within that long-term portfolio, they may decide that a small allocation to higher-risk or alternative assets is appropriate.
That is a very different proposition.
Start with the portfolio, not the product
One of the biggest mistakes investors can make is constructing their finances around individual products or investments rather than their overall objectives.
Bitcoin is simply another example of this.
If someone has researched Bitcoin, understands the risks, can tolerate significant volatility and wants a modest exposure as part of a much wider portfolio, that is a very different conversation from somebody moving their savings into crypto because they have seen how much it has risen.
The same principle applies to almost any investment.
I would be equally uncomfortable with somebody putting all their money into one technology company, one commercial property or one investment fund.
Concentration creates risk regardless of how exciting the underlying investment might appear.
Diversification may not generate many headlines, but it remains one of the most useful tools investors have.
Accountants are often the first people to spot the issue
This is particularly relevant for accountants because they often have a unique view of a client’s financial position.
You may see a business owner accumulating significant cash within a company. You may know that they have considerable personal deposits. You may also be the first person they speak to when they are considering making a substantial investment.
That creates an opportunity to ask a very simple question:
What is this money actually for?
If the answer is that it isn’t required for ten or fifteen years, leaving everything in cash may not be appropriate.
But equally, discovering that cash isn’t necessarily the right long-term home for the money doesn’t automatically make crypto the answer.
The next step should be to establish the client’s objectives and consider the wider range of investments and tax wrappers available to them.
That may ultimately include Bitcoin or another alternative asset.
It just shouldn’t automatically start there.
Crypto can be part of the conversation
As advisers, I don’t think our role should be to dismiss an asset simply because it is new, volatile or unfamiliar.
The investment landscape evolves.
If clients are interested in Bitcoin, we should be capable of having an informed conversation about it, understanding the risks and considering how it interacts with their wider financial position.
But there is a significant difference between including crypto within a portfolio and building a portfolio around crypto.
For most investors, the foundations remain fairly unexciting, adequate cash reserves, sensible tax planning, diversification, appropriate use of pensions and ISAs, exposure to established asset classes and a long-term investment strategy.
Once those foundations are in place, there may be room around the edges for something different.
And for the right investor, that could include crypto.
The key is not to confuse accessibility with suitability.
Just because an investment has become easier to access doesn’t mean it suddenly deserves a significant proportion of someone’s wealth.
Before jumping from cash to crypto, investors should stop and consider everything in between.
Because in many cases, that is where the real financial planning takes place.
You can book a Planning Points with Pocknells session at a time that suits you here:
The tax landscape will continue to evolve.
Good financial planning should evolve with it.
This article is for general information only and does not constitute personal financial advice. Investments can fall as well as rise in value and investors may get back less than they invest. Cryptoassets are high-risk investments and may not be suitable for all investors.
