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Come on in, sit back, relax and enjoy episode 124 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, the founder and CEO of Ezra Group Consulting. Over the past 16 years, we’ve worked with hundreds of FinTech vendors and enterprise wealth management firms to guide them towards making better business and technology decisions.
The WealthTech Today podcast features interviews news and analysis on the trends and best practices in technology for wealth management, asset management, and other areas of financial services.
This is our January News Roundup, and we are covering five stories. We are coordinating with our partners at Kitces.com, so please check out The Latest In Financial #AdvisorTech (January 2022) and their Advisor Tech Map, which we work with Michael Kitces to produce.
Click here and schedule a Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.
January News Stories
- BNY Mellon’s Pershing to Acquire Optimal Asset Management
- Wealth Management Platform FNZ Seeks to Raise $1 Billion for Expansion
- Wealthfront Is Exploring a Potential Sale at a Value of $1.5 Billion
- A String of Acquisitions Shakes up RIA Compliance Space
- Crypto: Bitcoin’s 13th Birthday! The SEC Brings the Hammer Down on Bitcoin Spot ETFs
- Acorns [20:21]
- Appian [12:51]
- Appway [11:20]
- Avaloq [14:10]
- Betterment [17:04]
- BitRIA [39:06]
- ComplySci [24:51]
- Docupace [25:04]
- Dynasty Financial [28:38
- Envestnet [15:30]
- FNZ [09:53]
- IFS Automation [12:54]
- InvestCloud [11:56]
- Jaccomo [31:00]
- LPL Financial [08:27]
- M1 Finance [16:48]
- NYDIG [38:33]
- Orion Advisor Technology [24:53]
- Pershing [02:44]
- PreciseFP [31:01]
- Refinitiv [12:04]
- Robinhood [16:52]
- SmartRIA [28:39]
- Temenos [14:10]
- Wealthfront [16:45]
Complete Episode Transcript
Craig: A business trying to compete without software is like a city trying to run without electricity. That’s my paraphrase of a quote from Naval Ravikant, one of the most prolific entrepreneurs and investors of the 21st century. It’s also my way of kicking off this episode of the WealthTech Today podcast. I’m your host, Craig Iskowitz, and this is our first episode of 2022. Thanks for joining me here. This is our January news review, where I dive into a few of the top stories in the wealth and asset management spaces.
I’ll be covering the following stories, Pershing’s X business unit makes its first acquisition. FNZ wealth management platform seeks to raise a billion dollars for expansion. Number three, robo advisor Wealthfront is pursuing a potential sale at a billion and a half dollar valuation. Number four, we’re seeing a surge of compliance tools being acquired in the industry. And number five, as we’ve been doing for a while, we’re gonna wrap up with a bunch of crypto wealth related news for you. So those are our five stories for today.
Before we jump into the first story, let me talk to you about Ezra Group consulting. 2022 is our 17th year in business at Ezra Group. And we’ve worked with hundreds of fintech vendors, enterprise wealth management firms, asset management firms, and PE firms to guide them towards making better business and technology decisions. If you are the CEO, CTO, COO or other fintechs executive with the software product that you’re selling to broker dealers, RIAs, asset managers or other run, don’t walk to our website EzraGroupllc.com and click the button to schedule a discovery session. Our wealthtech researchers can deliver a wide range of market insights for your firm, including competitive analysis, product strategy, market estimates, sales targeting, insights on buying decisions and more. Every vendor needs this data to be successful, especially when entering new markets, and you can get on the right track by going to EzraGroupllc.com.
All right, a couple of quick housekeeping tasks before I forget, a quick shout out to our sponsor, the Invest in Others Foundation go to InvestinOthers.org. Be sure to subscribe to the show wherever you listen to podcasts so you don’t miss future episodes. And now let’s get this episode started.
BNY Mellon’s Pershing to Acquire Optimal Asset Management
Craig: So our first story is Pershing X business unit makes its first acquisition indirect indexing. So what is Pershing X? BNY Mellon’s Pershing unit launched a new business unit last October, which they called Pershing X. The goal, according to Pershing CEO,Jim Crowley was to deliver the industry’s leading end to end advisory platform. So this is a continuation of what they started last spring, according to Crowley, when they realigned their business under two main segments, what they’re calling Wealth Solutions and Institutional Solutions. So the Wealth Solutions Group is their RIA broker dealer and bank channel business, which they merged. They used to have Pershing Advisor Solutions, which was their RIA business. They merged the RIA and the broker dealer business under Wealth Solutions. So Pershing X will be operated alongside the wealth solutions group. So they also see it as an opportunity, according to Crowley to serve clients who may not use Pershing as a custodian or they may be multi custodial.
So that’s a big ask for any custodian to support other custodians on their platform. What’s interesting about that decision, assuming they follow through with that, is I’ve done some consulting for Pershing senior management for a couple years, from 2008 to 2011, specifically on their wealth platform, and one things that we were recommending was that they go multi custodial. They technically were multi custodial at the time, but only for one client, which was RBC because they were in Canada so they had to support that, but they wouldn’t do it for anyone else. And every time we suggested it, we got shot down. So 10 years after, they’re seeing that as something, an opportunity to grow an opportunity to gain more market share, at least on the tech side.
It’s really unusual for any custodian to want to be multi custodial because it’s really not in their best interests. The cash cow that is any custodial platform is tremendous, and the money that’s generated from that business provides lots of free services to advisors, whether it’s a free tech platform or free practice management or other things. The money they make off the custodial services far outweigh any money they can make on the tech platform, especially as prices keep getting driven down, the competition is fierce in the space.
I wrote an article year, which you can find on Kitces.com called 47 Portfolio Management Systems Can’t All Survive. The reason I wrote that was because of the proliferation of portfolio management software in the industry. If you check out the Kitces advisor tech map, which Michael and I collaborate on the new one is just out, I believe yesterday just came out, you can see there’s a lot of options in the left side of the map, portfolio management, rebalancing only, all in one and custodial platforms. There’s a lot. There’s a lot to choose from, there’s a lot of choices for advisors and broker dealers when it comes to portfolio management solutions. It’s very difficult to differentiate yourself especially if you’re custodian. So they’ve got a large hill to push their rock up at Pershing.
Now the news that just came out was their first acquisition of Pershing X, which is being run by Ainsley Simmons who became president last October. Their first acquisition was Optimal Asset Management, which is one of the last direct indexing firms still available after all the other acquisitions.
So interesting acquisition, why they would go for that. It seems like they were the last one standing, although they do have over a billion dollars in AUM, so they were getting some traction. You could say better late than never, or you might say, well, why would you want the last firm that no one else wanted to buy? There’s no way to know there, we’ll see what they do with it and where it comes from, but every custodian is going to need this type of solution. They’re going to need these types of options especially on the small account side, when it comes to direct indexing, it’s great for smaller accounts to get into that market. A lot of firms talk about the ESG potential, I see that as a lesser reason for direct indexing, it’s way better when it comes to taxes and way better when it comes to offering better solutions to smaller accounts, but still they’re doing it.
But looking overall at Pershing X, I hope they do well and custodians need to refresh their platform every so often. So this could just be that, I remember when they announced NetX, they used to have a couple different platforms that they merged into NetX, and that was around 2010. So it looks like every 10 years they’re coming out with a new name and refreshing, which is fine. You’ve got to keep doing it, you’ve got to adjust to the market. This also could be feeling pressure from LPL. LPL has really grown tremendously over the past five years in terms of assets and in terms of number of advisors, as a broker dealer and a custodian. They’ve also got their own platform, which is based on a couple of underlying technologies, but they’ve built a lot around it and it’s an end to end system, it works really well, they’re on the third iteration of ClientWorks, which is what their application is called. Advisors are really liking this 3.0 version and their assets are growing. Pershing is at $2 trillion, which makes them by default the number three, RIA custodian, but LPL is not far behind. They just crossed a trillion, which is a hundred percent increase, doubling since 2016. So this rebranding to Pershing X could be a response to LPL growing and stealing some clients from them. We won’t know, but overall in the end it’s gonna be good for advisors, it’s going to be good for broker dealers to have more choices, and I think it’s good for Pershing as a custodian to look, to give more options to their clients and not lock them in. We will see how it plays out.
Wealth Management Platform FNZ Seeks to Raise $1 Billion for Expansion
Craig: Next up in our January news review, wealth management platform FNZ seeks to raise a billion dollars for expansion. So who is FNZ and what are they looking to raise a billion dollars for? So FNZ was founded in New Zealand in 2003 for serving investment banks and wealth managers with technology platform, they expanded from New Zealand to the UK in 2005, and then their growth accelerated from there. And they got a buyout from a PE firm in 2009, more invested in 2012, and now the company is over 1400 employees in the UK, Czech Republic, Shanghai, Singapore, Australia, and New Zealand.
One thing I like about FNZ is 400 of those employees are shareholders, and they will continue to own about a third of the equity in the company, at least following the 2018 transaction. Not sure if that equity’s gonna stay if they do this billion dollar raise, but it’s nice to see employees as shareholders. FNZ also was a beneficiary of the UK putting out a lot of regulations, helped their RegTech business really thrive and help them get their foot in the door with a lot of companies and build out their platform. We’ll talk about regulations and RegTech in a later story today. Recently, FNZ made an acquisition of a Swiss-based company called Appway, which is basically a new account opening workflow system. They launched a US push, I think, 2016, 2017, and they’ve built out some US clients, I know LPL financial users Appway, and a couple Canadian broker dealers as well. But again, not a lot of of landscape in the US for Appway yet, but they’re getting there.
Now that some vendors have partnered with Appway, Tegra118, formerly Fiserv now InvestCloud, they have an Appway license as a strategic partner and embedded into their advantage fee billing product. And Refinitiv on their beta self clearing platform also partnered with Appway for new account opening and workflow. So those are some of the good things about Appway. Some of the negatives, what we have seen from some of our clients and we’ve worked with some clients who used Appway, the complaints are there’s too much custom code required and lots of one off implementations for clients. We see that a lot with enterprise wealthtech firms we work with, they wind up having to make a lot of promises to close some deals, which requires custom code. And if they don’t do it right, they wind up with a lot of fragmented code base, which is difficult to support.
In our opinion, other firms, such as Appian, Pega, Finerigo, IFS all have really good tech and a little bit more flexible, a little bit deeper pockets, although now with FNZ as their owner, their pockets got a little deeper. I know firms like Appian counts the US military as a client, as well as First Republic, Bank and RBC. So definitely some competition there for FNZ’s new acquisition in Appway.
Let’s talk about this expansion. So FNZ’s infrastructure is used by more than 150 banks, asset managers and life insurers globally. So vast majority are outside the US, they really don’t have a lot of presence in the US, and they have about $1.5 trillion in assets under advisement on their platform. They plan to use this billion dollars, that’s not a billion dollars in valuation, but a billion dollars in new funding, to grow the business and support future acquisitions. That’s interesting that they would leak this now, obviously they had to have leaked it I imagine, not sure what they are looking to accomplish there, but maybe they want to drum up some more business, get some more firms interested in bidding on this funding. They have a couple of competitors globally, firms like Temenos and Avaloq, we work with companies in the UK and in Singapore, that compete with FNZ and that run on FNZ and FNZ has a decent reputation especially in the UK. They’ve had some problems as as many legacy vendors have had especially the firm that we work with in Singapore, life insurance company had problems replatforming, it cost them a significant amount, and actually hurt them when they sold their business. They had to sell for significantly less because of technology problems.
But that’s a problem we see with a lot of older companies that have success, they become a victim of their success. They wind up with a legacy tech stack, and it’s very difficult to configure, it’s very difficult to customize rather and, and difficult to expand. So that billion dollars could come in handy if they could use that to replatform themselves, put some new technology into their infrastructure, make things a little easier, build more APIs, and then even buy up some some US wealthtech firms. It would be one of the biggest raises in our industry. Who’s ever seen a billion dollar raise of new funds? It would put a lot of the US wealth tech vendors into play, so I wonder who would they target next to try to build out the next Envestnet Killer?
Wealthfront Is Exploring a Potential Sale at a Value of $1.5 Billion
Craig: Our third story is about robo advisor Wealthfront pursuing a potential sale, looking for a one and a half billion dollar price. Is that a bridge too far? So what is Wealthfront? We all know they are a robo advisor, one of the early robo advisors. They’ve raised about $200 million in venture funding with the latest raise coming in 2018 at $75 million with evaluation of around $500 million. They’ve been pivoting a lot, which is not a bad thing. I mean, I see some articles kind of dumping on Wealthfront for pivoting, and that’s what you have to do. I mean, if you don’t pivot, you don’t keep changing, you see what works, what doesn’t work you’re gonna be out of business and very few firms make the right decision, build exactly the right product at the right time, very, very few and far between. Most firms have had to pivot at one time or another, but they are pivoting quite a bit.
So most recently they moved away from their pure robo advice platform to being more self-directed so more like M1 Finance or the big fish in the pond is Robinhood, the multi-billion dollar company. So Wealthfront is reporting around $28 billion in assets and 240 staff, they are a direct competitor to Betterment, who reports $32 billion in 375 staff, and when they first came out there was a lot of talk about will robo advisors replace human advisors? Well, that clearly is not true, that’s not going to happen. Have they changed how humans deliver advice? Yes, it definitely modified things specifically around electronic account opening, paperless account opening, that wasn’t really a thing 10 years ago, and the robo advisors pushed that, and now it’s pretty much table stakes to have a completely paperless account opening process.
In the independent RIA channel, there’s about $3 trillion in assets, across 15,000 RIAs and hybrid RIAs that are affiliates with broker dealers about $2.2 trillion across 915 firms. Robo advisors really haven’t even made a dent. If you look at the top 10 robo advisors, which have 90% of the assets, it’s barely $400 billion. Compare that to the $5 trillion in the RIA space. It’s a very small percentage, not even 10%.
There’s been a lot of writing about Wealthfront and other firms, I’ve written about them for example, in 2016, I wrote an article called Dead Robo Walking, Why Wealthfront is Doomed. Now that was a little premature, they certainly didn’t go bankrupt. At the time in February, 2016 when I wrote that article, they were just under $3 billion AUM. They almost 10X’d it, right. Actually $2.8 billion, now they’re at 28, that’s exactly 10X. So I think most firms would be very happy with a 10X increase in assets. The question is, is that enough for them? With $200 million in venture capital money to pay back and only 25 basis points in fees, it’s going to be hard for them to make money. It’s difficult to generate enough revenue on the number of clients to justify a billion and a half dollars valuation. Let me go back here. So the most prescient was of course, Michael Kitces. I found an article in July, 2012 from Michael, Why Robo Advisors Will Be No Threat to Real Advisors, clearly he was way ahead of the curve there. The scope of most robo advisors is so narrowly focused on delivering passive, strategic, low cost index portfolios that arguably their greatest competition is not comprehensive venture planners, but instead from do it yourself for alternatives like Vanguard and Schwab, they’re essentially focused on the construction of an asset allocated portfolio based on the investor’s time horizon. By contrast advisors are increasingly focused on a wider range of comprehensive venture planning services.
Soon point there, and especially considering where these firms are going, where Wealthfront is going more towards self-directed, they see that most of their existing clients lean more towards self-directed. They see the benefits of offering self-directed tools, look at the explosion of users at Robinhood, they want a piece of that and now they’re going more self-directed so things are coming full circle.
I think also, Wealthfront is a bit jealous of firms like Acorns and they would love to have their valuation. I think Acorns was going to money with a SPAC, this came out in May 20,21. They announced they were going public with a SPAC deal, $2 billion SPAC deal. It hasn’t happened yet. So I’m not sure if that’s just delayed. If it’s shelved, we don’t know, but at least their announced valuation was $2.2 billion and people will say, well, how could that be? Acorns has a much smaller revenue base, or rather, asset base. You look at Wealthfront, they’re are $28 billion, Acorns, $5.5 billion. There’s a huge disparity there, but what I point out and I’ve written some articles about Acorns is it’s not as much the assets, it’s the number of accounts, the number of clients. Wealthfront has 440,000 accounts, and you assume that’s a pretty close relationship to the number of clients. Acorns has over 4 million, it’s 10X. So which firm is more likely to monetize that user base to become multi-billion dollar valued company? I’d say Acorns. Wealthfront is just a really large RIA and RIAs have a very strict valuation methodology, whereas Acorns with 4 million accounts is looking more like a fintech valuation. So I think Wealthfront might be a little bit of jealous of that, and is looking to try to capture some of those clients if they can.
They’ve expanded into banking and I know I heard a good interview with Andy Radcliffe talking about how they want to be the power of money and be able to automate money movement for clients, which is all great. It’s just difficult to do and difficult to get enough traction and get enough interest from your clients to actually start to consolidate all their finances in one place.
There’s also been a number of errors at Wealthfront that they made some missteps in 2018, they had a big problem with tax reporting. Their entire business model is around automation efficiency, if they can’t even get the tax forms outright, that’s a big problem. The SEC charged them in 2018 with false disclosures. And then in 2020 they had some problems around their risk parody fund that they were charging 50 basis points, which is twice normal amount. And it fell 43% during the market selloff, which no one expected, they had to apologize for that. So they don’t have the best reputation.
I know I’ve kept a small account there and at Betterment and a couple of the robo advisors so I can keep track and they’re getting better in terms of their interface and their fee, their functionality. But I think they’re still lagging behind a bit. Will they be able to sell the company? They’ve gotten rejected a number of times $1.5 billion just seems too much considering their technology has shown itself to be especially great. And a lot of firms are building for themselves or moving another direction. So not likely that they’ll get that full amount, but I’m sure they’ll get something for their company, but the amount that they get, if they do sell Wealthfront, won’t be anywhere near what their VCs were expecting. You know, VCs are looking for 7-10X or more in return, and they’re just not going to get that kind of valuation if they’re forced to sell.
If they don’t sell, they said they’ll keep it private. The future doesn’t really look bright for them. I see them merging with someone, pivoting again, really trying to force their way into the self-directed space because they need to bring on more users. They need to build up their base or else they’re just not goingto be a force to be reckoned with. They’re just not going to have the client base to support where they think they’re going with the company.
Surge of RegTech Acquisitions in the Industry
Craig: Moving right along in our January review of the news. There’s been a surge deals in the RegTech space for wealth management. How h
ot is this market we’ve seen, let’s say I’ve got a list of four deals all for RegTech compliance companies in the past few months, first RIA in a Box acquired by ComplySci. Then Orion Advisor acquired Basis Code, Market Council and Dynasty Financial made an investment in Smart RIA and finally Docupace acquired jaccomo compliance and advisor comp and data vendor.
So what is behind all of these deals? At Ezra Group our consulting firm, we’ve always seen compliance and regulations as being a driver of part of tech spend. But it seems as though it’s going up across the board with a lot more firms of different sizes. We’ve seen a couple different areas of driving in part it’s SEC enforcement actions that have driven some people, a need to improve efficiency and keep labor costs down, especially as we’ve gone remote and in hybrid models where some things, sometimes people aren’t as sufficient when they were in the office, as they are spread out, especially compliance teams, and they need more tools in order to manage the companies as they’re growing, especially RIAs that are buying up other firms or broker dealers that are expanding.
Enterprise firms are usually looking to reduce the number of vendors they deal with, so if a compliance firm can offer multiple compliance tools and they can build out a suite that offers fewer contracts for the firms to deal with. So we’re seeing these RegTech vendors across these different acquisitions, looking to build out a full suite of compliance tools, including things like monitoring employee activity, trade surveillance, Reg BI documented collection and archiving, tracking registrations, prepping for audits and cybersecurity. So lots of these acquisitions and prior acquisitions were done to build out this suite.
RIA in a Box acquired by ComplySci is mainly known in the institutional hedge fund space. They’re really focused around monitoring, managing reporting conflicts of interest, employee activities, personal trading, and things. So bringing in RIA in a Box gives them a foothold in the wealth management space, in the RIA space because RIA in a Box is one of the leaders. I think they have 300 employees and 2,500 customer firms, that’s a lot of clients, it makes ComplySci one of the top vendors now. So they’re looking to keep growing they just got $120 million equity investment over ComplySci. So they’ve got some money to spend and they’re looking to build and grow their revenue and market share.
Orion Advisor has always had some good compliance software. I know clients, high net worth RIAs and other RIAs and broker dealers that bring in Orion just for their compliance tools. They don’t even use the other parts of it, so their compliance is solid. Adding basis code, which includes testing and risk assessment for advisors, scanning for insider trading, staff certifications, and other audit types of tools will only help them. And if they can integrate it into that really nice dashboard that Orion came out with, I think last year or the year before, 2020, they came out with their advisor dashboard, which I really liked and putting a compliance section on there.
We always hear the some of these buzzwords, like “a single pane of glass” but it’s true. If you could have everything in place that increases ef
ficiency, if Orion can integrate basis code into their existing dashboard, you get a single user experience. So the chief compliance officer does need to bounce around to separate programs for all of those different tasks that their one suite of services can provide. Market Council, Dynasty makes an investment in SmartRIA, so we know Dynasty Financial is now using SmartRIA and their own platform. We know Market Council does a lot of work with compliance management, they’re a major compliance provider for RIAs, as well as pre-deal compliance.
So a lot of firms that are looking to buy or sell RIAs will go to Market Counsel to do some due diligence on their compliance issues. I had a conversation with Brian, he was talking about all the work they were doing and how excited he was by this deal, because it’s really gonna automate a lot of the things that the
y were doing manually before. And he had a vision and he worked with SmartRIA and they helped build out some tools that helped his firm become more efficient and make it easier for them to deliver these compliance services to their customers. Great article, if you wanna read some more, Deals Signal a Hot Market for Compliance Tech by my friend, Ryan Neal, over at FinancialPlanning.com.
As the regulatory and risk landscape continues to evolve RIAs find themselves allocating outsized internal resources to protect the firm and maintain their regulatory compliance programs, said Market Council, president and CEO, Brian Hamburger. Compliance hasn’t traditionally been a major focus for advisors technology budgets, just over 40% of advisors say they’ve adopted compliance software, according to Financial Planning’s 2021 tech survey, only a quarter of advisors said they plan to spend on upgrading their current compliance solutions. Well, that will change. They’re really going to need more. There’s just too much coming down the pike. SEC just getting a little bit too aggressive when it comes to fines around technology and compliance.
Finally Docupace acquires jaccomo, jaccomo flew under the radar. They were a small company, but they’ve got some robust compliance solutions, trade and account surveillance, letter generation, books and records, suitability, KYC, trade and account level license checking, automated OFAC. So some of those are more broker dealer focused, but it just shows that there are firms that are looking to expand into compliance, they see that as a need. Docupace is a really strong back office
provider especially in the broker dealer space, and they’re growing well in the RIA sector as well, new account opening. I call them an orchestration layer, they’re more than just document storage. So they’ve acquired jaccomo and PreciseFP. So they’re really looking to have more data available and be able to capture more data from advisory firms, be able to do analytics on it, be able to do reporting on it.
This is a clear trend we’re seeing. There aren’t that many more compliance vendors out there, but if you look at the Kitces advice tech map, which I partner with Michael on, you can see it’s a small little box in the middle compliance. There’s only 2, 4, 6, 7 companies in the RIA compliance space. If you add in social media archiving, which is another seven firms and manage service providers, like iTegria which I think was purchased, RIA in a Box, managed service provider for cybersecurity. That’s another area that compliance firms are looking to expand into, being able to offer cybersecurity training simulation platforms and validation endpoint validations. I know iTegria does that, checking every advisor’s and staff person’s computers to make sure that they are in compliance with cybersecurity processes and procedures. That’s another area where they’re growing.
So as we see firms on the advice tech map get consolidated and acquired, more pop up, because there’s always going to be a need. Everyone’s going to come out with an idea, Hey, why aren’t we doing it this way? Why aren’t we doing it that way? As firms grow larger, they become a little bit less innovative. So we see new firms start up with new ideas on how to do things and building on new technology, they can get it done quicker, so expecting to see more compliance firms pop up with different ways of doing things and more options for advisors around compliance.
Craig: Okay. Now we’re up to my favorite part of the crypto news. We’re gonna talk about how the SEC is still pushing back hard on Bitcoin spot ETF approvals, but first a little celebration for Bitcoin itself. This is a tweet from John street capital. “The Bitcoin Genesis block was mined 13 years ago.” So what that means is the very first block was created that stored data on the Bitcoin blockchain 13 years ago on January 3rd. So he posted a couple stats about how Bitcoin has grown since then. So it’s an asset that went from zero to over a trillion dollars with no direct funding, marketing or dedicated team. We’ve seen over 700 million transactions with $8 trillion of volume. There’s tens of millions of people holding Bitcoin in their electronic wallets. There’s been $38 billion of revenue distributed to the minors and validators on the network, it’s a multi trillion dollar asset class that was created basically out of thin air. So he’s thanking the unknown developer of the Bitcoin white paper, Satoshi Nakamoto, in his tweet.
Another tweet from Travis Cling, who’s a former long-short equities portfolio manager who now runs a crypto investment fund called Ikagai Asset Management, he posted this tweet last March. “So Bitcoin is worth a trillion dollars yet it has never spent a dollar on marketing, never had a CEO or a board meeting, never had a budget, never hired a lobbyist lawyer, or auditor never entered into a partnership and never even existed in physical form.”
So what are some milestones in the past year to celebrate Bitcoin’s 13 year anniversary it surpassed a trillion dollars in market share, Morgan Stanley started offering wealthy clients access to Bitcoin’s funds in their accounts, the nation of El Salvador adopted Bitcoin as legal tender, the first US futures base
d Bitcoin ETF launched. Now, it’s not the same as the spot ETF, which we’ll talk about in a second. The price of Bitcoin hit an all time high of $69,000. More importantly, to me, Bitcoin’s hash rate hit an all time high. The hash rate is a key metric when assessing the strength of the network that, that validates, and then runs Bitcoin. It represents a total computing power used by the minors and validators to make new Bitcoins, but at higher hash rate means the network is stronger, more secure and resistant to attacks.
Last April, I posted an article on my blog called Why Bitcoin Has Reached a Tipping Point With Advisors. It was a summary of a webinar with Sunayna Tuteja, who is formerly the Chief Innovation Officer at TD Ameritrade, but is now the Chief Innovation Officer at the Federal Reserve, and her partner on that webinar was Ric Edelman, founder of Edelman Financial Engines and the RIA Digital Asset Council. For many years, Ric has recommended advisors include a 1% allocation Bitcoin in their portfolios. He also posted an article which you can find online that Bitcoin is the First Really New Asset Class in 150 Years, that was in June, and he also posted his predictions for the digital asset market in 2022.
So how can advisors and their clients invest in Bitcoin? Well, for the time being in the US, it will not be through a spot Bitcoin ETF because the SEC has shot down two spot Bitcoin ETFs that came out in InvestmentNews on December 23rd, there were two proposals, they rejected them both. They believe that Bitcoin doesn’t have enough investor protections in the market.
Some people ask what’s the difference between the spot ETF and the futurist ETF, and the biggest difference is in the framework that they have different regulatory pathworks, securities ETFs are ruled by the 1933 Securities Act, which requires different forms to be filed to verify there’s no market manipulation. Whereas a futurist based ETF is rule is regulated by the 1940 Investment Company Act, and doesn’t require that market manipulation form. Of course, cryptocurrency spot markets are largely unregulated, whereas futures markets are regulated specifically by the, in the us, the Commodity Features Trading Commission sets those rules. Of course the CME, the Chicago Mercantile Exchange where a lot of the features are traded, are cash settled and designed to track a reference rate. So it’s not exactly the same price as Bitcoin. In fact, there’s a fair amount of difference between that as well as all the fees that go along with the futures contract and costs that I won’t get into, things like contango when the futures price of a commodity becomes higher than the anticipated spot price, that hits investors with additional costs, their price tracking issues.
So overall we’re seeing a lot of issues here around these Bitcoin ETFs not being approved. And there was NYDIG is another company, they’re one of the biggest providers of institutional Bitcoin support, their ETF proposal for a spot wasn’t rejected, but it was delayed. So they delayed it by I think, 60 days. So I don’t know if that’s a good thing or a bad thing it’s better than being rejected, I guess, but now they have until March 15th to make a decision, so it doesn’t look good. I think they’re just trying to kick the can down the road. I’m on the side of, we need a spot Bitcoin ETF, it’s better for consumers to be able to invest in that with lower costs, lower fees and not have to get involved with their own digital wallets and buying it that way. So I think it’ll be good for the market when they eventually do that, and I’m a big supporter, but it remains be seen when the SEC will come around and approve a spot Bitcoin ETF.
And until the SEC spot Bitcoin ETF one great way for advisors to invest their client’s assets in digital currencies is through a separately managed account with a digital asset manager. Advisors and broker deals can do this by contacting BitRIA, formally Blockchange.io, and they offer tools and technology that connects advisory firms and broker dealers with some of the best digital asset managers in the industry. They offer the rebalancing, the connection, the trading the custody through Gemini. So they’ve got a one stop shop that allows advisors to safely and securely invest clients’ assets in digital models. So you’re building model portfolios with some of the best digital asset managers in the industry. It plugs right into your existing systems and tools, compliance tools, reporting tools. It’s a great way for for wealth manager firms to get access and exposure to digital currencies in a safe and secure manner. That’s BitRIA, check them out.
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