Investment

PI insurers kill advisers' crypto appetite

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If a security were to rise from 97 cents to $70,000 in 10 years, it would be hard for a financial adviser to not get calls from clients asking about it.

This is what Bitcoin did between April 2011 and April 2021. Over the decade, the cryptocurrency's wild gains and falls have continued.

Despite the volatility, it has also won acceptance from large institutions like BlackRock, Fidelity and State Street. At the time of writing, BetaShares and VanEck are working on ASX-listed ETFs based on cryptocurrencies.

And now some advisers are willing to have a look.

One of them is Align Financial's Darren Johns.

"I am not averse to it. Some advisers don't like it," he says.

Despite his interest, Johns can't advise his clients on the cryptocurrency yet. The reason being that his professional indemnity insurer is unwilling to cover him.

"They said, 'not yet'. It exposes me to claims from my clients," Johns says.

All four advice associations: Association of Financial Advisers (AFA), Financial Planning Association of Australia (FPA), SMSF Association (SMSFA), and Association of Independently Owned Financial Professionals (AIOFP) declined to comment on the specifics.

They were asked: if advisers should be able to advice on cryptocurrencies, if they knew of any advice firms adding cryptocurrencies to their approved product lists (APLs), if they had engaged with PI insurers on covering advisers for cryptocurrency advice, and what the best practice for advisers was if their clients wanted to invest.

AIOFP executive director Peter Johnson said: "...I am not aware of any of them currently dealing in cryptocurrencies. We did address the issue at our 2019 London conference, but I think it is fair to say there has not been much of a demand or appetite for further information since."

The FPA pointed to CFP 4 Investment Strategies, page 106: "Investors can often become caught up with potential for high returns, sometimes desperately so. The role of a financial planner is to educate clients on the risk return trade-off and help them find solutions that achieve targeted returns within an acceptable level of risk."

Despite the silence from the associations, advisers are pushing ahead with Bitcoin.

Pitcher Partners partner Charlie Viola says

nine of his 150 high-net-worth clients have invested in either Bitcoin or Ethereum, while 60 have requested information.

"It's certainly something that is getting harder

to ignore," Viola says.

"Often the discussions will really just be cryptocurrency's validity as currency, as an investment versus method of transferring wealth - should they buy it, where does it fit, is it something that absolutely has to be in a portfolio."

Viola's clients who have invested in cryptocurrencies usually invest $200,000 to $400,000 from their average $10-15 million in investible assets. As they are sophisticated investors, the cryptocurrencies don't have to be on the APL.

"We are certainly not exposing mum or dad investors to cryptocurrencies or other exotic investments like seed venture capital. These [nine] investors usually work as investment bankers, corporate executives for listed companies or are wealthy professional investors," he says.

"We don't ask them to sign a liability waiver, but we certainly provide a reasonably intense warning for any exotic asset on things like risk versus return and volatility."

For McDougall Kelly & Martinis, which brokers PI insurance for 200 AFSLs with about 1500 advisers, covering crypto advice is a "complete decline" for all the PI insurers it works with.

"Crypto is too volatile and people don't understand it at the investor level," senior partner Oscar Martinis says.

He says insurers are often willing to cover liability for leveraged funds. But some others, with a history of losses for the insurance industry, like mezzanine debt funds and agribusiness funds, are covered on a case-by-case basis.

"We can get mezzanine finance and agribusiness covered but by exception only. That is, they are typically automatically declined [for new PI policies] but we can go in and negotiate with the underwriters," he says.

SURA Professional Risks managing director and underwriter Paul Robinson's comments indicate there isn't strong motivation for providers to cover potential liabilities from cryptocurrency advice.

"We wouldn't underwrite it because Bitcoin is famous for its volatility," Robinson says.

SURA provides professional indemnity insurance cover to about 400 of the 1975 small-to-medium financial planning practices operating in Australia.

None of these 400 advice practices have asked for crypto advice cover, says Robinson.

"We have 10 underwriters, and I can't recall even one case where advice is being offered on cryptocurrencies. Certainly, a financial planner would struggle to get their investment committee to approve it [and to put it on the APL]," Robinson says.

One dealer group whose investment committee has had conversations about approving crypto advice is Lifespan Financial Planning.

"It comes up [in investment committee meetings] because clients do ask advisers about it," Lifespan's chief executive Eugene Ardino, who also sits on the investment committee, says.

"But we've never considered putting it on the APL. It is way outside our risk profile as a licensee. The reason for that is it is a very difficult product - or instrument or whatever you want to call it - to understand.

"How do you value it? Look at the volatility you've seen it have moves of 10-20% up and down in a day and it has collapsed 80% or more from its peak four or five times in its history. How on Earth do you recommend it to a client?"

Ardino says conversations at Lifespan about crypto never advanced to a level where they'd talk to their PI insurer. However, if a Lifespan advice client wanted to invest in Bitcoin or other cryptocurrencies, the firm wants the adviser to document the investment was un-advised.

"Clients can invest in whatever they like, they often hold things we wouldn't recommend. It has to be well-documented [by the adviser] that the client's made a decision to hold it," he says.

"It hasn't come up yet [with crypto] but you would either document it in your client file, put it in the Statement of Advice, in the client data form, or some form of signed document that indicates that the [crypto] investment wasn't advised on."