- Liability insurance is one of the main reasons advisors have been slow to offer crypto advice.
- Insurance companies are waiting for regulatory guidance and seeking data to assess risk better.
- These factors are leading to limited coverage or costly coverage for investment advisorske RIAs.
Financial advisor Daniel Bishop has been a loyal follower of the crypto space since its nascency. But when it came to advising his clients on digital assets, he hit a roadblock.
The highest insurance coverage he could find to cover financial advice about cryptocurrencies was $ 1 million for a trade error – but he needed 10 million. He decided the insurance policy wasn’t worth getting.
“It doesn’t make sense for me to have a policy that’s not really going to cover me,” Bishop, an advisor at Illinois-based Black Swan Advisors, told Insider.
For crypto-enthusiasts and latecomers alike, the financial-advisor industry is working to get up to speed on how to help their clients invest in crypto, but one piece of the puzzle being left out of the conversation is business insurance.
The crypto market is worth nearly $ 2 trillion as of March 21, according to Coinmarketcap data, and 16% of adult Americans have either used, invested in, or traded crypto assets. The lack of education around the asset class and regulatory scrutiny are the top reasons many registered investment advisors, or RIAs, have yet to adopt digital assets into their offering.
That is changing as the financial industry becomes more acquainted with the crypto market and receives more guidance. In March, President Joe Biden signed an executive order that provided a rough idea of the government’s plans to address the risks and benefits of digital assets. Major Wall Street banks like JPMorgan and Wells Fargo are warming up to the market, too.
Nearly half of financial advisors had clients ask them about adding crypto assets to their investment portfolio, a significant increase from 17% in 2020, according to a survey published in June by the Financial Planning Association. Of the survey participants, 26% planned to increase their use or recommendation of digital assets to clients, and 14% of financial advisors were advising their clients on the nascent digital marketplace in 2021, a leap from 1.4% in 2018.
But advisors want protection before wading into the volatile assets. And they’re looking for digital-asset coverage in liability insurance plans like errors and omissions, an insurance that covers advisors from client claims that the advisor caused them a financial loss.
It’s about liability protection
States like Oklahoma and Oregon have been pushing for financial advisors to purchase liability insurance to protect investors. Late last year, Charles Schwab, which custodies 3.73 trillion in client assets for thousands of RIAs, announced that it was mandating advisor clients to have at least $ 1 million in total liability insurance. These moves have forced many advisors’ hands in obtaining errors and omissions, making it standard liability insurance for RIAs.
Whether an insurer will cover the advisor’s business has been preventing some financial advisors from advising on crypto assets, Ryan Firth, an independent advisor based in Bellaire, Texas, told Insider. Firth, the founder of advisory firm Mercer Street who calls himself his clients’ crypto consultant, said advisors are playing it safe by sticking to investments that have a longer track record.
Insurance companies have been hesitant to stick their necks out to cover digital assets. Despite Biden’s message, Brian Francetich, director at Golsan Scruggs, a risk management and insurance brokerage firm, said Biden’s executive order provided little guidance for the insurance industry, particularly underwriters.
“There’s still just a lot of regulatory murkiness. And the underwriters are kind of saying, ‘Until the SEC will say what these assets are, what they aren’t, and how they’re gonna regulate them, we’re in a wait. -and-see approach, ” he told Insider.
So insurers are operating on a case-by-case basis, where they offer insurance plans here and there but not everywhere. Then there’s the matter of insurers who will take on investment portfolios wholly invested in crypto while others only want a small percentage invested in crypto.
Sources said the common US providers of digital-asset insurance are Travelers, AmTrust, and Markel. There are overseas companies like Lloyd’s of London and Bermuda-based Relm assisting advisors, as well. None of the companies responded to Insider’s requests for comment.
Crypto-asset management firms like Grayscale and Bitwise, which sell products to financial advisors, have insurance built into some of their index funds or trusts. The insurance, however, is crime insurance bought from Coinbase that only covers losses due to theft.
There’s not enough data on crypto-assets for insurers
Insurance companies’ hesitation to cover digital assets can be attributed to the lack of historical data. Without a deep well of information, actuaries are having a tough time assessing the risk.
“Actuaries want 10 years of data looking backwards, so that they can price things properly. So as we go along we’re getting a little more data,” Bishop said of what he’s learned from his digital-insurance research. He added that he thinks actuaries are pricing policies high to make up for the limited data and increased risk of not knowing what to expect from policyholders.
Crypto-asset insurance is still being established and, depending on what an advisor wants, can feel like a small marketplace.
Insurers are looking at companies’ balance sheets and how diversified their investable assets are to determine what they’re comfortable with, Matthew Studley, a complex risk expert at Hub International, told Insider.
“I can then make the argument on behalf of our clients to an insurer that this is only a de minimis amount of their business and you’re getting paid for all of the risk. And 98% of this is not crypto, and thus inherently less risky, “he said. “That’s a much easier argument with the insurance companies versus a company that is 100% into crypto.”
He added that the insurance industry’s cautious approach has produced a low supply of digital-asset insurance despite a high demand for it, and high premiums that fall out of budget for many RIAs.
Bishop and his clients put their own set of relevant contracts in place to provide protection for both parties. Out of privacy, Bishop declined to disclose what type of contracts were used.
“I’m covered in other ways, to the extent I can be,” he said.