Written by Maximiliano Saavedra
Volunteer Director of Latin American Financial Education, More Than Baseball
High returns, wild volatility and persistent media attention have propelled cryptocurrencies to the front of news cycles. In Ameriprise Financial’s view, these are speculative, high-risk investments that require more regulated, quality products before we consider it a robust and investable asset class. Still, we believe long-term investors may benefit from an overview of what they are, the material risks and what’s ahead.
What are cryptocurrencies?
To understand cryptocurrencies, we first must understand the blockchain technology that enables their existence. A blockchain is a decentralized record of all transactions across an open network, secured by cryptography. Blockchains allow users to transact without the need for a trusted central clearing authority. Potential applications of blockchain technology include transfer of funds, trade settlement and voting.
Cryptocurrencies are digital assets (not physical assets like cash) used within blockchain networks to send value, pay for transactions or provide network incentives. Prices generally are driven by supply and demand and cost of production (e.g., the computing power required to mine one bitcoin).
There are currently thousands of cryptocurrencies, which typically share these common traits:
Connected by a network of computers around the world
Beyond the control of governments and central banks
Secured with encryption technology (cryptography) to block counterfeit efforts
Bought and sold via online coin exchanges rather than traditional, regulated financial exchanges such as the stock market
Investors may own or buy cryptocurrencies for a host of reasons, such as enthusiasm around the potential of blockchain technology to disrupt long-established industries or simply speculative investment (short- or long-term). However, digital assets are young and still forming.
In our view, government regulation is likely to increase over time and could add volatility to an already tumultuous asset class. Regulatory actions aimed at limiting the ability to exchange digital assets or convert them into fiat currency (e.g., U.S. dollars) would likely cause demand to decrease and prices to fall. For example, in May 2021, Chinese authorities ordered a massive crackdown on bitcoin mining activities. According to China government media, more than 90% of China’s bitcoin mining capacity was estimated to be shut down by late June 2021. During this period, the price of bitcoin dropped significantly.
Given these issues, only investors with the highest risk tolerance, willing to lose most — if not all — of their contributions, should consider the space.
What is the origin?
In October 2008, an anonymous computer programmer using the alias “Satoshi Nakamoto” published a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper described how individuals could hold and exchange items of value digitally, without the need for a trusted intermediary such as a bank or investment broker.
The bitcoin software was subsequently released in January 2009 and became the first successful application of decentralized blockchain technology. As of July 2021, the number of cryptocurrencies worldwide has grown to over 6,000.
What are the main risks to investors?
Valuation difficulties. One of the major challenges associated with cryptocurrencies is how to reasonably value them. Cash-producing assets like stocks and bonds have decades of research and time-tested valuation models behind them. Physical commodities like gold or crude oil don’t generate cash but have established pricing models that lean heavily on the supply and demand for these tangible assets. Compared to those traditional asset classes, there’s very little history to aid in determining an underlying value.
Storage pitfalls. Another key concern in the cryptocurrency space is how to hold and store them safely. This is commonly known as “custody” and is something of which all investors in cryptocurrencies should be conscious. Ownership is established by controlling a password. If that password is lost or stolen, the cryptocurrency is lost forever. The best practice is to keep a password in “cold storage,” such as offline on a piece of paper in a safe. Storing a password online exposes it to the risk of being hacked. Some investors rely on specialized cryptocurrency exchanges to custody their digital assets. In this case, the investor trusts the exchange to hold their key and now relies on the exchange’s promise to return their assets.
Rapid boom and bust cycles. Crypto is a very new development in finance, and we have seen many extreme price swings since the first bitcoin was minted in January 2009. Investors should expect significantly more volatility than the more mature stock and bond markets. Investors in cryptocurrencies must have the discipline to avoid giving into the lure of chasing outsized returns at the top of cycles and the temptation to sell at the bottom of severe downtrends.
What’s ahead for cryptocurrency-based investments?
Currently, several exchange traded funds (ETFs) designed to track the price of bitcoin are going through the registration process with the U.S. Securities and Exchange Commission (SEC). The SEC has until November 2021 to approve or deny the first of these applications.
Products in this area are still developing, and there are key considerations around them, including custody, underlying costs and divergence between market prices and underlying values.
As always, we recommend that you regularly meet with your financial advisor. They will review the asset allocation in your diversified portfolio and can offer personalized recommendations to support your financial goals, time horizon and risk tolerance.
4 Levels of financial advice
Do it yourself
You can open a self-directed brokerage or retirement account. Nearly all online brokerages now allow easy sign-up, an ACH bank link, and immediate access to trading. Every major retail brokerage charge $0 for per trade. Most brokerage platforms do not have account minimums, and those that do typically have very low minimums of $1,000 or $2,000. Doing it yourself is the lowest cost option, but with that cost savings you are 100% responsible for your investment decisions. If you are going to go this route, it is always a good idea to begin familiarizing yourself and learning about markets first and starting out with a smaller amount of money. There are a lot of great free online resources that you can use to learn about investing and to do your own research. Here are a few of my favorites: investopedia.com, thebalance.com, seekingalpha.com, & smartasset.com.
For a brief tutorial on how to open your own account click here: (link to video from August newsletter)
Robo-Advisor
Robo-Advisors have a very popular way to invest in recent years. This is the “in-between” level of advice from doing it yourself, to paying a human advisor to manage your investments. Robo-Advisors charge minimal fees, allow you access to an online portal to be able to view your account, and give you access to an automated call center. These are digital platforms that provide automated, algorithm-driven investment services with little to no human supervision. Typically, robo-advisors use model portfolios built by using a basket passive index funds. These platforms then allow to choose between a mix of pre-packaged options, based on a short risk-profile questionnaire. Robo-advisors are low-cost option, and typically charge an annual flat fee of 0.2% to 0.5%. Account minimums typically range from $1,000 - $5,000 depending on the platform. This option is great for getting started if you are simply interested in saving and investing over time with a “buy and hold” strategy. However, it is not as well suited for more complex financial planning issues and estate planning.
Some popular robo-advisor platforms are: Betterment, Wealthfront, Vanguard Digital Advisor, and Ellevest.
Broker-Dealer (Stockbroker)/Investment Advisor
An investment advisor is a person or company who is paid for providing investment advice to clients. Investment advisors can also manage client assets directly. A broker-dealer is an individual or company that buys and sells securities such as stocks, bonds, and mutual funds. For both types of financial advisors, portfolio management solutions are more custom built to client needs and includes a human advisor/manager as a point of contact. There are some key differences between Brokers and IA’s, typically brokers are what they call “fee based” which means they charge a % fee of the assets that are managing, in addition to commissions paid on the investment products they sell to you (typically mutual funds). Investment advisors are typically “fee only” which means that they only get paid a flat % on the assets they are managing for you, and do not make commissions on the investment products that they use. For human advisors, the argument in favor of using one is that you get what you pay for. According to a 2019 study by Vanguard a relationship with a financial advisor can be worth over 3% per year in annual returns.
If you choose to hire an advisor, check out 5 questions you should ask your financial advisor to learn the questions you should ask when selecting an advisor.
Full service Financial Planning
The most comprehensive approach to building wealth. Full-service financial planning involves working with a team of advisors & assistants to utilize a full suite of services. These services can include:
Investment Management/portfolio management
401(k)/company sponsored retirement plan review
Retirement savings and distribution analysis
Budget & Cash Flow analysis
Debt planning and reduction
Stock options
Education Planning & Student Loans
Insurance Planning and Protection
Regular Plan updates and reviews
Financial planners are typically either “fee only” advisors, or instead they charge a monthly retainer fee for the services they provide. Due to the fact that some of the services that financial planners provide are not regulated, such as budgeting and debt reduction strategies; many advisors who engage in full service financial planning hold the Certified Financial Planner (CFP®) designation. CFPs have met the rigorous training and experience requirements of the CFP Board, have passed the certification exam, and are held to high ethical standards.
Picking your level of investment advice is a personal decision and can be determined by any number of factors. No matter what your personal feelings are about money. It never hurts to educate yourself enough have a basic understanding of what you need to do to set yourself up for success. The internet is a great place to start, with today’s technology anyone can access information about investing that was never possible before. Many of the above sites mentioned in this article have great financial education and investment research resources. If you are more of a conversational person, don’t hesitate to reach out to people in the industry and pick their brain a bit. Most financial advisors or planners would be willing to sit down with you over a cup of coffee or a phone call to walk you through some investing basics, and more than likely give a couple free pointers. As a member of the MTB team, you also have access to Max and Myself, if you would like to reach out with any financial questions you might have.
Financial steps to take when you lose a loved one
Maximiliano Saavedra
Volunteer Director of Latin American Financial Education, More Than Baseball
The loss of a family member is a difficult time. In addition to coping with your grief and potentially planning a memorial service or funeral, there are often many financial decisions that follow soon afterward.
But how do you know what you’re supposed to do? It can feel overwhelming. Here’s a list of common steps to help reduce stress during this time. As you move forward, consider tracking dates, discussions and decisions in a notebook or online document.
Reach out to professionals
Contact your financial advisor so they can help you evaluate the financial aspects of the situation.
Contact the person’s estate attorney to see if they have an estate plan. This might include a will and revocable trust, for example. The attorney should be able to tell you if there is an: executor of the will, trustee of any trusts that exist, a guardian for the care of a child and financial management while the child is a minor
If the surviving spouse previously named their now-deceased spouse as their durable power of attorney or medical power of attorney, they will need to contact their attorney to name a new person in estate documents.
Arrange necessities
Obtain multiple copies of the certified death certificate. Some companies will not accept a photocopy. This is common with insurance policies and annuity contracts, for example.
Obtain a certificate of appointment to document the authority to act as personal representative, if required in your state. Keep in mind that language used to describe aspects of settling an estate can vary in each state.
Find the individual’s passwords and consolidate them in one place.
Open an estate checking account, if necessary, to pay bills and receive accounts/assets associated with settling the estate. If you open a checking account for the estate, you’ll need to get an employer identification number through IRS Form SS-4, Application for Employer Identification Number.
Locate a local notary, as they will be needed for many steps. You might also need a medallion signature guarantee, which guarantees the authenticity of a signature that authorizes a transfer of securities that are held in physical form.
Update financial accounts
Contact financial organizations to find out how to update ownership and beneficiary designations on joint financial accounts (investment, bank and credit accounts).
Contact financial organizations to determine how to close single-owner financial accounts and transfer assets.
Update names and beneficiaries on insurance policies, including life, health and auto policies. Among the insurance providers, also confirm the coverage requirements to maintain the person’s assets (including the car).
Contact all three major credit bureaus to minimize the risk of identity theft.
Manage or update real assets
Determine how the person’s assets/property will be maintained during the estate settlement process.
Update the property title(s) for real estate. If property was owned in multiple states, review the probate process in each state. (For non-resident states, ancillary probate may be necessary.)
Locate the title and registration for any cars, so that you can update the vehicle title and registration; cancel the driver’s license.
Look into third-party benefits
Contact the Social Security Administration regarding survivors benefits. You might also be eligible for a one-time death payment.
Contact a deceased spouse’s employer (if applicable) if there is a 401(k) account and a group insurance policy. It may also be necessary to contact former employers that may have provided a group life insurance policy. The person may also have retirement plans through former employers.
Look into veterans’ benefits (if applicable) and possible assistance with burials costs for veterans and their spouses.
You’re not alone — support is available when you need it
Your financial advisor understands your financial goals and needs, and they can help guide you through the financial implications following the death of a family member.
If your family or friends are not working with a financial advisor, consider referring yours. According to the recent Ameriprise Financial study, Financial Priorities, 4 in 10 respondents who don’t have an advisor believe advisors help withstand unexpected financial changes.
Comments