Morningstar - Q3 2022 - 18

Dispatches
potential for law enforcement agencies to shut
down or limit investors' ability to use or
trade specific cryptocurrencies-yet another
level of risk that cannot be overlooked.
SEC's Disclosure of Custodian Risks
Outside of 401(k)s, another way to invest
in cryptocurrency is through an exchangelike
platform that handles trading and custody.
Exchanges such as Coinbase COIN can charge
relatively lower fees and offer limited
insurance coverage to protect against theft or
hacking, but significant risks remain.
For example, Coinbase recently made clear in
a 10-Q filing with the SEC that its customers
could lose their crypto assets if Coinbase were
to go bankrupt. (This can't happen with
securities like stocks because of the established
processes under SIPC that would transfer the
securities to another broker.) The risk of losing
their assets is not new for crypto investors,
but the disclosure is. The disclosure came because
of new guidance in the SEC's latest staff
accounting bulletin that addressed accounting
for entities that have obligations to safeguard
platform users' crypto assets. The bulletin
called for increased disclosures about the unique
technological, legal, and regulatory risks and
uncertainties involved in this custodial relationship.
As we mentioned above, self-custody is an
option, but that requires technological savvy and
isn't realistic for most retail investors.
Advisors should be aware of their clients'
technological know-how and ensure
that they understand all the risks involved with
investing through an exchange-not
just in the event of theft or key loss but also in
bankruptcy and any other technological,
legal, or regulatory challenges the exchange
may face.
The Registration of Crypto Robos as RIAs
Investing through a robo-advisor like Makara
or Titan is another option. Investors can
invest in a diversified basket of cryptocurrencies
through an entity that is registered with
the SEC and take advantage of sophisticated
algorithms that can tailor their portfolio
to their goals while mitigating research burdens,
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Morningstar Q3 2022
adjusting to market conditions, and limiting
fees. Because these robo-advisors are regulated,
they must make disclosures about fees and
conflicts of interest, enabling investors to make
more informed decisions.
Still, while this may be the least speculative
route into crypto, it is not without its
pitfalls. This option provides more protection than
exchanges, but advisors still must be mindful
of overallocating client assets to crypto, which
could violate their fiduciary duties.
Also, while there are more protections with
a robo-advisor, there is little clarity as to
precisely what those protections are, particularly
because the assets are in the custody
of unregistered platforms such as Gemini.
Critical Role
Advising on crypto can feel like walking through
a minefield. There are many factors to
consider and varying risks for every investment
pathway. It's important for advisors to look
at each client's circumstances, risks, and wealth
to determine proper allocations and be confident
that they fully understand the risks of this
asset class. That being said, crypto may be of
interest and use to clients who wish to allocate
a small portion of their portfolios at the
appropriate level. Advisors have a critical role to
play in helping clients make the right allocation
decisions and decide the best way to
invest-be it through a platform, robo-advisor,
or, if available, their workplace 401(k). K
Jasmin Sethi is an associate director of policy research
at Morningstar.
While it's not perfect, I prefer the term sustainable
investing, but it's a battle I may not be winning.
Many seem to prefer the simple initialism
for environmental, social, and governance-based
investing: ESG. It's a convenient shorthand,
for sure, and one that I'm not above using
myself: I maintain a blog on Medium called The
ESG Advisor. And for headline writers, sustainable
investing takes up 7 times more space than
ESG. That could be one reason ESG is used
more often in fund names. In the United States,
I count 151 funds with ESG in their name as
opposed to 123 with some version of sustainable
in their name.
But I think the real reason so many asset
managers and intermediaries (consultants, wealth
managers, advisors) use ESG is because it
sounds more values-neutral, gives them flexibility
in interpreting how they practice this type of
investing, and allows them to sidestep the
bigger-picture theory of change that sustainable
investing implies. Many (perhaps most) traditional
investment professionals are uncomfortable
with, if not outright hostile toward, the broader
project of encouraging companies to embed
sustainability into their operations and business
models to create value for all stakeholders.
Using ESG gives them cover to define what they're
doing far more narrowly. Many asset managers
Sustainability or ESG?
The widespread use
of ESG obscures
its broader purpose.
Jon Hale
SUSTAINABILITY MATTERS
What should we call investing that supports the
transition to a just, low-carbon economy and
encourages companies to focus on creating
sustainable value for all stakeholders, including
positive impacts on people and planet?
https://www.morningstar.com/stocks/xnas/coin/quote https://www.morningstar.com/authors/1855/jon-hale https://www.morningstar.com/authors/2356/jasmin-sethi
Morningstar - Q3 2022

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