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Marty Flanagan, Invesco President and CEO:
Hello everybody. I'm Marty Flanagan, the CEO of Invesco, and I'm pleased to be joined by Ric Edelman today, who is the founder of the Digital Asset Council of Financial Professionals. It's the organization that created the certification in blockchain and digital assets.
Ric has also written the book, The Truth About Cryptocurrencies. And so I wanted to sit down with Ric today, spend some time to better understand the opportunities, the challenges around the digital asset space, and really learn from his experience and really create the opportunity for everybody to hear from Ric.
So Ric, as I said, you literally wrote the book on cryptocurrencies and digital assets. Why don't we start by just spending a minute and you defining digital assets and why you think the space is growing in such a rapid pace.
Ric Edelman, Founder of Digital Assets Council of Financial Professionals and author of The Truth About Crypto:
Marty, first of all, thank you so much for inviting me on to chat with you. You know how big a fan that I am of Invesco and your work and the leadership that you show in helping advisors stay cutting edge and informed and educated. I'm really glad to be part of this program.
The fact is that digital assets is the first new asset class in 150 years. The last new asset class was oil, the discovery in the 1850s. And look at the incredible global impact oil has had.
People sometimes don't remember the fact or realize that prior to the discovery of oil, we were using whale oil to light our candles. And so what a change the world has experienced in the last 150 years. And that's where we are now with this innovative technology.
It's the most profound change for global commerce since the invention of the internet back in the nineties. And most advisors don't understand yet the incredible impact this technology's going to have.
And the fact that it is so totally new and different means that all of our collective experience in managing money and in understanding asset valuations really isn't applicable to this asset class, because it is a totally new vocabulary, a totally new technology.
And the innovative nature of this, the fact that it is growing at an exponential rate is why it has zoomed at such a rapid pace.
It's fascinating that a year ago, nobody had ever heard of an NFT. It wasn't until Beeple last February sold a piece of digital art for $69 million in an auction of Christie's. Nobody had heard of NFTs.
Nine months ago, we never heard of DeFi. Eight months ago, you never heard of a DAO, a Decentralized Autonomous Organization. Five months ago, you never heard of the Metaverse. This is growing and evolving with such rapid speed that it's vital that investment advisors keep up so that we can better serve clients and giving them the advice in their best interest.
That's really helpful. You're highlighting really the rapid development that the world is just catching up to. And with that said, where do you think the digital assets could evolve to in the coming years?
And picking up on your long, successful experience in financial planning and the asset management industry, what do you think the impact will be on our industry, quite frankly?
It's going to be massive. When you have a company the size of Facebook changing its name to Meta platforms, Zuckerberg is making it very clear, it's all about the metaverse. It's all about a digital economy and digital commerce.
And what we have to recognize is that the world's economy is going digital. By the end of this decade, the vast majority of asset classes will be represented digitally. Meaning you're going to have tokenization as a routine element of business.
People are looking at NFTs saying, "That sure looks like a beanie baby. It looks like a bubble. It looks like a fad that'll be short-lived like Hula Hoops." We have to remember, Hula Hoops was still around after 75 years.
And so we need to recognize that this isn't a fad. Oh sure, an individual NFT might be a fad. Who knows if the bored apes are going to be something that has staying power? But the notion of tokenization, the ability to create a digital representation of a physical asset is something that is here to stay.
And as a result, we're going to see virtually all asset classes represented digitally. And that includes, frankly, ETFs, let alone stocks and bonds and other asset classes. We're going to be tokenizing real estate, the biggest asset class in the world, triple the size of the global stock market.
It's about $300 trillion in value. Most people don't have access to commercial and industrial real estate because they're really expensive properties and they're illiquid. But if you tokenize them, you make them affordable and liquid, just like shares of IBM are.
And this changes everything. We can tokenize, thanks to the blockchain, any asset class. We're going to start with real estate. We're already doing it with digital art. We're going to be soon tokenizing music royalties.
Bob Dylan's song catalog was sold for $500 million last year. Pretty soon, you're going to be able to buy tokens of Bob Dylan's music so that every time you hear it played on Spotify, you're going to earn a royalty.
We're going to be tokenizing contracts for professional athletes and Hollywood actors and Broadway stars so that as their careers grow and they make money doing what they do, you're going to earn a piece of the action.
You're going to be able to tokenize entire teams in the professional sporting world. The opportunity to create this tokenization means instead of having 15 or 20 asset classes, there are going to be 15,000 or 20,000 asset classes.
The ability to create truly customized portfolios are going to be exploding and this is going to increase the value of financial advisors and the financial advisory business in a way that is going to be really hard to even fathom. It's going to be extraordinarily exciting.
Ric, I couldn't agree with you more. I'll tell you, here at Invesco, we believe the exact same thing. I was literally just in the meeting talking about tokenization of our real estate portfolios. There is no doubt it's going to create access to asset classes that today many individuals can't get to.
So they'll be able to build better, more diversified portfolios and get access to different return opportunities that they really can't today. I'd also say there's no part of our business right now that we're not staring at because it's all going to be digitized.
The issue for us is, how fast can you go? And what's the most meaningful area to focus on initially? But the opportunity's enormous. I'd say the end game is probably beyond even what we're imagining right now.
So again, really good thoughts. And I think you're right on the mark. Maybe changing gears again, you've seen over the years how financial advisors change the way that they engage with their clients about historically building portfolios. But now there's this element of digital assets.
How are you counseling and seeing the conversation of financial advisors as they talk to their clients? And how do you bring them into the opportunity here?
Four years ago, I created this organization, DACFP, the Digital Assets Council of Financial Professionals because I recognized early in this decade, this past decade that this is a transformative asset class that is unlike any other that we've ever experienced. And most financial advisors are not trained or educated in this field, and therefore they're not able to counsel clients effectively because they don't know frankly much more than their clients. You ask a typical consumer what's Bitcoin? They can't answer. And you ask a typical advisor what's Bitcoin? They can't answer either. And for much of the last decade, advisors didn't care about the fact that they didn't know what Bitcoin was because they weren't getting questions from clients.
The advisors didn't really believe much in this. It was need to dismiss Bitcoin because of its incredible price volatility as either a fad or a fraud. If it's not a tulip bulb, it's a beanie baby. And they were just able, just with a wave of their hand, the rare occasion a client would say, "Hey, what's Bitcoin? What's blockchain?" The advisor was easily able to say, "Oh, ignore it. It's a fad. It's a fraud. Pay no attention. Just keep doing what I've been telling you to do." Well, that dismissiveness kind of worked for the last decade.
Even up till say three years ago, an advisor could succeed in blowing it off. Not anymore. Today, it is clear that this technology is here to stay. We've got the chair of the Fed saying we're going to create a CBDC. There's now a chief innovation officer at the Federal Reserve whose task is to figure out how to launch a CBDC. We've got the White House issuing an executive order, the first ever, Obama didn't do it, Trump didn't do it, Biden has, calling on the full resources of the federal government to coordinate in the development of federal policy and regulation for guidance and protection of consumers in their ability to invest in this asset class and to foster innovation.
We're not going to ban it. We're going to help foster and facilitate it while protecting consumers. We've got Janet Yellen who just in the last two weeks as secretary of the treasury had a major speech saying this is a transformative innovation and we need to facilitate the innovation. When you've got the Treasury Department, the White House and the Federal Reserve all saying this is a big deal, we know that advisors can no longer wave it off. And now that you're seeing major crypto companies being the dominant advertisers at the Super Bowl and the World Series, with crypto companies slapping their names on stadiums, this is something we can't ignore anymore.
And as a result, consumers are now asking questions of their advisors. What is this thing? Who is that company? Is this something I should be investing in? How does it work? What does it mean for me? Advisors now realize they don't have a choice. They need to be able to demonstrate to their clients that they know what they're talking about. That they're able to help guide their clients to say whether or not you should invest in this asset class. If so, how much should you invest and how should you invest? What investments do you buy? What ETFs? What private placements?
What digital assets? Should you do it with an IRA? And if so, through what IRA custodian? How do we protect yourself from the scams and the frauds? In other words, we got to do our job in this asset class the way we do our job and every asset class. Because at the end of the day, it's just another asset class. And if you believe in diversification, if you believe in long term investing, if you believe in portfolio rebalancing, this new asset class is additive to the portfolio.
And so over the last year, Marty, we have seen at DACFP a massive sea change in advisor attitude. Advisors who historically were dismissive about it, who didn't like the idea, who thought it wouldn't have any staying power have changed their tune. Partly because clients are asking with greater level of frequency, partly because they're seeing the mainstreaming government regulators getting engaged in this, major institutional investors. When you've got companies like Mass Mutual, MicroStrategy, IBM, American Express, all making big investments.
When you see major endowment funds, pension funds, hedge funds, three out of four, family offices are investing in crypto and half of them say it's a key component of their portfolios. When you see this going on, advisors realize I better get on with it or I run the risk of losing credibility, having my clients go elsewhere and I'm going to lose clients, lose assets. I'm not going to be able to demonstrate that I'm staying state of the art. They're engaging. And the problem is most advisors don't know where to turn because there are very few resources for getting the education they need.
And that's what we do at DACFP. Our certificate course, which you are a huge proponent of and I'm really grateful for the support that Invesco has provided in helping us educate advisors. We're able to provide advisors the certificate in blockchain and digital assets through an 11 module online self-study course that teaches you what you need to know, not just about what is the tech, how does it work, but the practice management elements, the investment thesis, portfolio, allocation, regulation, taxation, and compliance, and most importantly, how to communicate with advisors and clients.
How do you talk to clients about this, how do you help them understand it and to determine whether or not it belongs in the portfolio, and if so, how. So this is being a bottom up driven thing where clients are demanding that their advisors be able to help and advisors who are resistant are going to lose credibility. They're going to lose clients.
And look, the work you're doing is just so important. And for all the years that we both have been in the industry, education is foundational to client success, ultimately. And we could not be more supportive of the program and the importance that is bringing to the educational element and creating the opportunities for all of our clients. But let's stand one of these foundational elements right now. How do you think financial advisors are doing with their clients in distinguishing between cryptocurrencies and really digital assets more broadly?
And do you think they're starting to understand the opportunity in digital assets more broadly?
Yeah. I think that they are recognizing the possibilities better. Advisors are beginning to realize that there are two categories in the world of digital. There are digital currencies, as you noted, and digital assets. In the beginning, there was Bitcoin. That was all there was and it was meant to be a digital currency, an online form of money not issued by a government. That experiment failed. And Bitcoin has proven that it is not really going to serve as a currency because it has massive price fluctuation. That's the last thing you want for the currency.
And so Bitcoin has proven itself to be a store of value, just like gold, just like oil, just like stocks, just like real estate. That value fluctuates with the sentiment of investors and the supply demand issue. But there is no question that Bitcoin has a massive price over $40,000 as we speak here today and widely expected a massive increase in that price in years to come. So as a digital asset, it has the characteristics of any other asset, whether we're talking rare wine, rare stamps and coins, baseball cards, or stocks, bonds, real estate, gold and oil.
Separate from the digital assets, you have digital currencies. What we now refer to as stable coins. These are currencies, digital currencies that are pegged to a fiat currency, the dollar, the Euro, the yen, etc., where you're using these literally as a currency where it allows you to own and transfer them, exchange them with other people without worrying about volatility or fluctuation in price. This is wonderful as a payments method. It allows you to move money across borders around the world instantaneously and free in a highly secure and transparent way, which you can't do in the federal and global swift system.
It takes five days and six and a half percent in fees on average, to move money from one country to another. With digital currencies, you can do it in minutes for free. This is transformative for global business around the world. So, advisors are beginning to realize there are tremendous commercial use cases, there are wonderful attributes using this technology of blockchain. And that represents at the same time, massive investment opportunity. So, advisors are beginning to appreciate this, realizing there's a there there. And this is something that they haven't recognized for much of the past decade, and so they're beginning to appreciate that digital assets bring a huge new asset class to improve portfolio diversification.
Advisors, more than ever, become of greater value because consumers are hearing about digital asset. They're confused about digital assets. They need an advisor to assist them with digital assets. And this is a wonderful business building opportunity. And the advisors who recognize that now are the ones who are going to win in the rest of this decade.
Well, I think you're right. And as you say, you can feel the pace and energy of everybody's trying to get their arms for around the opportunity. But one thing that was fascinating, and I'm sure you know this, so Investopedia recently surveyed 4,000 people. And what was amazing to me actually was, found that more millennials own crypto than they owned stock. And so, a couple thoughts there. Why do you think that's the case that millennials are more allocated crypto than to stock? And do you imagine that this trend is going to go beyond the millennial crowd in the future?
Yes. Among the millennials and Gen Xers, this is a fact, and it's not going to change in the course of their lives. We have to remember that most of investors these days are baby boomers. We're the ones with all the money. We're the ones with the most investment experience. And we use tech, but we don't use it very well. I still get confused with the remote control covering my TV. We use tech, but the younger generation is tech. They grew up at age three, playing with an iPad. They understand scrolling and swiping on a screen. They don't use paper books, they download eBooks and they use audio books. They refer to videos that don't have any sound on TikTok, we used to call them silent movies.
And so, their attitude and their functionality in this conversation is totally different. They're not going to suddenly change and go to an old school mutual fund back when they had eight and a half percent front-end loads. Right? Those days are gone and that's not who this audiences dealing with. But as they become more ingrained in this marketplace, recognizing that digital investing is their life, they're influencing their parents and their grandparents.
And so, we discover now that there is a huge engagement by baby boomers in the crypto space. It isn't limited to the next gen. And so advisors need to realize that your clients, even those in their 50s, 60s, and 70s own crypto. They haven't told you, just like your teenagers are drinking beer, they haven't told you that either, because they don't want you to know. They're afraid of being judgmental. They're afraid that you're going to be negative, and so they're doing it, but they're not telling you about it.
If advisors were to embrace, or at the very least be nonjudgmental about it, it'll help improve the relationship with a client. And we need to recognize that this technology is going to impact all parts of the client's business. Tokenization is going to democratize and demonetize. It's going to allow investors to engage with smaller amounts of money in a broader array of asset classes. And the ability to create portfolios that are of greater value of the client will be never bigger than ever.
So the younger investors are leading away, and they're going to show their parents and grandparents that future. And that is to encourage those parents and grandparents to talk to their advisors about it. And if the advisors continue to say, "I don't know much about it." or, "My firm won't let me engage.", all they're saying is, "Go somewhere else." And that's going to hurt their business overall. So, the advisory community, not just the advisor but their firms, have to figure out how to engage, how to retain the client, how to keep the assets, and how to grow the assets. And we're excelled in teaching you how to do that in a way that is safe from a regulatory perspective, a reputational perspective, and a revenue perspective. The days of being passive and oblivious to this, those days are gone.
Let me get specific here. Obviously, very optimistic on the long term opportunity here, and I agree with you there. But as somebody's looking today at cryptocurrencies, what would you advise them? How should they think about crypto currency in their portfolio today?
Well, here's the neat thing. One of the objections, frankly obstacles, that advisors have is there's no easy way for me to add crypto to my portfolio. I would have to radically change how I do business. I would have to tell my client to go to a digital exchange like Coinbase or Gemini or Kraken, where the client's got to do all the work in opening the account. These outfits won't really coordinate with me. I can't do block trading on behalf of all of my clients. I can't rebalancing. I can't include the asset in my portfolio reporting because it doesn't connect to Orion or Envestnet. I can't do tax management at the end of the year, and I can't debit my fee. And so I can't even get paid.
And why would I want to do this? And it's so disruptive. I'd have to build new systems. I'd have to retrain my staff. I'd have to fuss with my compliance department. I don't even know how to do all that. Why would I want to bother doing all that? And it just doesn't fit within my practice, even if I wanted to, which a lot of them don't even want to. So it's an obstacle. It's an objection that people have, and it's reasonable.
Here's the point. All of that I just said is old school thinking. It was valid three years ago, but not today. The crypto community has grown up in amazing ways over the past two or three years. Partly because the crypto community has hired massive numbers of financial services executives. There's been a huge outflow, as you have seen, Marty, in the industry, of people leaving Wall Street to join crypto companies. And these folks are bringing with them the financial services expertise that the crypto community has not had.
Meaning today, however you operate your practice, there is a crypto solution available to you. Meaning some advisors like to trade stocks. Others like to use ETFs, probably the majority of advisors like the ETF model. Just look at the success of Invesco, one of the major ETF players in the country. Some like to trade options and futures. Some like to buy... they like to engage in private placements on behalf of accredited investors. No matter how you like to manage money for your clients, there is a strategy within digital assets that accommodates you.
So when advisors say it's too hard, it's too difficult, it's too new, it's too different, it's not something my compliance department would approve of, that was true three years ago. It's not true today. And as a result, advisors would be shocked to discover how easy it is to add this asset class to their client portfolios in a seamless way to practice management. So advisors need to recognize that if you haven't studied the marketplace recently, you probably don't realize how easy it is to do this, so that you can say to your client, "I got you covered. We can easily add it to the portfolio." No fuss, no muss. Nothing new or different. It's the same as we've been managing the rest of the portfolio, no matter how we manage it, we can integrate this into the client portfolio, no big deal.
That's really helpful. And Rick, thank you for joining me today. And this is such an important area, and your leadership is so important for the financial planning community and for the end clients. The opportunity is enormous for financial planners, but also their clients. And really balancing the opportunities with the risks and the practice management of how to go forward is really well done.
And again, congratulations on starting the Digital Assets Council for Financial Planners, and the program, educational program, is just absolutely essential for the success of the industry. So thank you very much, and good [crosstalk 00:30:42].
Well, I appreciate it so much, Marty, and all of your support.