Inside one advisor's search for a crypto allocation 'breakthrough'

Portfolio manager speaks out on compliance and technological challenges

Inside one advisor's search for a crypto allocation 'breakthrough'

While Daniel Frereault has taken a forward-thinking position in helping his clients get exposure to cryptocurrencies, the portfolio manager is also the first to admit that on the whole, Canada’s wealth space is ill-equipped to truly embrace crypto as an asset allocation option.

“I'm a discretionary portfolio manager, so my job is to bring the best asset mix to the clients,” Frereault, the founder of Montreal-based Platinium Capital, told Wealth Professional. “I can get crypto exposure through spot ETFs, but it’s like squeezing a 2021-era piece of technology into something from 1980. It doesn’t make sense.”

Frereault says that since 2015, he’s wanted the ability to include an allocation of 2% to 3% crypto in his clients’ portfolios. With 200 to 250 clients in his book, he estimates 10% of them are higher risk-tolerance individuals who actively ask if they can invest in crypto assets; the rest are open to doing so as long as he can show it would improve their portfolio returns on a risk-adjusted basis.

When he first looked into the possibility of investing in crypto, he found out that while there were already fiduciary trust services available that could accommodate those digital assets. But to actually trade in the assets, the exchange platforms that existed at the time required him to open an account for each client relationship in his practice. That’s what led him to engage with MeetAmi, a tech company that’s dedicated to helping wealth firms get the solutions and education they need to recommend and invest in crypto directly for their clients.

“MeetAmi’s AmiPro software provides the tools I need to do block trades and easily manage crypto assets for 300 accounts, with the same setup I use for stocks, bonds, and options on a portfolio basis,” Frereault says.

The ability to do block trades and then allocate crypto holdings across individual client accounts is crucial for Frereault to fulfill his fiduciary obligation effectively. Doing hundreds of trades one by one, he says, would take significant amounts of time. Because asset prices will change between the first transaction and the last, it would lead to an inconsistent portfolio experience for his clients.

“When I gained access to block trading capability for crypto, it was a breakthrough,” he says. “Now I can tell the other 90% of my clients ‘I can manage crypto like stocks and bonds on a portfolio basis. Are you open to being part of that asset allocation?’ And once I explain the advantages to them, they say yes.”

While Frereault is convinced that cryptocurrencies have awesome potential, he isn’t blind to the reality that they are highly volatile. At this point, he says, there are significant numbers of investors that want to buy in when cryptocurrencies are on the upswing and cash out when they’re in decline, which exacerbates movements in both directions.

Some speculators may want to take a chance on a 10% to 15% crypto allocation within their portfolios, but Frerault advises against it because of the asset’s wild behaviour. That’s not to say he’s against having volatility in the space; with the entry of more institutional investors who are willing to hold considerable amounts of crypto for the long haul, he’s convinced that crypto volatility will eventually settle down to more manageable and healthy levels.

“When you try to regulate or control a market, I think it’s a mistake. There’s always going to be a loophole to that, so it’s better to let the market run,” he says. “Regulators have the ability to oversee how crypto funds behave, and that’s good. But letting other participants do price discovery and act as free market players is all for the best, I think.”

As the owner of his own firm, Frereault is able to talk to his compliance department and work with legal professionals to set up an appropriate structure that allows him to invest in crypto on his clients’ behalf. But the vast majority of advisors in the wealth space, he says, have a more challenging relationship with their firms’ compliance representatives.

“Every advisor wants exposure to, or is at least interested in the crypto world. Unfortunately, even if their clients want that, advisors can’t get it for them … compliance is the biggest hurdle as of now,” he says. “As advisors want to move on with this, I think it will take a group of thousands to put enough pressure on compliance units to make that happen. But I hope my story can show others just what’s possible.”