Does Recommending Cryptocurrency Violate CFP Board Rules?
CFP® Certificants in the News
You’re a CFP® Professional with an investment advisory practice and you just advised a client to purchase cryptocurrency assets (CRAs). Did you just violate the ethical standards? Should you expect a communication from the Disciplinary and Ethics Commission? Here’s the seemingly equivocal answer—maybe yes and maybe no. This article will focus like a laser on unpacking CFP Board’s most recent NOTICE to answer those questions. We’ll cover the following:
- CFP Board’s Perspective,
- Authority to avoid CRAs, and
- Authority to recommend CRAs.
CFP Board’s Perspective
We gain valuable perspective from the notice itself. “CFP Board’s Code and Standards does not require [emphasis added] a CFP® professional to offer Financial Advice to a Client on every Financial Asset that is available in the marketplace.” That quote implies that, depending upon the facts and circumstances of each client’s case, financial advice to invest in CRAs is neither required nor prohibited.
Authority to Avoid CRAs
“A CFP® professional does not violate the Code and Standards when the CFP® professional does not provide [emphasis added] Financial Advice about cryptocurrency-related assets.” Note carefully how the preceding quote is written. Choosing not to provide Financial Advice regarding CRAs could be interpreted as an ethical safe harbor (in the author’s opinion) when we consider the unequivocal phrase “…does not violate the Code and Standards.”
Authority to Recommend CRAs
"Moreover, the Code and Standards does not prohibit a CFP® Professional from providing Financial Advice about cryptocurrency-related assets.” The NOTICE goes on to identify the due diligence expected of a CFP® Professional when providing financial advice regarding CRAs, including the duties of:
- Competence in CRAs,
- Providing a fiduciary standard of care,
- Assessing the client’s risk tolerance/capacity, and
- Evaluating tax-related issues.
“When providing Financial Advice about cryptocurrency-related assets, however, a CFP® professional should do so with caution. A CFP® professional must be competent to provide that Financial Advice and must consider the particular attributes, risks, and uncertainties that cryptocurrency-related assets present when providing that Financial Advice.”
Let’s consider the potential recommendation of “high-yield” bonds to illustrate the CFP Board’s position on CRAs. What if a client told you she wanted more income from her portfolio? There are many ways to accomplish that goal, potentially including high-yield bonds (pejoratively referred to as junk). Should you advise your client to buy high-yield bonds? That answer depends upon a multitude of factors that include your client’s risk capacity,1 how much risk is in the bond (e.g., a bond rated BB is among the least risky of the “high yield” bonds), and much more. So it is with providing financial advice regarding CRAs; as long as your due diligence supports such financial advice, you are not prohibited from doing so.
Key Takeaway
The collapse of FTX and the arrest of its founder argues for an extreme level of due diligence before providing financial advice regarding CRAs. While the outcome of FTX-related criminal charges and civil suits will not be known for years, it seems to the author that even if your firm allows trading in CRAs, you must decide for yourself whether the risks outweigh the benefits for your clients and yourself.
1Risk tolerance less existing risk in the portfolio = risk capacity.
