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An Ethical Framework for Consumer Led Demand

|0.5 CPD hours, FPA Accredited

FASEA Professionalism and ethics (0.5 Hours)

ASIC Deposit Products and non-cash payment products (0.5 Hours)

Learning Outcomes

This piece investigates the ethical dilemma financial advisers may face in recommending digital assets to their clients. The purpose of the piece is to enlighten the reader with information on how the dilemma has surfaced, why it is necessary to resolve it, as well as provide potential solutions to diminish the impact of it over the short-term. Key issues that will be addressed include:

  1. The prevailing consumer and adviser sentiment regarding digital assets.
  2. The underlying psychological causes of biases one may have regarding digital assets.
  3. What impacts these biases may have, and solutions to manage these biases.

Why Are We Talking About This?

At Monochrome Asset Management, we are committed to providing the financial advice community with research that can help advisers improve their communication of digital assets with their clients. In our recent launch to the financial advice community, we have been encouraged by the feedback we have received, while at the same time, recognise the challenges that many advisers face when discussing this asset class with their clients.

One of the key questions that arose from our interactions with the financial advice community was, “how does one manage implicit biases; both our own biases and biases of our clients?”

There is no shortage of controversy surrounding the digital asset ecosystem. Controversy, by its very nature, causes a polarization of opinions. Typically, the greater the degree of polarization, the greater the risk of clinging on too firmly to our prejudices, which blinds us to new ideas and opportunities.

In this article, we aim to address some of the underlying causes of our biases, with a particular focus on cognitive dissonance when considering digital assets and the risks it poses to both advisers and clients. We then offer some solutions on how it can be managed.

It must be recognised that today advice cannot easily be given in digital assets. The nascent asset class is not clearly defined by ASIC (for advice purposes) and therefore there remains questions over coverage by a Responsible entity, an advice licence, and even professional indemnity insurance (PI cover).

That doesn't necessarily mean though that an intelligent conversation cannot take place with clients, as we will discover.

Consumer Sentiment & Adviser Hesitancy

Digital assets like Bitcoin have taken the financial world by storm. Being a growth asset rather than a yield asset, Bitcoin’s value has grown massively, recording returns upwards of 300% over the past year, and upwards of 8000% over the past 5 years, which equates to a 5-year compound annual growth rate of 138.93%, as of 20 September 2021. This recent performance has created a new challenge for financial advisers, as although some digital assets have thus far provided excellent investment returns, they have not been covered by traditional investors.

Some financial advisers, in response to client queries about digital assets, have expressed the sentiment that “there is clearly an emotional euphoria that seems to be sweeping through the public around cryptocurrency,” and that “the vast majority of people who own cryptocurrency are doing so for all the wrong reasons and misunderstanding what they are truly buying.” For advisers, the consumer-driven hype of digital assets is very real, so it will be important for them to be able to effectively engage with clients who have a fear of missing out on digital assets.

Digital assets have become extraordinarily popular over the past 10 years, with the ecosystem seeing several thousand alternatives spawn in the past few years. A survey conducted by digital asset exchange Kraken revealed that 4 million Australians are likely to purchase digital assets in 2021. A survey by online financial broker Savvy showed that 17.3% of Australians currently own some form of digital asset. Both surveys had samples of around only 1000 people however, so samples this small may suffer from sampling bias. From an age demographic perspective, digital assets are clearly more popular with younger investors, with only 21% of all Australians willing to purchase digital assets compared to 34% of Australian Millennials. The demand for digital assets has so far been largely consumer-driven rather than corporate-driven, with most Australians who purchased digital assets doing so independently through online exchanges rather than through a financial adviser. Witnessing the nature of the rise of this asset class can understandably lead an adviser to tread carefully.

Another common source of hesitancy surrounding digital assets like Bitcoin is how difficult they are to value. In a canonical Bitcointalk.org forum post by the creator(s) of Bitcoin, Satoshi Nakamoto, they said “Sorry to be a wet blanket. Writing a description for this thing for general audiences is bloody hard. There’s nothing to relate it to.” Because Bitcoin is so hard to describe, define or contextualise, people can barely agree on what Bitcoin and other digital assets even are! This makes achieving consensus on valuation almost impossible. To make matters worse, internet memes like Dogecoin are bundled into the “digital asset” basket right alongside Bitcoin, along with other outright multi-billion dollar scams like Bitconnect. Regardless of the “asset”, value is effectively narrative-driven, with quickly-changing narratives playing an important role in price volatility. Fundamental financial techniques can be useful, but since Bitcoin is not just a financial instrument, but also a peer-to-peer software protocol, other methods such as Metcalfe’s Law may be used. In a separate article, the various methods of valuation of digital assets are explored in more detail.

Financial advisers have also been hesitant to discuss digital assets with clients due to the lack of government regulation. Currently, Bitcoin is treated as property by the Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC) is currently undertaking consultation to determine the nature of Bitcoin., Australian digital asset exchanges are not regulated to the same extent as Australia’s primary securities exchange, the Australian Securities Exchange (ASX). Indeed, 79% of Australians want to see digital assets more heavily regulated. Current US Securities and Exchange Commission Chair Gary Gensler is hinting that effectively all “digital assets”, barring Bitcoin and a few others, are securities that should be subject to the SEC’s jurisdiction and oversight. In another article, we explore the current regulatory landscape of digital assets. Given this context, it is understandable that advisers are wary of advising clients in this space.

A final concern advisers might have is that digital assets have exhibited high volatility when compared to other traditional investments, a concern shared by 43% of Australians. While digital assets do experience higher levels of volatility, these sentiments imply that volatility is unable to be managed, when in actuality, various portfolio volatility management techniques exist and can be implemented.

Due to the aforementioned concerns, many financial advisers are hesitant to mention digital assets to their clients. Yet, despite this hesitancy, advisers are increasingly being confronted with enquiries from their clients regarding digital assets. Under a Financial Standard survey that was conducted during September 2021, 77% of Australian advisers had received at least one inbound enquiry regarding Bitcoin and digital assets from their clients over the past 12 months. The survey also found that 82% of advisers did not feel equipped to respond to client enquiries relating to bitcoin and digital assets. This causes a level of anxiety to some clients, where they feel that their financial adviser’s dismissal or lack of engagement of the asset class conflicts with their client relationship and possibly their best interests duty.

Therefore, financial advisers commonly find that their healthy and reasonable levels of scepticism towards digital assets are being contradicted by their clients’ counteracting levels of enthusiasm towards digital assets.

What is Cognitive Dissonance?

So, how should advisers with healthy levels of scepticism towards digital assets manage these enquiries from clients with equal, but counteracting levels of enthusiasm towards digital assets? Does the adviser’s duty of care to their clients require them to provide the necessary information needed to help them make an informed investment decision? It is reasonable to experience a strong emotional reaction to this discussion, and if this has occurred, then the reaction may be caused by something known as cognitive dissonance, which when left unresolved, has the potential to create risks for both the financial adviser and the client.

Put simply, cognitive dissonance is the discomfort someone experiences when they try to reconcile two contradictory thoughts, beliefs or behaviours - with the magnitude of discomfort varying on a case-by-case basis. The textbook example of cognitive dissonance is someone smoking cigarettes despite being aware that it dramatically increases the risk of lung cancer. This person may justify this behaviour by saying that they need to smoke to help them deal with anxiety, but as an external observer, a contradiction can be seen between their behaviour (i.e. harming their health), and their belief (i.e. that smoking will help them overcome their problems).

From here, we will explore why a financial adviser may experience cognitive dissonance, dive into further detail about how it can impair an adviser's ability to give sound advice and prevent investors from making informed decisions, and discuss what strategies can be used to keep it in check and ensure objectivity is maintained.

Before moving on, it is worth noting that cognitive dissonance is experienced as much by clients as it is by advisers. So, the very least an adviser can learn from this article is how to deal with clients who are experiencing cognitive dissonance.

Why May Financial Advisers Have Cognitive Dissonance Around Bitcoin?

In the financial advising context, advisers may experience cognitive dissonance around digital assets such as Bitcoin if they find that their belief about digital assets (i.e. their scepticism), is being contradicted by the behaviour of digital assets and others’ opinions of them (i.e. the prolonged success of digital assets for over a decade and their clients’ counteracting levels of enthusiasm towards them).

In addition, being a nascent asset class, digital assets have not been included in asset class definitions, and are neither on model portfolios of approved product lists (APL) nor covered by AFSL Professional Indemnity (PI) insurance cover. But just like investment property, with appropriate disclosures and disclaimers, advisers may be able to discuss it if required by the client and advisers can make portfolio adjustments to accommodate when and where necessary.

From a purely ethical perspective, if a financial adviser does not understand an asset or is sceptical about it, it would make sense for the financial adviser to not recommend the asset to a client. But at the same time, disregarding an asset class due to scepticism or a lack of knowledge may create a meaningful opportunity cost. Even a modest exposure to Bitcoin over the last 5 years would have created significantly better outcomes for investors. For example, combining the Blackrock 60/40 fund with a 1% or 5% Bitcoin exposure led to an increase in overall returns without drastically increasing volatility when rebalancing monthly, as seen in the graphics below.



In addition, if the client is knowledgeable about the product and wants to invest in it, then should the financial adviser be prepared to discuss it with the client anyway? According to the Financial Planners and Advisers Code of Ethics, it is the financial adviser’s responsibility to act in the best interests of clients, and address any cognitive dissonances they may have surrounding an asset class.

What Effects Occur When Advisers Have Cognitive Dissonance?

A financial adviser having cognitive dissonance around an asset class is a risk to manage for both the adviser and the client. It may lead to the ethical dilemma of either discussing digital assets with clients and potentially exposing the financial adviser to an area of limited knowledge, or not discussing digital assets with clients and leaving them to make their own, less informed decisions. Cognitive dissonance may prevent the adviser from investigating and deepening their knowledge regarding digital assets and consequently dismissing the asset class altogether. Cognitive dissonance is not uncommon for advisers with regard to digital assets, but it is important to clearly understand its impact on both the adviser and the client.

The good news is that there are many ways and strategies to resolve any biases one may have. Digital assets are not for everyone, but if one wants to address any cognitive dissonance one might have, there are working solutions which will now be discussed.

Solutions to Cognitive Dissonance

If a financial adviser finds that they have cognitive dissonance against digital assets, then it is very important to identify the cause of the cognitive dissonance and then attempt to resolve it. If the financial adviser finds that their cognitive dissonance is caused by a lack of confidence in their knowledge to provide appropriate advice, then there are potential options they can take.

Firstly, financial advisers can learn about digital assets by completing online courses, researching or enquiry. CPD courses are now available and there is currently a plethora of quality material available to peruse. These can assist the adviser in understanding the asset class, to have better informed conversations, and be able to come up with strategies to accommodate the client without advising.

Or financial advisers can simply limit the discussion about digital assets to listing their benefits and risks and facilitate informed decision making for their clients. This may be necessary until digital assets are covered by asset class definitions, as well as included under APLs and PI cover. Clearly caution must be exercised in this situation as the adviser must make clear that they are not advising for or against a particular, or a collection of, digital assets. However, this will, at least in the short term, allow financial advisers to have an intelligent conversation about digital assets with their clients, while not necessarily advising them in the form of a recommendation, and allow for demand for digital assets to remain consumer-driven.


Financial advisers must make an effort to remain indifferent and impartial towards all different kinds of assets, including emerging assets, as a part of their duty of care to clients. Acting in their clients’ best interests, financial advisers should be aware of their own biases and incorporate strategies that limit their impact on clients. While one often considers the impact of poor investments made, it is equally important to take the time to consider the opportunity cost of investments consciously excluded from portfolios.

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