Have the crypto and ESG revolutions been canceled?

Throughout 2022, cryptocurrency and ESG were always in the headlines of financial news. And yet according to most financial advisors, neither product plays a significant role in their businesses — and few expect it to grow in 2023. 

A new study by Arizent, Financial Planning's parent company, shows just how wide the gap is between the media buzz and reality. The survey, "2023 Predictions: What to Expect in the Year Ahead," asked 362 advisors what they thought 2023 would look like for the wealth management industry, including what assets their clients were likely to invest in. Crypto and ESG (short for "environmental, social and corporate governance") investments barely made an appearance.

Crypto, in particular, seemed to be a non-starter. Almost half of advisors — 49% — said they did not consider digital currencies a suitable investment. For three-quarters of advisors, less than 5% of their clients were invested in crypto in 2022. For 22%, none of them were. So is the crypto revolution coming next year? Not likely. Only 30% of advisors expected more clients to buy crypto in 2023 — down from 60% who thought so in 2021.

Prospects looked dim for ESG as well. A large majority of respondents — 69% — said they were unlikely to recommend ESG products in 2023. Twenty-one percent said they were  somewhat likely, and only 10% say they were very likely to do so.

This may seem surprising, considering all the press coverage devoted to crypto and ESG last year. From Bitcoin's peak last winter to its plunge in the spring, the news media avidly followed every crest and crash in the value of digital currencies. Meanwhile, investment giants like BlackRock dove head-first into the ESG movement. From the headlines, crypto and ESG looked poised to play a big role in the future of finance.

Or maybe not. Since June, Bitcoin's price has stayed in the doldrums. In May, the sister coins TerraUSD and Luna collapsed. And in November, the crypto exchange FTX imploded in spectacular fashion, leading to the resignation and arrest of its CEO, Sam Bankman-Fried, on fraud charges. (Bankman-Fried has pleaded not guilty.)

At the same time, Republican politicians loudly turned against ESG. GOP leaders from Florida governor Ron DeSantis to former vice president Mike Pence spoke out against what they call "woke capitalism," and state legislators in Kansas, Texas, Oklahoma and other states have been pushing new bills to clamp down on it.

But even apart from all this bad news, both crypto and ESG face a simpler obstacle: Many advisors steer clear of them.

"I don't recommend (or even discuss, really) crypto with clients due to the liability of doing so," said Ron Strobel, a certified financial planner and founder of the RIA Retire Sensibly in Meridian, Idaho. "From a professional perspective, I just don't see how we can do any form of due diligence on something that is so questionable in the first place."

Others are put off by the opaqueness of the technology.

"Most of my clients want to understand it before they'll put money in it, and crypto isn't something easily understood," said Sarah Jane Paulson, a CFP and head of Valkyrie Financial in Appleton, Wisconsin. "While I get a lot of questions about investing in crypto, I haven't had anyone ask for it in their portfolio."

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Even among advisors who recommend crypto, many think it will be less popular next year. Jan Pevzner, a CFP and founder of Gotham Block in New York City, said he's generally "bullish" about the technology but is not advising his crypto-owning clients to buy more of it.

"Because many investors already own crypto and are down this year, the interest is naturally dampened," Pevzner said. "Many people are disenchanted with crypto because of the recent slew of bad news."

ESG's problems are different, but they can be just as repellant to advisors. Typically, an ESG product is one that invests in companies thought to have positive impacts on the environment, social and governance issues — or at least exclude those that are considered harmful to those causes. But if a fund doesn't exactly match a client's ideas of who's harmful and who's not, the advisor then has to custom-fit the index to the investor's ideals, cherry-picking the "good" companies and weeding out the "bad" ones. 

And ratings of firms based on ESG metrics can vary widely based on who is making the assessment and the factors included. That's how a company that makes cluster bombs can sneak into a fund considered ESG-friendly.

Strobel said this can quickly become a headache.

"The 'one-size-fits-all' ESG approach doesn't fit most of our clients," he said. "It opens up the floodgates on building an investment strategy that is so complicated and time-consuming for me that it distracts from my other, more important responsibilities."

That's not to say there's zero interest in these products. After all, almost a third of the advisors Arizent surveyed said they were at least "somewhat likely" to recommend ESG funds. And even after the year crypto has had, some advisors still think it will be a good investment in the long run.

"There is nothing wrong with crypto itself," Pevzner said. "Most scandals are related to regulations, compliance and bad actors. I think it is necessary to go through this period; by the time the world figures out how to suitably handle the technology, it will be too late to invest in it."

But according to Arizent's research, the majority of advisors don't expect to do much business with either of these headline-grabbing assets in 2023 — in fact, they expect to do less than last year. For many, it just seems easier to stay away from them.

"I've found that the best option for my sanity and for the investor to accomplish their goals is to simply recommend them to a specialist when they want to invest in crypto or ESG," Strobel said.