Non-Custodial, Non-Discretionary Digital Asset Advisory Agreement & Disclosures Template

Legal Disclaimer: This article is for informational purposes only and does not constitute legal, compliance, or professional advice. Registered Investment Advisors (RIAs) considering incorporating these suggestions into their practice should consult with a professional to ensure compliance with all applicable laws and regulations. The materials and documents provided by L1.co are offered "as is" and are intended to be modified and repurposed to fit the specific needs of an RIA. We thank L1 customer and investor Ironclad Financial for sharing their compliance and legal documentation that enabled the creation of this open source framework.

In the rapidly-evolving world of wealth management, digital assets present an exciting opportunity for Registered Investment Advisors (RIAs). Not only are digital assets a growth opportunity – with more than two trillion dollars in assets sitting outside of traditional wealth channels – but also the future rails for other asset classes, enabled by the tokenization of funds, stocks, bonds, property, and other investment products. This represents unprecedented possibilities but also brings unique compliance and operational challenges. Navigating these waters requires a well-thought-out strategy, particularly concerning custody and discretion over digital assets.

The Non-Discretionary, Non-Custodial Model: Simplifying Compliance

One of the most effective strategies for RIAs to manage the compliance overhead associated with digital assets is adopting a non-discretionary and non-custodial advisory model. This approach significantly reduces the regulatory burden, as it circumvents the complexities associated with having custody of client assets.The L1 platform exemplifies this model by providing a framework for RIAs to offer digital asset advisory services without taking custody of the assets. This setup not only streamlines compliance processes but also aligns with the decentralized nature of blockchain and digital assets, giving clients control over their investments.

Incorporating Clear Language in Client Agreements

To effectively implement this model, it's crucial for RIAs to incorporate specific language and disclosures into their client agreements, and consider incorporating additional disclosures for clients to acknowledge and sign as part of their onboarding process. This language should clearly outline the scope of advisory services offered, emphasizing the non-discretionary and non-custodial nature of digital asset advisory. For instance, the Investment Advisory Contract used by Ironclad Financial (ICF) serves as an example with sections detailing:

• Digital Asset Advisory (Non-Discretionary): It specifies that the firm offers specialized advice on digital assets, where clients maintain control over transactions based on the firm’s guidance. Clients receive a separate disclosure outlining risks associated with digital assets, underscoring the non-custodial advisory nature.

ICF offers specialized advice for clients interested in digital assets like cryptocurrencies and tokens. In this non-discretionary service, clients maintain control over transaction approvals based on ICF’s guidance. Clients will receive a separate Digital Asset Disclosures document outlining the risks associated with digital assets, which must be reviewed and signed.

Digital Asset Disclosures Template

In addition to their standard client agreement, RIAs should consider incorporating a dedicated Digital Asset Disclosures template. This template complements the main agreement by offering detailed insights into the specific risks, fee structures, and operational practices associated with digital asset investments.

DOWNLOAD TEMPLATE FOR FREE: Digital Asset Disclosures (word document)

Key sections from the template provided by L1.co include:

• Risk Disclosure for Digital Assets: This section educates clients on the inherent risks of digital asset investments, such as market volatility, regulatory changes, and cybersecurity threats, ensuring clients are well-informed before making investment decisions.
• Self-Custodial Digital Assets – Best Practices: It outlines best practices for managing digital assets in a self-custodial manner, emphasizing the client's responsibility for secure asset management and the benefits of maintaining control over their digital investments.

By incorporating these disclosures, RIAs can ensure clients are fully aware of the unique aspects of digital asset investing, facilitating a transparent and informed advisory relationship.

As digital assets continue to carve out a significant presence in the investment landscape, RIAs must adapt their practices to address the unique challenges and opportunities they present. By adopting a non-discretionary, non-custodial advisory model and incorporating clear, comprehensive language in client agreements and disclosures, RIAs can navigate the compliance landscape effectively. This approach not only safeguards compliance but also empowers clients, fostering trust and transparency in the advisor-client relationship in the digital age.