LPL’s $1.4 Trillion Gatekeeper Avoids Bitcoin-ETF Hype, for Now

Investment leaders, such as Blackrock, spearhead Bitcoin ETF platforms and products, whilst LPL takes a slower approach.

Securing Gary Gensler’s ETF approval was just the first step toward bringing crypto investing to the masses. Now people like Rob Pettman at LPL Financial — a gatekeeper of more than a trillion dollars in capital — need to be convinced that the new spot-Bitcoin exchange-traded funds are worthy additions to their massive trading platforms.

The message from the LPL executive: The next three months will prove critical in figuring out which of the new funds will be made available to the company’s clients. At top of mind is the notorious slew of ETF closures across the industry’s history as investment fashions come and go.

As the head of wealth-management solutions for LPL, Pettman leads the due-diligence process on funds before they are added to the platform that custodies $1.4 trillion in assets overseen by financial advisers.

“We just want to see how they work in the markets,” he said. After the three-month assessment, the platform will decide which funds they want to offer, or whether they need more time to assess the ETFs.

Like many gatekeepers in the money-management world, Pettman faces a balancing act between keeping his clients shielded from dodgy investments and allowing them to reap the rewards of an emerging asset class. Some platforms, like Fidelity and Charles Schwab, already have the funds available for RIAs to trade for their clients. Vanguard Inc. has no plans to launch its own Bitcoin ETF or allow the existing funds to be traded through its brokerage.

At the moment, financial advisers using LPL can purchase Grayscale’s GBTC ETF for their clients, since that fund existed in a trust structure and was available on the platform prior to converting to an ETF. The other nine funds, including BlackRock’s IBIT and Fidelity’s FBTC, are under evaluation.

A chief concern for Pettman is that ETFs that don’t accumulate significant assets often shut down, which can cause headaches for advisers, investors and platforms like LPL.

“That can be a very negative experience for the investor, for the financial adviser. It’s also incredibly costly for a firm like ours operationally to help to facilitate that,” he said. So LPL needs to be “mindful of the product that you’re placing on the platform and make sure that they are durable over time, that there is a good investment thesis. That’s ultimately the position that we normally come from when evaluating these.”

Last year saw an outsize number of ETF closures, as funds with fleeting pandemic-era strategies failed to sustain enough assets to operate. For the 253 US exchange-traded products that closed down in 2023, the average amount of assets was $34 million, according to data compiled by Bloomberg. Among them were several crypto-themed funds, including the VanEck Digital Assets Mining ETF (DAM) and the Volt Crypto Industry Revolution and Tech ETF (BTCR) that invested in stocks of companies involved in the industry.

It’s far too early to predict whether any of the newly listed spot funds will end up closing. But so far, the disparity in asset sizes is widening. At the top of the leader board of new products is BlackRock’s iShares Bitcoin Trust, which has already grown to $3 billion in assets. At the opposite end of the spectrum is the WisdomTree Bitcoin Fund, which has less than $12 million in assets.

“While the attention and ink dedicated to spot-Bitcoin ETFs has been unlike anything else we have seen in the ETF world, the truth is they are ETFs just like any other and will face the same headwinds as any other ETF launch in this crowded, mature marketplace,” said Amrita Nandakumar, president of Vident Asset Management. “And if these funds cannot meaningfully raise assets in a reasonable amount of time, it should not come as a surprise that some eventually close.”

The evaluation process underscores the next leg of the spot-Bitcoin ETF horse race that saw a legal battle and fee war play out before the funds were even approved by the SEC. Now, not only do the fees make a difference in garnering assets, but market participants are judging how well the funds trade and the size of assets under management they accumulate.

“Time is going to tell on the investment thesis,” said LPL’s Pettman. “And that’s essentially what we’re monitoring at the moment.”