Wealth Management’s Big Bang – Winners, Losers and the Future of Banks in the Blockchain Age
Costless, secure and instantaneous financial transactions. That’s the future. Seems too good to be true but that’s exactly what blockchain technology will herald for the financial services industry.
Some suggest that blockchain’s impact on the global economy may even surpass the efficiencies brought by email and the internet. Industries as diverse as trade finance to diamond trading are eyeing the opportunities to cut costs and improve security. Stock exchanges around the world have begun to examine how stocks and other investments could be transacted using the technology.
Blockchain will allow financial securities to be traded at near zero cost. Instead of taking 1-3 days to settle a transaction, trades over blockchain will be instantaneous. Custody services – the trusted bank or financial institution who holds the shares for you – become obsolete, replaced by an immutable distributed ledger representing higher levels of security and safety than even the best rated banks.
Implementation of blockchain is not far away. Australia’s ASX stock exchange is undertaking a trial to clear and settle Australian stocks using blockchain. The LME, ICE, CME and NASDAQ, have also launched initiatives to investigate how they can leverage these platforms.
Blyth Masters, a former senior executive at JP Morgan who established a company called Digital Asset Holdings, said recently at the Australian regulator ASIC’s conference that we can expect tens of billions of dollars of waste and costs to be removed from the industry as a result of introducing the technology.
“It’s a big deal. And it is going to change the way that our financial world operates” says Blyth Masters.
The biggest winners of all will be us – the consumers. Payment, settlement and custody fees are a drag on the performance of any investment. Just as online stockbroking allowed investors to access the stock markets at a vastly reduced price in the 1990s, blockchain will allow wealth management to be provided at a vastly reduced cost. As the Gen X’s, Y’s and Millennials plan for their retirement, the cost of buying, holding and managing their nest-eggs will be a fraction of those paid by their parents.
Companies operating robo-advice platforms
Without the need to assess who can be trusted with your wealth, and who can provide the best price for buying and selling investments, the investor has a simpler investment problem. Providing advice on what assets to buy to achieve a person’s financial goals and objectives will be the key service of wealth management in the future.
Powerful robo-advice platforms are emerging which aid the investor in their investment journey. These platforms assist the investor to understand their risk tolerance and plan their investments to match their wealth goals. They will match the investor’s needs to the lowest cost instruments in the market such stocks and ETFs. They will also help the investor to manage their investments; continuously rebalancing the investment to suit changing market conditions and specific personal considerations of the investor. High net-worth individuals may prefer a completely hands-off approach to investing, in which case the robo platform will be administered by an advisor. For the foreseeable future, the human advisor will remain important for managing more complex aspects of wealth planning. However, institutions automating less-complex, manual tasks will come out on top.
Traditional asset managers
Asset managers who don’t adapt to the changing landscape will struggle.
Where once there was an efficiency to having an asset manager trade, manage and safe-keep the assets on behalf of all investors, the introduction of blockchain technology will see those benefits disappear almost entirely.
Already, the market’s grown weary of the so-called active asset managers. The outperformance promised by these active managers has on average been gobbled up by their high fees. There has been a mass exodus of cash from active managers to passive index tracking funds and ETFs. These passive funds don’t claim to have a secret sauce but they charge a much lower fee. Rather than outperform the market, these passive investments aim to track a sector or the market, and deliver the market’s performance.
Blockchain and robo-advice technology, may well see the demise of traditional asset managers. The new asset managers in the blockchain age will be robo-advice platforms, managing mass customized portfolios of securities suitable to the specific needs of investors.
Some active asset managers have already seen the writing on the wall. In 2015, Blackrock acquired FutureAdvisor, an emerging robo-advice platform, while other firms such as Invesco, Goldman Sachs and JP Morgan have also made investments into companies with robo-advice platforms.
Custody settlement and clearing agents
In recent years, trust in banks has been eroded from within and now from without. The service of looking after your assets may no longer be the one you require your bank to do.
Blockchain represents an immutable distributed ledger offering an indisputable record of ownership, which will eventually eliminate the need for traditional custody agents. These agents charge substantial fees for every line of stock transferred into their safe keeping. That will change with blockchain wiping millions from investor’s costs.
What happens to the banks?
As the internet emerged in the 1990s, there was much talk about how it might change the world. Not all those predictions were correct.
What we have and continue to witness are new generations of companies offering services that not only grabbed market share from existing players but created whole new industries: Google, Amazon, Netflix, Alibaba, Uber, AirBnB to name a few.
Banks have long held the position in our society of being trusted financial services providers. In return, a large percentage of bank revenues are linked to the provision of these safe and trusted services.
Sooner or later, consumer banks will realize that revenues they have generated from doing transactions, payments, custody, or sales of managed products are at risk. To earn a fee, they will need to further develop other services unaffected by the proliferation of blockchain.
Some of the most forward thinking consumer banks are beginning to realize that robo-advice will allow them to profitably offer wealth management to clients with lower account values. As clients baulk at the idea of paying fees for services that are available elsewhere for free, remaining incumbents are likely to catch on to the trend. Information, guidance, and portfolio management delivered anytime, anywhere and on any device will be the hallmark offering of the modern consumer bank, and it will be one of the few wealth services clients are willing to pay for.
Consumer banks are likely to do well from this transition. These banks already have the clients. They also have the capacity to fast track themselves to being the best and lowest cost service providers, whether they build or buy the technology. Forward-thinking banks around the globe are now assembling teams to examine how to use blockchain in payment systems, trade finance and investment platforms.
Companies which embrace blockchain and other new technologies like robo-advice, data analytics and artificial intelligence will probably do better than those which take a wait and see approach. This approach is only prudent until the moment you realize your organization is so far behind and there is no chance to catch up.
As Bill Gates said:
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“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”