Brokers Gone Blockchain: How Public Ledgers Will Disrupt Wealth and Asset Management
By Nicolas Marchese
With the world of finance in awe of the decentralized public ledger that is blockchain, questions arise pertaining to its possible effects on wealth and asset management. Looking at the current business model of a brokerage firm, trades are traditionally executed as follows: a broker sells a particular security, the transaction is verified and executed through a clearinghouse such as Fidelity, and the asset is “received” days later. Brokers, of course, charge significant fees for these transaction and management costs.
So, while blockchain would be likely to increase the efficiency of trades by eliminating the intermediary, it is important to note that millennials will likely invest for their retirement at a far lower cost than that paid by their parents. This does not mean, however, that wealth management is necessarily threatened. Improvements in client onboarding, model management, and security could make for a grounded and efficient operation within the financial services sector.
In a recent report on the implications of blockchain in wealth management, Ernst and Young discusses that client onboarding and profiling would be simplified with the new technology. Currently, brokers are faced with the challenge of obtaining proof of identification, marital status, residency, sources of wealth and net worth, among many other personal data.
Communicating this information with a new broker can be daunting, but with blockchain, the data would be stored in a profile on the ledger with only trusted parties being granted access. A relationship would be initiated by the profile owner, and the system would automatically audit the prospective client on the secure Blockchain network. This would, of course, enhance the process of client and risk profiling. In a business rooted so strongly on the principles of trust, a secure network with selective access would make customer acquisition, the greatest hurdle in WM, far less challenging. And while, as mentioned above, removal of an intermediary may affect the ability to charge fees, it would fare well for client retention.
A efficient transferring of recourses would inevitably improve the experience of investing. When considering the actual sale of securities, blockchain allows for near-instantaneous transfers of assets with authenticated provenance of tracked changes. In time, this could be more threatening to traditional systems such as automated clearinghouses (ACH) and automated customer account transfer (ACAT) than brokerage firms themselves. All said and done, blockchain technology can help banks cut costs by up to $12bn annually in back-office processes such as settlement, regulatory and cross-border payment costs.
Of course, when it comes to personal finances, there is one issue that is paramount — security. Much like the client onboarding process, the security of actual assets would also improve by virtue of the transparency and decentralization of the blockchain ledger, which is very resistant to hacking and manipulation.
Blockchain transactions are distributed across many computers, and it is not possible to alter any information about the transaction without also altering all subsequent blocks, and disrupting the entire network, which is currently believed to be impossible. In the environment of wealth management, where individuals are often susceptible to scams and hacks, the notion of a visible ledger on a secure network is comforting to an investor.
We look forward to seeing how money managers will implement this emerging peer to peer technology.