Blockchain Wealth Management 101: History And Future Potential

June 21, 2018

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The field of wealth management has broadened over the year as new financial instruments have emerged. However, the advent of blockchain wealth management creates a world of new opportunities–and obstacles–in the finance sector.

The wealth management industry needs to ensure it stays ahead of the changes to remain competitive. At the same time, clients will be looking to their wealth advisers to help navigate new digital financial instruments, and understand the implications for their portfolios.

So what is likely to be the impact of blockchain wealth management, and how will it affect the broader discipline of wealth management?

Developments in the Financial Sector

Wealth management is what banks perform for their high net worth clients. It was invented back in the 1930s by investment banks including Morgan Stanley and Goldman Sachs. The banks wanted to differentiate the services they were offering to their wealthiest clients from the services they provided to the masses.

Company pensions and stock investments have become more available over recent decades. And in turn, people have started to become more financially curious.

The banks saw benefits in providing some wealth management services to wider audiences. However, this was usually on a more generalized level, giving access to seminars or provision of information leaflets and, eventually, online.

During the last 20 years, with the emergence of low-fee Exchange Traded Funds (ETFs) and online trading open to the masses, demand for this kind of information service has increased. However, traditional private wealth management, typically between a client and their wealth adviser, has remained in the domain of the super-rich. It may include any or all of the following:

Retirement planning
Tax and accountancy services
Legal and estate planning
Portfolio management
Investment advice

As the financial markets have become more complex, the role of the wealth manager may now involve coordination of multiple other parties, such as brokers or pension specialists, according to client needs.

Now, the financial sector is facing a new challenge in the form of distributed ledger technology. Wealth management looks set to change as the finance industry embraces the possibilities of this new technology.

The Big 4 accounting firms have already started to issue papers and articles detailing what they think the big banks should consider in the face of the new technological era.

So what does the future hold?

Blockchain Wealth Management – the Future

Three main areas within the wealth management process are set to be disrupted by the introduction of blockchain wealth management. These are client onboarding, real-time settlements, and automated investment vehicles. Cryptocurrencies and security tokens also offer new investment opportunities, bringing further considerations.

Client Onboarding

Banks are required to conduct lengthy KYC (Know Your Client), and AML (Anti-Money Laundering) checks on their new clients. Consequently, the time to onboard a new client can be weeks or even months. Clients must produce proof of ID, residency, marital status, business and political interests, and more before a bank can accept them as a client.

Automation of many of these checks is now possible. Biometric scanning can compare a selfie with photographic ID. Optical character recognition can process the details of documents.

However, recording the outcome of such checks on the blockchain means that client data becomes immutable and easily portable. Blockchain can therefore significantly reduce the time taken to onboard a new client. It also eliminates the role of intermediaries involved in collating all this information.

Conversely, this ease of onboarding may decrease client loyalty. If it is easier for them to change their bank they may be more likely to do so.

Blockchain firms have already recognized the potential in this area. KYC Chain is one company offering out of the box compliance solutions to banks and other institutions required to undertake KYC checks.

Real-time Settlements

The current financial system is heavily reliant on intermediaries for the reconciliation and verification of trades. Using blockchain can reduce or eliminate the role of the intermediary, allowing the settlement of trades and transfers in real-time. The Australian Stock Exchange has already announced a move to the blockchain, which will enable automated real-time settlements on a 24/7 basis.

Sydney Harbour – home of the Australian Stock Exchange

Increasing transaction speed brings multiple benefits. It can make capital available more quickly for reinvestment and reduce transaction fees. Blockchain can verify the parties to a transaction and therefore reduce any associated risk.

Reducing costs offers clear benefits to clients. However, fees are also where wealth managers can generate income. It may be that banks have to look for other ways to create fee-generating value for their high net worth clients.

Automated Investment Vehicles

Smart contracts could manage the process of investment. For a client who wishes to keep a balanced portfolio of investments across asset classes, it could be that a smart contract takes over the role of portfolio manager. If a particular asset class in a portfolio increases in value above a certain threshold, the smart contract could automate the redistribution of funds into other asset classes to balance the portfolio.

Digital Asset Classes

Cryptocurrencies themselves offer an additional asset class for investors wishing to diversify their portfolio. Crypto index funds including Iconomi and Crypto20 provide an alternative to standard index funds. Banks wanting to set up a new index fund within the crypto class can now use blockchain tools like Blackmoon.

Security tokens are another exciting new development. They offer the chance to digitize any physical asset, providing investors with fractional ownership. Imagine owning your very own piece of a jet plane, or a superyacht.

For just $150k, 0.0005% of this could be yours!

Wealth managers will need to ensure that they are apace of such events in blockchain wealth management to ensure that they can appropriately advise their clients of opportunities and risks.

Challenges for Blockchain Wealth Management Adoption

There are two issues currently hampering widespread adoption of blockchain in the finance sector. They are transaction speed and compliance with the complex legal and regulatory frameworks.

Digital Asset Holdings is set to transform the financial industry with distributed ledger technology that is custom-designed for the domain. Corda, the open-source blockchain platform developed by financial consortium R3, could also serve to overcome some of these issues.

It now seems like a matter of when, rather than if, the financial sector will fully adopt distributed ledgers. Wealth management, like any area of the industry, needs to be ready for when the internet of value makes its presence felt.

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