Blockchain will change the advisory business—someday

Faster, safer and cheaper financial transactions will reduce the need for middle men

Dec 5, 2017 @ 5:47 pm

By Ryan W. Neal

With the price of bitcoin continuing to soar, advisers find themselves inundated with questions about digital currencies and blockchain, the ledger technology that makes bitcoin possible.

Those questions are bound to increase now that the Vanguard Group, one of the world's leading asset managers, has announced it will begin using blockchain to simplify and automate the process of sharing index data.

Advisers have questions of their own, going beyond whether they should recommend clients invest in a cryptocurrency. Is blockchain something that will change how the average advisers run their day-to-day business?

"I would say that in the short term, no, it's not going to change a thing," said Jeff Koyen, a strategic adviser at 360 Blockchain, a venture capital firm investing in blockchain and cryptocurrency companies.

Though financial institutions of all kinds are examining the technology and some are even piloting applications, the industry is still a few years away from widespread application. But there is potential for the wealth management industry to use blockchain technology to vastly improve their back-end systems, Mr. Koyen said.


Reconciling the data discrepancies between each player in the financial system is a costly process. If banks and custodians can adapt their current ledgers to a blockchain system, they drastically reduce the time and effort it takes to purchase investment products and move money between accounts while reducing errors and lowering fees. Transactions that traditionally took advisers days or weeks could be cleared in a matter of seconds, and for a fraction of the cost.

State Street, for example, is in the process of consolidating multiple applications and data repositories into a single blockchain solution, according to Moiz Kohari, a senior vice president and chief technology architect at State Street Corporation. Mr. Kohari said this will provide "an immutable single source of truth" and "provide access to real-time transactional information that starts to provide near instantaneous views into our investment, accounting and custody books of records, without the costly and manual overhead of reconciliation."

Mr. Koyen said there is opportunity for existing institutions and vendors to create new solutions for advisers using blockchain. These could be especially beneficial to independent advisers who have to handle operational costs.

Ric Edelman, the founder and executive chairman of Edelman Financial Services, said that beyond financial transactions, advisers can use blockchain to improve how they collect and store client data. For example, a client can upload their personal financial information—things like their will and house deed in addition to investment assets—to a digital ledger, and the adviser could in turn upload their financial plan.

Mr. Edelman said it would make financial plans more accurate, easier to maintain and update, and more secure.

"Data put onto the blockchain cannot be changed, altered, deleted or replicated, dramatically improving security as opposed to current systems," Mr. Edelman said.


This capability also points towards a more dramatic impact of blockchain technology—the elimination of middle men. Mr. Koyen said the clearing houses and custodians are especially threatened.

"A lot of these guys are shaking in their boots," Mr. Koyen said, adding that several firms are investing in blockchain to avoid becoming obsolete. Blockchain technology could theoretically replace anything between the adviser and the product provider, and, Mr. Koyen said, "If all [a firm] is doing is managing records, they should be looking at another thing to do for a living."

Mr. Edelman went even further, saying the advisers themselves could be replaced by blockchain if all they provide is investment management.

"At the end of the day, investment advisers are middle men. We facilitate the transaction between the client and the investments the clients purchase," Mr. Edelman said. If every investment product can be made available directly to investors, along with algorithms helping to advise on how to construct a portfolio, advisers will have an increasingly hard time earning a living by selling investments.

This isn't a long-term concern. Mr. Edelman believes these changes will be felt in the next three to five years, but thinks that advisers already adjusting their business models will be able to survive. "It's not a threat to the advisers being in business," Mr. Edelman said. "It's a threat to the way advisers do business."


Eric Clarke, the CEO of Orion Advisor Services, said that it's likely the custodians will produce their own digital ledger before they are truly disrupted by blockchain. If they can put one out, Mr. Clarke said it will open new opportunities for technology vendors like Orion to improve functionality.

Gone would be the time and money spent on reconciliation, meaning advisers could use portfolio accounting software like Orion to see more accurate, more up-to-date reflections of clients' financial lives.

"To the extent that we can start to exchange information with our custodial partners via a blockchain … it does have the potential to eliminate a lot of costs out of our business structure," Mr. Clarke said.

Practical applications for blockchain are still a few years off, but advisers can prepare for potential disruption now by learning all they can about the new technology, and the digital assets, like bitcoin, it's spawned. Mr. Edelman, for example, says he's not spending time on developing a blockchain, but is instead waiting for the institutions he works with to produce their own.

In the meantime, Edelman says, his firm is looking for opportunities to invest in blockchain technology. Mr. Edelman says advisers need to understand the technology in order to answer questions from clients and potentially find ways to integrate digital currency into financial planning.

"The more [bitcoin] rises, the more advisers will be asked about it," Mr. Edelman said. "Continued silence on this subject is not an option."


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