Blockchain is a disruptive force but also a transformative one. This is how it is transforming the wealth management industry.
Blockchain or distributed ledger technology is the key foundation over which crypto assets have been developed. The blockchain may be thought of as an underlying, fundamental technology (like the internet), over which other applications (like email, ecommerce, social media etc.) are built. The applications of blockchain in finance, retailing, entertainment and even manufacturing have been explored. But for the wealth management industry, the opportunities are nothing short of game changing.
Smoother client onboarding
Client onboarding is often a challenging task in financial services since the process of KYC/ AML (Know Your Customer / Anti Money Laundering) compliance can be time consuming and susceptible to errors. It is not just a matter of the cost and time of performing these checks though. Delays can have a significant opportunity cost in a highly competitive market environment, especially since FinTech firms are focusing on this aspect a lot.
With blockchain technology, this process could be streamlined with easier KYC, smart contracts that are more secure and tamper-proof, and the ability to securely record transaction histories while ensuring data privacy and non-repudiation of origin.
Faster and cheaper settlements
Transaction costs can be greatly minimized with blockchain technology while also having a positive impact on settlement time. This would be accompanied by a reduction in counter-party risks and reduce risk management costs. There is already growing cost pressure from robo-advisors and other low-cost competitors and the wealth management industry can make use of blockchain technology to compete on that front.
Financial services firms and FinTechs are already working on projects to enable the trading of various over-the-counter security types through blockchain technology. There is a very strong incentive to do so as distributed ledger technology is perfectly suited for such applications.
While blockchain tech offers a lot in terms of reducing costs and increasing security, another unique opportunity exists in terms of new investment opportunities for wealth management clients. Crypto currencies or assets powered by the distributed ledger technology provide diversification and the opportunity to invest in an exciting and rapidly evolving new asset type.
Crypto asset investment can be approached in so many different ways and wealth management firms specializing in this asset class might have a unique selling proposition that might give them a definitive edge with certain demographics or even traditional investors looking to diversify. For example, there are crypto currencies which are designed for very specific use cases like, say, for paying for energy. In this case, the said crypto currency will have a strong correlation to the energy market and may be invested in accordingly.
Asset tokenization can provide infinite opportunities for alternative investments and crypto asset management. And the additional security and cheaper transaction costs are just cherries on top.
The time for wealth management firms to embrace blockchain technology is now. Distributed ledger technology will allow wealth management firms to reduce transaction times and costs for their clients, expedite and secure the client onboarding process and provide new investment and diversification opportunities to their customers. In an age where cyber threats are looming large and there is stiff competition from automated platforms, this might just be the boost that they need.
Written by Mark Shields
Mark has over 20 year's of experience working with financial technology across the banking, asset management and capital market sectors. He regular writes content for Avaloq's global community of banks and wealth managers, covering technology trends and innovations, to provide insight and provoke new ideas.
This whitepaper explores the opportunities and challenges for banks and wealth managers of entering the crypto assets market.
How integrating crypto assets can help you overcome several challenges
How you can offer a secure and convenient way for your clients to unify their traditional and crypto assets in one place
How you can prepare for future trends in this market space
Classic cars, art collections or rare wines are examples for non-bankable assets. Tokenization and fractional ownership will aid their inclusion into wealth management portfolios along traditional financial assets.
Blockchain has been a buzz word for a few years but the announced disruption seems to have disappeared. So where are we since then? Are the promises all gone? Is there really something beyond the hype?
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