Benefits and Roadblocks to Blockchain Adoption by Wealth Management

Blockchain, the underlying technology of bitcoin, is drawing significant investments from many of the larger wealth and asset management providers. Given a blockchain's potential to have a significant impact on current processes and systems for this industry, many firms are beginning to dedicate resources to understand and integrate this technology into their businesses.

Blockchain technology — also known as a distributed ledger — has a number of potential use cases within the wealth and asset management life cycle.

A blockchain is a shared record of all transactions and related information for a particular entity, visible by all parties with permission to the record. Distributed ledgers are highly flexible; once implemented, they can be used to remove friction from the client onboarding process, streamline management of model portfolios, speed the clearing and settlement of trades, and ease compliance burdens associated with anti-money laundering (AML) and know your customer.

This eliminates redundant functions, reduces operational expenses and increases opportunities to enhance the client experience. While blockchain technology is unlikely to replace current systems, it may be used to reconcile information across them or enable new infrastructure for new markets and products.

These concepts can also expand to broader wealth and asset management applications, such as rollovers, trusts, estates, insurance and other transactions where assets are moved between parties or contracts are executed. A distributed ledger supports near-real-time transactions to enhance the client experience and reduce costs.

Blockchain Benefits

Client profiling and onboarding

Blockchain technology can revolutionize client onboarding for wealth managers. In today's world, potential clients must provide proof of identification, residency, marital status, sources of wealth, occupation, business interests and political ties. Going through this process can take days or weeks to collect and verify the data.

However, storing a profile on a blockchain/distributed ledger would grant trusted parties access to all or part of the profile based on cryptography. In this case, new relationships would be initiated by profile owners, and the system would inherently enable an audit trail for tracking changes to the chain.

The chain would facilitate many key functions of onboarding such as client and risk profiling, financial planning, anti-money laundering checks and money movement, and it could possibly enhance or replace traditional systems, such as Automated Clearing House (ACH) and Automated Customer Account Transfer (ACAT) since it can enable near-instantaneous transfers of assets between authenticated financial institutions.

Model management and trade order generation

The proliferation of open architecture investment offerings and the availability of third-party investment models in separately managed accounts have presented a number of operational challenges for wealth managers.

Distributed ledger technology would allow portfolio managers to instantly communicate portfolio changes to all clients "subscribed" to the model, as well as enable real-time views of individual account performance and cash flows. Also, smart contracts would allow users to manage fees paid by the sponsors — essentially taking a payment every time the model is used or downloaded.

In this scenario, Investment managers would create and maintain a model — similar to how they do it today. Models could be transmitted through a blockchain to various subscribed brokers. Individual accounts can be invested according to the model. Customization for restrictions and other account-level constraints can be stored and applied.

The use of blockchain technology in this scenario would allow other account transactions and trades to be shared more easily. It can provide near-real-time performance, portfolio risk and drift data, allowing managers to observe more easily and have greater insights, and it can reduce the amount of reconciliation needed by moving from the current segregated master ledger to a secure, distributed one. It also reduces the need for some intermediaries responsible for settling and executing trades.

Blockchain Roadblocks

Is it too early?

Exploration of blockchain technology and its application for wealth and asset management firms are still in the early stages.

The chart below is based on 2016 EY research and indicates that scalability is expected to be a hurdle to industry-wide adoption for many organizations. To date, blockchain has seen limited deployment in situations requiring large volumes of data, and the linear nature of the technology calls into question its ability to handle such a volume. In addition, firms face product complexity limitations, as initial rollouts of complex products can be difficult to change later on the distributed ledger.

Chart: Which milestones must blockchain pass before broad adoption?

Given the difficulty in moving legacy applications and processes to a new platform, many firms are unsure of how to spend their very limited strategic dollars to move forward with blockchain solutions. However, a few have taken the initiative to use the technology in limited areas — either for internal solutions or in an innovation lab or pilot. Ultimately, the firms leading the innovation process will stand to benefit the most from implementing blockchain technology effectively within their organizations.