Distributed Ledger Technology: Use Cases in Wealth Management
Wealth managers’ adoption of Distributed Ledger Technology (DLT) is varied and in its infancy. DLT, or blockchain-based infrastructure, has the potential to alter the industry at an operational level.
DLT has an inherent capability to address the inefficiencies that come with working across multiple, legacy-based systems by automating certain processes, driving frictionless onboarding across the client journey, real-time settlement, and regulatory reporting. By creating a fixed record across a chain of processes, DLT can mitigate cost pressures, better address regulators’ and investors’ call for transparency, and ultimately improve client servicing and the client experience.
The digital and personalized client experience continues to be one of the major differentiators in an otherwise commoditized industry. The client experience in adjacent industries is driven by the proliferation and accessibility of technology, and the expectation is that wealth managers will provide a similar service (e.g. seamless delivery of personalized digital solutions across channels). Blockchain-based infrastructure can be a transformative building block towards achieving the frictionless client experience through its data-led view of investment flows and client tendencies thereby creating a proactive advisor and superior next best action capabilities.
However, there are several hurdles towards mainstream adoption, such as:
1) A shift in mindset from viewing DLT as an enormous undertaking and transformational piece of technology to incremental software upgrade. Internal expertise around DLT implementation and strategic vision, as well as a general sense of mistrust or unfamiliarity with the technology, are additional challenges.
2) Replacing legacy systems is a security risk, and resource and time intensive.
3) Regulation of DLT and blockchain is unclear, making wealth managers wary of its implementation across the value chain.
Ultimately, the potential transformative power of DLT is enormous, but the challenges towards mainstream adoption are significant. Wealth managers will need to take a long-term view when weighing the cost of its implementation against the benefits of operating at a more scalable and faster pace. As a result of achieving substantial scalability, an otherwise under or unserved clientbase will be more readily serviceable and D2C models will be more prevalent. Regulatory reporting can become less costly and asset tokenization or the creation of new alternative asset classes will become more readily available. Perhaps too early to declare that DLT is the golden ticket towards “democratizing wealth management”, but DLT’s potential ability to disrupt distribution models and alter some operational processes are too profound to ignore.