The proverbial table for asset management’s evolution has been set for quite a while. Some would say what started with the financial and regulatory effects of the Great Recession has now bubbled to the surface, manifesting itself in the form of high overhead, lower AUM and, subsequently, fewer managers. Regarding actively managed assets, the US-based Investment Community Institute (ICI), cited a net outflow of $835 billion from 2007 to 2015. A major factor for this ebb and flow is the rise of passively managed funds, allowing firms to lower their operational costs and client service fees.
While it is expected that this trend towards passive investments will continue in the short term, active managers are looking at readily available IT solutions like content automation and data analytics and burgeoning technologies like blockchain to help them gain greater operational efficiency and offset the reality of tighter margins and stronger competition.
Can Blockchain Satisfy Skeptics and Transform an Industry?
When the keynote panel at TSAM New York in June discussed at length the R&D initiatives surrounding the inevitable introduction of blockchain into the asset management space, it appeared that 2016 was in fact the year for such a technology to arrive. At its core, blockchain is a digitally time-stamped and distributed ledger that allows firms and managers to track transactions and run audits exponentially faster than otherwise possible, largely due to the elimination of intermediary components like brokerages and clearinghouses. Proponents envision more than just savings and streamlining; they believe the increase in transparency will aid active managers’ investment insights, subsequently delivering more value to clients.
Blockchain is a direct derivative of Bitcoin and is currently undergoing further examination and development by a consortium of firms called R3, which includes entities like BNY Mellon and State Street. Top concerns at the moment include the cost of operating a blockchain platform, the time and energy necessary to process a transaction, and the potential for network security gaps. However, even with such questions, a survey by State Street shows that 57 percent of 100 institutional advisors believe the technology will be adopted by the industry within five years.
Asserting this push towards bringing the technology to market is the migration of executives like Caitlin Long, who, after nine years with Morgan Stanley, just joined Symbiont, a company committed to launching blockchain across financial services. Incidentally, investment in blockchain firms has increased by 59 percent in the past year, totaling over $1 billion since 2009, according to research from PwC.
In a Financial Times piece, Michelle Seitz, head of William Blair Investment Management, said, “I do believe that blockchain has the power to disrupt the plumbing of the asset management industry, and if it does, it will speed the service and the delivery of what we do for the client, and cut out costs. It could be a massive disrupter to the industry, but in a good way.”
Complementing a Suite of Solutions
In July J.P Morgan and Oliver Wyman released a joint report detailing why blockchain is so important to the asset management space, how managers and firms can benefit from its arrival, and the critical roles the C-suite’s executives must play in order for any adoption of the technology to be successful. Despite the initial security and infrastructure hurdles, both firms see blockchain as a long-term industry mainstay that provides proactive asset managers with an opportunity to tackle many of their present challenges including frictional cost reduction, data management, process simplification, and AUM growth.
By engaging the truths and myths of blockchain and partnering with a capable platform provider, the report’s authors see early adopters—led by C-suites that both understand the technology’s potential and project a vision for its utilization—achieving a substantial competitive advantage over incumbents and challengers. And pairing or complementing such a solution with other technologies will only broaden the operational savings and efficiency for asset firms. As with any technological trend, there exists an inherent threat to the traditional model, but already the share of stakeholders that see this transition as favorable is expanding.