The revolutionary technology set to power the advice boom

Sherriff-Alan-2016-CUT

You may have noticed a lot of talk recently about blockchain, but what exactly is it and what does it mean for advisers? Blockchain is an emerging technology that looks set to transform the way the back office administration systems and processes of financial institutions operate over the next decade.

The great news for advisers is that you will be among the main beneficiaries but you do not have to do anything new. Under the hood, customer relationship management, back office systems and platforms will significantly improve while the cost of investment reduces.

Blockchain technology will catalyse an industry transformation towards providing super-efficient, ultra-low charge, highly regulated services that will make investment and, therefore, financial planning services far more affordable and trusted by all.

What problem does it solve?

Today’s admin platforms are designed around a central database that stores structured records about customers, assets, ownership and all related transactions. When one institution liaises with another it sends its admin system a message (buy, sell, switch, transfer, etc.). The receiving system processes that message, updates its own records and responds.

This is simple when two institutions are co-operating but as the number of institutions increases this model becomes exponentially complex, error prone and expensive to operate. Continuously running, inefficient reconciliation processes are needed to verify everyone’s records agree. Institutions have often chosen to reduce this burden by collectively outsourcing to a third party hub or “economy of scale” services at a cost.

Blockchain can turn the messaging model on its head by providing a secure shared industry ledger of asset and ownership data that can also execute the business processes agreed between institutional counterparties, with no need for centralised third-party services. When data is shared, there is no need for reconciliation. Therefore, the costs of reconciliation and third-party services can be reduced or even removed.

The background

None of the individual ideas of blockchain are new. This special blend of security and networking technologies was created for the Bitcoin digital currency that went live in 2009 and is still growing today. Bitcoin solved the problem of how to create digital cash without any trusted parties, such as banks. The financial world woke up to this concept last year and is now working hard to adapt to its own stringent requirements by resolving technical issues around scalability and data privacy.

The financial industry has rebranded blockchain “distributed ledger technology” and it is heading towards becoming core to how future financial markets will work. Indeed, DLT is fast becoming the new medium for the digital economy. Take a look at the R3 consortium, SETL, Ethereum, Linux Hyperledger and Chain.com if you are interested in looking deeper.

A bright future

We recently co-authored a paper (Financial Planning: An Optimistic Vision of the Future) that describes a day in the life of a young financial planner in the 2020s. It foresees a bright future for financial advice.

Powerful, data-rich, simple to understand, low-cost systems will make financial planning firms incredibly efficient and highly valued regardless of how they want to engage with clients: whether that be in person or via the plethora of technology on offer. There is help for everyone, however and whenever they want it. Many people still want the personal touch, though most prefer to self-service with online guidance and reassurance a professional is keeping an eye on their financial affairs and can step in when needed.

Everything will have a value, including reputation, tied directly to your unique identity and totally under your own control. There will also be a multitude of complex new digital asset classes and instruments available that simply do not exist now, strengthening the role of the adviser further.

The sheer speed, efficiency and transparency of the investment market will mean it is very popular and trustworthy. Every single transaction will be ultra-low cost and automatically monitored in real-time by the regulator. Clients can be certain that whatever advice and service an adviser provides it will be guaranteed rock solid and fair. Financial planning will be a first- class profession: necessary, affordable and trusted by everyone.

Alan Sherriff is managing director of CBoxx