Sometimes it feels like blockchain is all the talk in the financial services industry. Blockchain or distributed ledger technology is mostly known as the underlying principle of Bitcoin, the virtual currency. However, it has the potential to be applied in many other circumstances of the financial sector and industry professionals seem to come up every day with a new way blockchain will disrupt it. So it is no surprise that insiders in the asset management industry believe, too, that it will fundamentally change the processes of fund houses and their business model.
In other posts we have already discussed the disruption the blockchain could bring to clearing and settlement, so applying the technology to the asset management industry should significantly reduce time and costs of the process and in turn lead to lower fees for investors as well.
Another advantage that is often cited when talking about block chain is the possibility to cut out the middlemen. For asset management companies that would mean that they could trade directly with each other, eliminating thereby broker fees and speeding up the process.
According to a report by the Boston consulting group in 2014 assets under management reached Record highs at $74 trillion with a return of profits at $102 billion. A report by PWC predicts that these numbers are even going to rise up to over $100 billion in Assets under Management by 2020. However, the recent rise in profits is largely the result of the amount of increasing assets under management, while other factors like the continuous low interest environment and the rising costs of doing business, for instance, because of new regulations, has increased the pressure on profits in real terms. With so much money at stake and the pressure to succeed in view of growing competition, the asset management industry’s search for solutions to face these trends successfully is only natural.
Obviously, the industry will benefit from changes to compliance processes, i.e. The application of the block chain Technology on anti-money-laundering and KYC procedures in order to increase transparency and gain better knowledge of their clients. The use of Smart Contracts, i.e. computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary, is also likely to play an important role in the change of how fund companies are going to do business.
It is often said that Asset Managers are generally not the first to embrace new trends given the nature and size of their businesses and change in comparison to the rest of the financial services industry seems to be slow. Only recently it emerged that five of the UK’s biggest fund houses, including Schroders and Aberdeen Asset Management, had started project to explore how the Block chain technology could be used to reduce trading costs. Others big names in the industry like Pimco and JPMorgan Asset Management are not even looking closely at how distributed ledger technology could be applied to their businesses, according to industry insiders.
Given the obvious benefits of blockchain though, the question is for how long asset management companies can afford to ignore it. So it is rather likely that the blockchain technology is going to play an important role in the asset management industry soon, too.