Transforming Wealth Management: Preparing for the Era of Digital Assets
The asset and wealth management industry is often seen as a digital technology laggard. The economic turmoil and regulatory changes that followed the financial crisis of 2008 left the industry with limited bandwidth to deal with technological advancements. However, the more recent emergence of fast and agile Fintech startups in this space has started to bring about rapid changes – be it mobile-first client acquisition and engagement, AI-based advisory and portfolio management, or distribution of products via all-new social channels – technology has begun to play a leading role.
But there’s a far bigger and bolder transformation subtly happening within the industry.
With the emergence of digital assets powered by Blockchain technology - first with bitcoin, followed by thousands of crypto assets and more recently central bank digital currencies and tokenized securities – the digitization of the asset and wealth management industry has started to accelerate at an exponential pace.
Two convergent trends are fuelling interest in digital assets:
1. Growing investor curiosity
According to a recent advisor survey, 79 per cent of advisors received questions from clients on digital assets and 22 per cent said they will start/increase allocations to crypto (- there are now more than 2,000 crypto-assets which also include newer types of assets, such as stable-coins and security tokens)
2. Institutional shift towards ‘Digital’
Leading institutions and consortiums have expressed interest in issuing and using digital currencies, while financial institutions are exploring issuing traditional securities in tokenized digital format.
(Tokenized securities continued to gain credibility from regulators and progressive developments have taken place in a number of jurisdictions across the globe.
However, the lack of digital asset-based structured product and portfolio solutions has left financial institutions anticipating and investors hesitant to get involved in this nascent but fast-emerging market. Left to themselves, investors have to deal with multiple complicated aspects of digital assets. These include:
A highly fragmented marketplace – Available assets are spread across a highly diverse set of platforms
Ever-evolving regulations/tax - The rules of the game continue to evolve intermittently across jurisdictions
New Custodial Services - Secure and legal holding of this new form of digital assets is still in its infancy
Limited liquidity/reserves - Inaccessibility to integrated pools for quick transactions and price stability remains an ongoing test that many are trying to solve.
Notwithstanding the challenges, blending familiar traditional finance structures and emerging digital models to create digital asset-based structured products can address many of the key issues and drive mainstream adoption of the asset class. The enablement of the effective creation, structuring, distribution and trading of institutional-grade digital asset investment products, powered by programmable, self-executing smart contracts will help bring the convenience and risk/return advantages of managed and passive funds (currently only open to accredited investors) to the world of digital assets and to the broader public by combining the benefits of managed accounts and ETFs.
Fintech startups have started to swiftly move into this segment with multiple ventures now offering innovative digital asset-based products to institutional and accredited investors. But with their large customer base and established distribution channels, traditional asset and wealth managers too can quickly participate in this transformation by crafting and distributing digital asset-based investment products that have a significantly larger and broader mass appeal. Albeit, a collaboration between financial institutions and Fintech startups could turn out to be the ideal scenario. Together, they can quickly institutionalize digital assets and take this new form of wealth management mainstream.
Either way and notwithstanding any initial teething challenges, the creation of a novel, global capital market powered by digital assets is underway. As this landscape matures, it is providing for the creation of entirely new tradable assets, helping unlock liquidity in traditionally illiquid markets and delivering far more efficient investment management across a range of asset classes. This presents a huge opportunity, but with change accelerating with every passing day, asset and wealth managers will need to quickly decide how they will embrace, participate and compete in the new medium of value creation and exchange.