OpinionJun 8 2022

Does blockchain technology have a future in advice?

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Does blockchain technology have a future in advice?
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But what about the implications of blockchain technology for our industry itself?

The ultimate use of blockchain technology is to securely capture the provenance of things, to create a record of transactions, to ascribe ownership, including to assets and wealth.

Everyone is looking for greater transparency.

A blockchain is often explained as a distributed ledger, a filing system that is maintained across multiple computers in a network rather than centrally.

Any transaction between two participants is encrypted, recorded only once, cannot be changed so it is immutable and is shared with all participants making a blockchain transparent and reducing risk and cutting costs.

Though that might not sound radical, it has huge implications for the value chains of many industries, not least our own.

ESG investing

Let’s take sustainable investing as an example. The way that asset managers and ratings providers rank securities from an environmental, social and governance perspective remains a source of debate – consider the headlines and opinion pieces that resulted from the recent news that Tesla has been removed from the S&P 500 ESG index.

As the focus on sustainability grows, the emerging industry around reporting is producing vast quantities of data of variable quality and definitions. Managers must patch together information from multiple sources, making comparison an inexact science.

As a result, everyone is looking for greater transparency – asset managers, ratings agencies, advisers and ultimately clients.

In 2018 US retailer Walmart hit the headlines by requiring farmers to track the lettuces they produced on a private blockchain in an effort to trace the provenance of these leafy greens following an outbreak of E coli. Today the system is used increasingly widely across north America.

Anyone with access to the network can trace the provenance of goods within a couple of seconds, a task that previously took hours if it was possible at all.

No matter how much information becomes available, most people need someone to help them focus on the future.

Last year, Jaguar Land Rover trialled blockchain for its leather supply chain traceability, including assessing its carbon footprint. The long-term ambition is to produce carbon-positive leather by sourcing from local, grass fed herds where there is no deforestation. 

What is more, if I really want to form an opinion on a manufacturer, I do not just want to look at the company itself and its financials but at its supply chain and non-financial information.

Where does an electric vehicle manufacturer, for example, get the cobalt for its batteries, and what is the human rights record of these countries and mines?

IBM has already partnered with Ford to make this possible. Pioneering companies like Covalent Fashion allow the consumer to track the carbon footprint of their pair of sunglasses on their website via a blockchain.

In the future, companies will publish their ESG declarations and supporting supply chain information straight out into a blockchain. Those with access to this information will be able to see not only what a company is doing but how it is doing it, going beyond the traditional published profits and losses and into the chain of activities that make up the E, S and G.

Initiatives such as Tisa’s Universal Reporting Network are already looking to make the most of the enormous efficiencies and leap in transparency blockchain can bring for asset managers. In this case enabling participants in a transaction to gain access to the EU Mifid II template on an industry blockchain.

Analysing data

Blockchains public and private have the potential to create a shortcut in the traditional flow of information, from company to analyst to fund manager to financial adviser to client. New entrants who build these networks will leapfrog traditional players in the value chain.

The quantities of data here of course are vast, many orders of magnitude greater than those available to analysts today as value chain information becomes available from individual product and service lines.

The parallel development of artificial intelligence in asset management is already helping asset managers improve portfolio management, trading and risk-management practices, in part by gaining insights from data sets far larger than traditional analysis can cope with.

A paper by the CFA Institute found a sizeable number of asset managers are already using AI and statistical models to run trading and investment platforms.

Advisers who are not embracing technology will find it harder and harder to stay relevant.

At the bleeding edge of this trend are pure robo-asset managers such as EquBot ETF who claim to manage $2bn (£1.58bn), analysing 1mn new articles and data sources a day across 50,000 companies and asset classes and 169 ESG signals, all powered by AI from IBM’s Watson.

So, in this brave new world, what will be the role of financial advisers and advice be?

Firstly, let’s remember that it is entirely possible for investors to research and set their own investment strategies today – with greater or lesser success – but most people do not.

No matter how much information becomes available, most people need someone to help them focus on the future, think about the trade-offs of risk and return, and design a strategy.

Will that process change? Undoubtedly. Will there be a greater availability and need for tools and technology? Absolutely. But will we still need trusted coaches to help people make decisions? I am sure of it.

The caveat is that the appetite for look-through has already grown enormously, and it is only the beginning.

Advisers who are not embracing technology will find it harder and harder to stay relevant, because competitors who remain ahead of the curve will use the tech to establish the transparent relationships that clients will increasingly expect.

Ben Goss is chief executive of Dynamic Planner