The inexorable march of blockchain, the transformational distributed-ledger digital technology that’s making inroads across the global financial landscape, poses a distinct threat to advisors’ revenue streams.
Over the next few years, blockchain will enable today’s clients to execute transactions for securities and financial products on their own, causing many advisory commissions to dry up.
Like an earthquake triggering a tsunami, the DIY transactional environment that blockchain is already driving will derive power from continued advances in consumer products and services using artificial intelligence. Futuristic scenarios that until recently were considered decades away—like those in the movie “Blade Runner 2049,” in which Ryan Gosling’s character easily performs complex research tasks merely by speaking to his ambient home computer—are now manifest, as people ask Alexa to find websites, order pizza and play their favorite tunes. For the Blade Runner scenario, forget about 2049. Instead, try 2029, or possibly sooner.
The concurrent development of blockchain technology and the proliferation of blockchains for myriad purposes will enable access to data and transactions by consumers, at their leisure, just by talking and listening.
The implications for advisors’ survival are clear: They must concentrate on truly advising clients, drawing on human qualities that machines can’t replicate (yet)— balance, perspective, empathy and goal-based analysis.
But to re-fashion their practices accordingly—and in ways that mesh with the coming blockchain environment--advisors must gain a clear understanding of how the transaction world is changing, what it will look like in five or 10 years and the future service expectations of tomorrow’s clients. It’s also critical to understanding how this transformation will disrupt the global economic system’s machinery.
Current or anticipated scenarios that reflect the reality or signal near-term palpability of this new environment include:
• Tokenization—the conversion of rights to an asset into units, represented by tokens. Blockchain’s transparent audit trail enables the secure registration of ownership tokens, representing a percentage of just about any asset: real estate, antiques, a sports league or a company, in shares. Already, people are selling shares documenting mutual ownership of real property and storing these on blockchain for all to see—a kind of global register of deeds. Some are even reportedly tokenizing works of art.
Eventually, many—if not all—securities will be tokenized, and regulatory approvals for this are already happening: Delaware, the Mecca of corporate charters, has amended statutes to allow the use of blockchain for corporate share registration. Moreover, the SEC will likely lend its blessing because of blockchain’s hack-proof immutability—a feature that‘s starting to win over exchanges, as it assures superior security and is conducive to monitoring.
If your client wants to sell a portion of there digitized stock holdings on their own through a blockchain-enabled decentralized exchange and then use this money to buy a piece of a Picasso that’s being tokenized, all without the use of an intermediary charging brokerage fees or commissions. However, the client may want advice on whether the transaction makes sense from a tax or investment perspective. Advisors who aren’t up to speed on blockchain transactions--or fine art, for that matter, may have a difficult time earning or retaining the client’s advisory business. This example shows that the capabilities of advisors who survive the blockchain revolution will have to expand or extend to partnerships with newly evolved specialist firms to advise clients with different predilections for owning tokens for all manner of assets (including those now called digital collectibles).
• The eventual upheaval of the insurance industry. Because of blockchain’s unparalleled record-keeping integrity, everyone can become their own insurance company or participate in one. People will be able to tokenize risk and get others to invest in it—a sort of global mutual insurance consortium. Sure, state insurance commissions will get involved and attorneys will battle over claims issues. But as this is business as usual, today with large insurance companies, why not with blockchain-enabled self-insurance? The difference will be the disintermediation of the behemoth institutions that act as intermediaries. Commissions on all insurance related products are already on the path to extinction, and blockchain may hasten the loss of this staple of many advisors’ revenue streams.
• Disruption of the banking industry. As the ultimate intermediary, banks profit from the trust that customers place in them. Yet blockchain’s transparency brings such verifiability and accountability to DIY transactions that this challenges this longstanding benefit of using banks. Significantly, these same benefits are the very raison d’etre of blockchain.
• A revolution in fact-finding and identity verification, the bread and butter of the financial services industry. To handle their finances on their own, people must get information, be certain of the financial facts and determine the right actions based on an array of complex information. The advancement of cognitive computing will eventually empower individuals to get a customized financial plan merely by asking aloud for it, tapping a virtual concierge service for asset management that charges no fees.
An essential part of the transactions involved is identity verification. Currently, we rely on institutions—such as the government and large credit-rating agencies like Equifax-- to be the vehicles for this verification. Blockchain will eventually change this dramatically, as more and more people register identifying information on blockchain, secured with private keys. This is known as sovereign identify or self-sovereign identity, and it’s already happening. Charitable organizations are seeking to ease the plight of refugees who flee their homes in third-world regions, such as Africa, without their personal identifying paperwork, by helping them register their identities on blockchain; all they need to do is remember the passwords for their private keys or, more likely, be prepared to submit to biometric authentication, to access their secure data. In “Blockchain Revolution,” authors Don and Alex Tapscott refer to this data as the “virtual you,” contained in individuals’ private “black boxes,” to be released in discrete amounts where holders choose.
• The growing acceptance of Bitcoin and other cryptocurrencies, whose vehicle is blockchain. This acceptance will grow, in part from the ease of consummating online transactions with digital currency. Advisors who learn about cryptocurrency will improve their understanding of the new transactional environment. Also, cryptocurrency will affect advisory practices directly.
Advisors who aren’t aware of these trends will be caught off guard, much to the detriment of their practices and their careers. By learning about how their clients will use blockchain, they can prepare to become part of this process (rather than their clients’ exes). This will mean, ironically, facilitating their clients’ new-found independence while adding something that machines can’t: the human touch.
Though humans won’t need human advisors for transactions—or even “advice,” as it will be attainable through cognitive computing—they’ll still need them for life planning and ongoing financial-life coaching. Naturally, advisors who already do this are well-positioned. Those who don’t, or can’t, may not be able to replace the revenue that blockchain will drain. The more advisors try to act like machines, the more they’ll pay the human price for it—lost revenues.
Indirectly, machines will teach us what’s good and irreplaceable about being human, and that we shouldn’t try to be anything else.
Eric C. Jansen, ChFC, is the founder, president, and chief investment officer of Westborough, Mass.-based Finivi Inc.,an SEC Registered Investment Advisor and is the founder of BlockSocial.com, a blockchain technology media site.