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The Wealth Management Industry is following the lead of the publishing industry
Three ways the adoption of AI & Blockchain will upend the ETF Model Portfolio industry
Published on 13 June 2023
Allan Lane
Allan Lane
Algo-Chain, Co-Founder
The hockey stick of progress is often hard to see. For years a trend might hardly register on one’s consciousness when almost overnight it goes exponential, and before long it has been elevated to a supertrend. When supertrends collide don’t be surprised when the eco system behind them starts to change shape, and so it is with the state of play across the financial services industry.

What can we learn from 500 years of history from the publishing industry?

To get an insight as to what exactly lies ahead for the industry one can learn a lot of lessons from the field of publishing, which by its very nature comes with a well-documented history dating back to 1455 when The Gutenberg Bible and the printing press made its first appearance.

The key events in that 500+ year history are many and varied but all are pivotal moments that created the status quo today. Along that timeline came the rise of newspapers and periodicals (17th-18th centuries); the industrial revolution that brought advancements in printing technology; the emergence of paperback books (19th century) where affordable paperback books gained popularity, reaching a broader audience.

And that’s just the start. To this we can add the desktop publishing when Tim Berners-Lee revolutionized publishing with the birth of the world wide web in the 1980s, with HTML, websites, online magazines, digital content platforms, e-books, and multimedia content.

Here we are in 2023, and if the story wasn’t impressive enough, the recent adoption of AI assisted content creation tools, has seen science fiction become today’s reality with what might be best described as ‘Black Box’ video creation. Who needs any creativity skills when with ChatGPT curated content, videos with engaging content can be created with one-click!

Ok, it might have taken a few centuries to get to this point, but the conclusion is irrefutable, wait long enough and the democratization of publishing becomes absolute.

More, not less Themed ETFs as tokenisation takes hold

As the AI genie creates havoc across the financial services industry, expect one of the first by-products to be the re-enforcement of the growth of the ETF industry as a supertrend. Within that eco-system, you might think the sub-trend of Themed ETFs has run its course, but I suspect quite the opposite will happen.

When the Berlin Wall came down in 1989 revolution was in the air, and coincidently almost out of nowhere, democratization took hold and upended the music industry. This rebirth came as a new category of dance music was built on the back of many small record companies pressing up their own 12” singles, allowing them to take control of the distribution channels and with that development came their own economies of scale. It would be hard to not exaggerate the explosion of sub-genres of dance music that followed. Once the democratization process was underway, the old order went straight out of the window.
The traditional top 3 ETF issuers have an unhealthy stranglehold on the industry
The traditional top 3 ETF issuers have an unhealthy stranglehold on the industry
For the ETF industry as we know it today, the economy of scale makes it almost impossible for a new issuer to compete with Blackrock, Vanguard and State Street. Instead, one needs to partner with a White Label Provider such as HANetf, Waystone & Goldmans providing them with a platform from which to operate.

That status quo is about to change, the destiny for new ETF entrants is one of tokenised funds. It is likely that within two years all new ETFs will be issued in this format where the barriers to launching your own ETF will come down. If you haven’t seen the rap sheet for the benefits of tokenizing securities, it’s hard to not be convinced. Here’s what those benefits look like.

The benefits will be fractional ownership, 24/7 trading and real-time settlement. It will enhance market efficiency, reducing the need for intermediaries, resulting in lower cost and more transparency and accountability. This will lead to access to new investment opportunities like fractional ownership of high-value assets, access to global markets and increased investor protection. Through automation and programmability like with smart contracts there will be secondary market efficiency. The possibilities for innovation and interoperability are huge.

Not surprisingly, BlackRock’s CEO Larry Fink buys into this tokenization nirvana, but he will not be able to hold the tide back once it turns. A recent article published on Yahoo Finance by Liam J. Kelly and Nivesh Rustgi, “Tokenized Securities on Ethereum, Polygon, Gnosis Hit $225M Market Cap”, suggests this transition is already underway.

Smart Contracts driving the Distribution Chain

Once the ability to launch your own bespoke ETF becomes feasible, then purely on cost grounds alone, expect an explosion of the next generation of themed ETFs to hit the market.

The benefits of tokenization will not only lower the manufacturing costs of ETFs, but also impact the distribution chains that connect the buyers and the sellers. Universal fractional ownership will remove, once and for all, the restrictions often placed on minimum investment amounts. While there will be both winners and losers, it’s best to view the future as one where the pie will get much bigger.

It's unlikely these micro-ETF issuers will miss the opportunity to flood the market with new products. To that expect the letters A & I to be plastered over many funds as marketing teams look to ride the AI wave.
Generative AI will enable Financial Advisors to deliver more for less
Generative AI will enable Financial Advisors to deliver more for less
Reaping the touted benefits that Smart Contracts offer will allow the broker & custodian to do much of the heavy lifting for you, such as automating the process of re-balancing your portfolio. Resetting a portfolio back to its original pre-drifted weights is one thing but expect these services to tag on an AI process to make more intelligent re-balancing decisions. In fact, it’s already become the replacement term for alpha.

Personalized Model Portfolios become the norm and not the exception

For years it has been the accepted norm that only clients with larger investment amounts could expect a personalized service. The reasons for this were the embedded costs that made it uneconomical to manage small amounts and the complexity of the process that went hand in hand with managing the lifecycle of bespoke investment solutions.

While some brokers are already offering fractionalized trading of ETFs and zero commissions, in the UK this is far from the norm. The game isn’t to necessarily set all of these fees to zero, though, but to deliver technology assisted services that truly democratize the investment industry.

The direction of travel is clear, the end investor will get more for less. As they continue to engage with online questionnaires, in the future expect their answers to influence which assets are selected in their Model Portfolios. You and I might call this core /satellite investing, but it will provide the framework from which personalization is delivered.

Until next time.

Allan Lane