Blockchain is much more than just a technology that will transform digital commerce. As the fulcrum of decentralized finance, known as DeFi, blockchain will also transform financial services — to the detriment of advisors who fail to adjust and prepare their practices.
The rationale behind DeFi is that individuals should be able to invest and conduct transactions on their own, without relying on what proponents call centralized entities — financial institutions that thrive on their role of middlemen charging fees. DeFi is about decentralizing these functions so that people can engage in them on a DIY, peer-to-peer (P2P) basis.
The DeFi movement, which has spawned various startup firms now in business and hundreds more in various stages of development, holds that financial services should be controlled by and for those who enable institutions to earn colossal profits by allowing them to use their money in banking, trading securities and providing insurance.
Blockchain technology applications are opening up a brave new financial world where consumers are: shopping online and paying routine household bills using cryptocurrency instead of what they call fiat (government-backed) currency or credit cards; accessing digital banking like services offered by startups like the Celsius Network, a new type of banking services platform that isn’t FDIC-insured but pays extraordinarily high interest rates on deposits; trading securities on OX, an open protocol allowing the exchange of assets P2P over the Ethereum blockchain; buying insurance through P2P pools over Etherisc; and trading in fractional ownership of heretofore inaccessibly pricey assets through tokenization — the splintering of the value of just about any asset into tradable tokens — on sites including Swarm, Harbor and Polymath. Already, investors are buying small pieces of ownership in works of fine art. Eventually, just about any asset — an apartment building in Tokyo, a piece of an NFL basketball team or you-name-it — might be tokenized, changing the definition of assets and globalizing investment in just about anything in a 24/7 context.
The implications of DeFi for the future of advisors are profound. Over the next five to 10 years, digitally inclined clients will be using more and more blockchain-based services and cryptocurrency to manage assets on their own, disintermediating traditional advisory services and stanching advisors’ revenue streams as the traditional advisory commission/fee structure fades.
DeFi’s DIY potential means people will need advisors less in general but, regarding informed advice for the coming DeFi age, perhaps more because of the eventual infinitude of options that blockchain technology will provide. Ironically, clients will need human advice to get more out of the independence that decentralized services will enable.
For advisors near the end of their careers, this evolving scenario isn’t really a matter of concern. But for mid-career practitioners, it poses an existential threat suggesting an urgent need to begin preparing by:
- Paying attention to what’s happening and learning about DeFi concepts and services, starting with gaining a fundamental understanding of current and developing blockchain applications. Few advisors seem to be preparing, if their absence at blockchain conferences and events is any indication.
- Imagining how DeFi will likely affect your practice and taking action based on likely impacts. Consumers may not need an advisor to trade in tokenized assets, but they’ll need advice on understanding the eventual broad range of these new assets, assessing risk/return and learning how to properly integrate them into their overall portfolios.
- Reexamining your practice’s role regarding life planning and financial coaching. As DeFi enables consumers to invest and conduct transactions on their own, they’ll still need the wisdom, experience, knowledge and expertise of a skilled advisor to properly tailor their investment holdings to their desired lifestyle — but in a wholly new context.
Perhaps the most apt metaphor for what will happen to advisory practices is what has happened with travel agents over the past 20 years, as resources became available or just more convenient for travelers to book their own trips, cutting commissions to a trickle. Today, the travel agents who are still earning a good living provide specialized guidance and advice based on the predilections of their clients.
This is the human factor — something that financial advisors will always be able to provide even after people start using their Alexa-like devices to get immediate financial advice (much as Ryan Gosling’s character used his ambient home computer for research in the movie, Blade Runner 2049). The advisory human factor will still be needed amid the growth of P2P social investing sites like eToro, which might disrupt thousands of money managers.
Yet disruption can be averted by adaptation. Advisors who adapt their practices and skills to the coming DeFi realm will not only survive. They’ll thrive in a less centralized financial world.
Eric C. Jansen is the founder, president and chief investment officer of Finivi | Financial Advisors. He founded BlockSocial.com, an online resource designed to help people better understand and capitalize on blockchain technology, digital assets and the coming decentralized world.