The Future of Wealth Management

WisdomTree, J.P. Morgan Private Bank, and several blockchain infrastructure providers created an ecosystem of assets and connected networks. They aimed to demonstrate the ability to manage many discretionary portfolios, consisting of tokenized traditional and alternative investments across various blockchains while preserving investor-level customizations.

This is a summary of the full paper linked here

Vision statement 

J.P. Morgan and Apollo envision personalized investment portfolios at scale, with streamlined order execution and settlement across traditional and alternative investments, powered by blockchain technology, smart contracts, and tokenization.

Current state

Limitations in discretionary portfolio management in the wealth management industry.

1. Adjusting portfolio allocations across asset types requires multiple systems, manual processes, and multiparty reconciliation.

2. Due to operational processing requirements and limited liquidity, alternative investment funds are not commonly included in model portfolios.

3. Access to and distribution of tokenized assets is fragmented across blockchain networks.

Thesis

Tokenization could harmonize the treatment of public and private assets in portfolio management, creating significant value.

1. Creating new, connected infrastructure can streamline operations and reduce costs related to building and managing portfolios.

2. The tokenization of alts can reshape the alternative investment landscape, making it more inclusive, transparent, and efficient. It represents a $400 billion annual revenue opportunity.

The proof-of-concept (POC)

J.P. Morgan and Apollo collaborated with WisdomTree, J.P. Morgan Private Bank, and several blockchain infrastructure providers to create an end-to-end ecosystem of assets and connected networks. The POC aimed to demonstrate the ability to manage many discretionary portfolios, consisting of tokenized traditional and alternative investments across various blockchains while preserving investor-level customizations. Onyx Digital Assets was used as the base chain, connecting to other blockchain networks (Provenance Blockchain and Avalanche) via interoperability solutions (Axelar and LayerZero). The POC included tokenized traditional and alternative investment strategies from J.P. Morgan Private Bank, Apollo, and WisdomTree on the three blockchain networks.

Potential Benefits

Efficiency and scalability

By deploying smart contracts representing discretionary portfolios, the POC successfully showed how tens of thousands of portfolios could be programmatically linked to representative models and automatically rebalanced en-masse when changes to those models occurred—even if these models include alternative investments. This solution could give wealth managers a “one-click” experience that aligns their investor base seamlessly, automatically updating investment strategies and reducing the operational back-office processing for distributing and settling associated orders. Assuming a wealth management firm has 100,000 client portfolios rebalanced monthly, this solution has the potential to collapse more than 3,000 operational steps into a few clicks. Further, utilizing blockchain’s ability to enable near-instant settlement, clients could remain fully invested thereby limiting cash drag, resulting in a savings of ~24bps per annum (assuming ~3% cash and a long-term return of 8% over cash). 

Inclusion of alternative investments in discretionary portfolios

Tokenization of private alts funds represents a $400 billion annual revenue opportunity for alts fund managers and distributors. As stated previously, the primary driving factors that prevent alternative investments from being included in model portfolios are their lack of liquidity and the cumbersome investment process. While liquidity challenges cannot be solved in a POC (see Practical Considerations and Challenges section below for proposals on how these could be addressed), we demonstrated how leveraging blockchain technology and tokenization could address the operational challenges. By representing traditional and alternative investments as tokenized funds, the funding, order execution, and settlement processes for both asset classes can be standardized and automated. This standardization could simplify how investments in alternatives are processed by replacing manual subscription processing with automated, straight-through processes that leverage smart contracts for payments and investor register updates. Pairing this new technological approach with different liquidity solutions could enable wealth managers to confidently include alternatives in discretionary and model portfolios, offering higher quality portfolios to their clients.

Broadening the investable universe with ledger interoperability

There are numerous findings to highlight on this front: 

• Despite the growing number of blockchains vying for fund manager attention and the increasing deployment of tokenized funds across various networks by fund managers, wealth managers can be entirely agnostic and impartial to the evolving landscape. This is thanks to a variety of interoperability solutions and the possibility of establishing a portfolio management capability allowing portfolios to be managed from a centralized place. By extension, this would mean that fund managers could be equally agnostic to the plethora of blockchains, provided their distributors’ systems were suitably connected across this landscape. 

•  Wealth managers can automatically deploy, manage, and monitor cohesive strategies consisting of tokenized assets without moving the underlying assets from their ledger of record when their systems leverage interoperability solutions that are scalable, well-connected, and simple to implement. 

• By enabling fund managers, PMs, and investors, who may all operate on different networks, to connect using these interoperability solutions seamlessly, the market size and liquidity of assets could be broadened

Improving the blockchain user experience

By leveraging a novel Account Abstraction concept such as Biconomy’s Paymaster service, we could abstract away the complexities of interacting with blockchains from the fund manager, who could seamlessly approve investment orders without needing to first obtain or hold cryptocurrency to pay for blockchain transaction fees. This experience is much closer to today’s process, can easily be expanded to many blockchain networks, and can reduce the overhead and risk associated with managing blockchain private keys, and purchasing and protecting tokens required for transaction fees. Further, the implementation of interoperability solutions, as described above, abstracted away the need for a PM to concern herself with accessing assets across disparate blockchains or to manage blockchain private keys associated with those different chains.

Practical considerations and challenges 

Investment universe

The universe of tokenized investments must hit critical mass i.e., with respect to how many assets under management a wealth manager could deploy, the breadth of tokenized offerings available by asset class, and a coalescing around operating models. While there continue to be many announcements in this space, the reality is that today you cannot build a robust portfolio of tokenized investments. The total inventory of tokenized real-world investments is approximately $1.3 billion and is almost entirely composed of tokenized U.S. treasuries and private loans. It will take time for a respectable marketplace of tokenized investments to emerge, but there is demand from both fund managers and investors to further tokenize investments.

Liquidity

While tokenization can enhance liquidity by creating a more efficient secondary transaction process, this technology does not, in and of itself, create liquidity. A potential future state would allow for a stack of liquidity solutions that could give wealth managers enough comfort to include alternatives in their discretionary model portfolios. 

Fund Structure

As more fund offerings are tokenized, fund managers may further explore innovative structures like Singaporebased VCCs, which were established in 2020 and have the built-in flexibility to invest across underlying asset types and operate as either open-end (subscription/redemption) or closed-end (capital call/distribution) vehicles. VCCs could also be used for investors with particular tax needs or who prefer the simplicity of a single line item. The authors believe there is a significant opportunity to deliver a better experience in traditional capital call-style investment vehicles. 

Blockchain-based records and regulation

To bring this initiative to life, different blockchain networks should serve as either the official books and records of investor ownership or must be closely aligned and automatically synced with record-keeping systems. The global regulatory landscape on this topic also continues to evolve across jurisdictions. In the U.S. there is ambiguity around the use of blockchain ledgers as the primary source for ownership records of registered funds. In contrast, some countries such as Germany, Luxembourg, and Singapore have passed legislation to enable blockchain-based record keeping.

Implementation and education

This POC explores an audacious change to how model portfolios are delivered to end investors. To gain adoption, the benefits to wealth managers, fund managers, fund administrators, and investors must be compelling enough for firms to make the necessary investments to implement this solution. Additionally, education will be key for potential entrants into this space, as there are many misconceptions about blockchain technology and tokenization.  

Privacy

Due to the transparent nature of blockchain technology, deploying all of the model details on-chain would risk exposing the wealth management firm's intellectual property publicly. As a result, in our proof-of-concept, we deployed the model and limited data on-chain, with the remaining information stored off-chain as reference data (i.e., fund manager, fund ID, blockchain, and % allocation were all off-chain). Further investigation around the balance between transparency and privacy would be required in a live state.

Results 

The POC demonstrated the ability to update the target asset allocation for a model and automatically rebalance all investor portfolios tracking that model, even when funds were held on different chains. It also showcased the automated allocation of newly invested capital according to the model, regardless of the asset types or the chains on which they were recorded. The successful execution of the POC highlighted the potential to link multiple portfolios to models and automatically rebalance when model changes occur, including alternative investments.