Every major financial firm is wrestling with how to add blockchain technology into their businesses. LPL Financial's first move is to offer financial advisors a low-cost product for clients interested in shares of large global firms applying blockchain technology.
The separately managed account offering, known as the Blockchain Innovators Portfolio, launched in May. The model portfolio, which is the fourth set up by LPL’s research division, costs only 5 basis points with a minimum investment of $50,000.
Not actually clear, however, is whether there are any direct applications of blockchain currently under development at the No. 1 independent broker-dealer. Other firms have revealed uses for the technology, such as Vanguard, which late last year began using blockchain to share data among index providers.
The industry at-large was decidedly less than impressed.
Ritholtz Wealth Management CEO Josh Brown called the portfolio model “a managed account comprised of corporations that use email” in a tweet to his 1 million followers.
In an exchange with an LPL executive, XY Planning Network co-founder Michael Kitces tweeted that he was “just really struggling on the expected reach of a solution like this, and who the target client is, given typical @LPL reps & their clientele.”
LPL Executive Vice President for RIA and HNW Advisor Solutions Matthew Enyedi had tweeted that the offering is “not right for all investors but certainly for some” and called it “significantly less expensive than the available ETF’s, all the benefits of SMA (transparency, liquidity, tax mgmt) and a unique research-based approach.”
Existing options in the marketplace and the range of holdings in the new portfolio formed the basis of the criticism. The strategy comes after the creation of at least six ETFs related to the digital ledger tech since January which have already grown to more than $400 million in assets, according to Reality Shares.
Blockchain, the distributed ledger technology underlying cryptocurrencies such as Bitcoin, has spawned a wave of startups focused to how best to tap it. The possible applications involve expediting transactions, data management and marketplace activity, according to Morningstar.
“Ignoring blockchain today is like ignoring the internet 30 years ago,” Jim Sinegal, a senior equity analyst with the research firm, said in a speech last week at its annual investment conference. “You don’t want to make the same mistake with blockchain just because we’re in the early stages.”
The initial holdings in the new LPL offering display the wide swath of global businesses its research team identified through a “a rules-based approach to invest in companies working together to advance blockchain technology, including those that are setting standards, developing infrastructure, and executing transactions,” according to a three-page briefing on the portfolio.
British Petroleum, the Swiss telecommunications firm Swisscom, SAP, the National Bank of Canada and the Japanese telecom firm KDDI came out as the top 5 holdings, the document shows. Other stocks to make the top 15 include Aetna, UPS, Microsoft, IBM, American Express and UPS.
“Blockchain could be a transformative technology and disrupt nearly every sector and industry as it evolves and adoption increases,” according to the profile of the portfolio.
To construct it, the research team’s system applies liquidity and market capitalization screens to the universe of firms, selects the top 50 companies by market capitalization and quantitatively optimizes them for risk and reward. The MSCI World Index serves as its benchmark.
LPL does not currently collect a management fee from advisors for the offering, and the firm says the clients’ management fee of 5 basis points falls far below typical fees on equity strategies of 40 to 50 basis points. The minimum investment also stands at about half that of the typical equity SMA.
“At this time, there are very limited investment solutions available for exposure to this opportunity,” LPL CIO Burt White said in a statement. “We are proud to be able to lead the industry by leveraging our scale and expertise to provide low-cost solutions that support our advisors’ ability to meet market demands.”
Representatives for LPL didn’t immediately respond to a request for any direct applications of blockchain currently under development at the firm. Like other incumbents, the firm could look at ample potential acquisition or vendor partners already deploying the technology.
Morningstar tracked more than 128 blockchain-related startups receiving significant venture funding. For example, Symbiont, which is collaborating with Vanguard, falls under the category of a bevy of firms providing enterprise solutions. Morningstar released an analysis earlier this month of what kinds of incumbents are best positioned for the impact of blockchain.
BDs and RIAs have also been peppering Envestnet with questions about the use of blockchain, as it and the cryptocurrency it helped spawn keep growing in popularity, says Daniel Hamer, Envestnet’s vice president of product engagement.
“There are absolutely going to be practical applications for it,” Hamer says, noting firms will need a “deep understanding” of the tech to tap into it. “I think we’re in the stage as an industry of figuring out what those steps are and what that opening move looks like.”