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How Open is Open Architecture?

Stephen Harris

WealthBriefing

26 September 2006

It’s one of the holy cows of private banking. Every bank is committed to giving its clients the best available products in the market through open architecture. But what does this actually mean in practice – and are clients really getting value and choice from the offerings? In its purest form open architecture in private investment management should imply that every client should have access to every investment product that has been manufactured globally, through any given wealth manager. Although regulatory issues will, in practice, restrict this choice. In this environment, wealth managers would be differentiated on quality of advice, broader service considerations and fees and commission charges rather than on quality or breadth of product offering. Product offerings would be commoditised. So to avoid being caught up in a commodity-based industry we might expect to see a move away from an emphasis on product pushing to an advice-driven climate in which the service offering is much more holistic and client focused. So what is happening at the moment? Private bankers always stress that their bank takes open architecture seriously and that they do it differently. Some say that they only offer their in-house products to customers when it can clearly be demonstrated that they are best of breed. Others go one stage further and talk about only in-house products that are “better than best” being part of their offering. Proof of open architecture is sometimes given by bankers who are happy to tell you that less than half of all products sold to clients have been manufactured in-house. This implies not only a very wide product range but also extreme confidence in the relative merits of the in-house products on offer to clients. Do customers want open architecture? They certainly want choice - this is amply demonstrated by the fact that the majority of them are multi-banked. And amongst their banks we know that customers are making constant comparisons on many levels. Recent research also shows that access to products is high on their list. We might infer from this that the widest product range on offer will give the bank a comparative advantage, and this might influence asset allocation to each bank over time. Perhaps the only route to pure open architecture is to manufacture no in-house products. But this is to overlook and underplay the vast experience and expertise private banks have in this area. Is it really in the customers’ best interest for this to be ignored? The logical extension of the open architecture ideal is the funds platforms that are now so important in the wealth management industry. But even here there are anomalies and impediments to the customers’ access to the full range of products on offer. Many platforms do not offer private clients access to institutional share classes of funds. According to some commentators this restriction is driven purely by the lower fee levels that these share classes command. This is particularly important to high net worth individuals whose scale of investments could qualify them to direct access to the institutional share class as of right. One that does offer institutional share classes to private investors is Raymond James. For instance with Standard Life UK Opportunities fund the retail share class management fee is 1.5 per cent per annum, whereas the institutional share class is 0.5 per cent per annum. One of the benefits of these platforms is the ability to leverage economies of scale that aggregated dealing gives, to get institutional level pricing advantages. It’s a shame that in many cases they’re not being pursued for the customer’s benefit. But the issue over open architecture is not just restricted to share classes, it also relates, in the UK at least, to tax wrappers too. The advisor should be allowed to access the tax wrapper that offers best value to the client and then allow unrestricted access to the underlying assets, and for now, this is not the case. And if the service to clients were truly open, platforms would allow investors to switch between each other without barriers. All too often now, in specie movements between the platforms are not allowed, exposing the investor to exit and entry costs and market risk.