From the October 2006 issue of Investment Advisor • Subscribe!

Stepping Into The Great Wide Open

An open architecture approach is allowing big banks to compete with private banks for the wealthiest clients

The concept of open architecture at banks that have a private wealth management capability is not new. For a number of years now, private banks and larger, more universal banks have been offering their high-net-worth clientele the combination of a broad range of investment products, chosen from either an in-house menu or from the wider financial market, and personal advisory services. Today, high-net-worth and ultra-high-net-worth clients have access to a range of highly competent providers, willing and able to serve their needs via an open architecture platform.

Clearly, open architecture is what clients want, but at a time when there are so many skilled providers of wealth management services, and clients themselves have become increasingly more aware of the plethora of investment choices and products available in the financial markets, experts say that the business of managing private wealth on an open architecture platform is still challenging, from the point of view of both firms and clients. It is a process that continues to evolve as this business grows, and as it evolves, both firms and clients must learn to define their expectations, their capacities, and also their limitations.

While some firms are better on the advisory side, they might not be offering their clients the best possible investment products. Others might have the resources and the manpower to either search for the top-performing products in the market or to create their own in-house, but might not deliver the kind of individualized approach that many wealth management clients expect.

On the client end, many high-net-worth individuals might be seduced by the idea of having access to the benefits of open architecture, but, when it comes down to it, are not exactly sure what this signifies, and whether it will prove to be the correct methodology and approach for them. Many people are also reluctant to leave the long-established relationships they have shared with a financial advisor or a broker, and take up something new with an institution that offers an open architecture platform.

But even if clients are not completely sure about what they can get from an open architecture offering, most are sure that they want it, and in private wealth management, as in other businesses, the client is always king. For wealth management firms to compete in an open architecture world, each one must decide what's right for them within the parameters of their business models and provide the highest level of service to clients at the most reasonable cost to all, says Andrew Hutton, CFA and head of asset management at RBS in London.

Indeed, wealth management firms need to figure out where their strengths lie and build on these, while getting out of areas that might not be their forte, agrees Ian Partridge, CEO of Geneva, Switzerland-based Loedstar, a firm that provides training and seminars to wealthy families across the globe. This is key to making open architecture work for all, and a principle all firms in the field need to adhere to, if they want to keep on appealing to an ever-growing universe of private banking clients.

"In today's wealth management industry, we see two trends in client demand that providers find difficult to reconcile: The demand for objective advice and the need for product excellence," Partridge says.

Open Architecture is Openly Defined

But while the jury is still out as to which players will be able to get the perfect combination of product offerings and advisory services, what's clear is that private wealth management is a business many firms want to be in, and each one, be it a private bank or a larger, more universal player, has its own definition of open architecture and how that can serve the needs of private clients.

UBS, for example, has been cross-serving its clients by leveraging the vast amount of group experience the bank has in various financial markets, business areas, and investment products. By virtue of being a universal bank, UBS has a global reach, says Peter Wuffli, CEO of UBS, who spoke at the Annual Meeting of the CFA Institute in Zurich in May, and the bank has been able to extend this even further through both acquisitions and organic growth. The know-how the bank has in a range of areas and sectors can be used to serve clients in a variety of ways, in order to provide them with a wide-reaching open architecture platform.

The open architecture model is extremely important to UBS, says Stephen Roussin, head of investment solutions for U.S. wealth management at UBS in New York.

"For us, open architecture is a strategy, far more than a concept," he says. "We believe that clients everywhere are looking for this, and we as a universal bank can provide that solution. Our approach is to construct holistic investment portfolios for our clients, with both in-house products and the best products from the outside world, in order to provide the best overall solutions."

But while larger financial institutions undeniably have a broader platform of offerings and services, and can be more aggressive in providing clients' access to both internal, structured products and external investment products, some argue that this creates a supermarket approach to wealth management that is not perhaps the most ideal one for private clients, particularly since wealth management at a universal bank is one among many business lines. On the other hand, smaller banks whose sole business focus is wealth management might not be able to reach such a variety of investment products, but they can offer a more customized solution to their clients, Hutton says. Instead of offering 20 equity strategies, for instance, a smaller bank could pride itself on selecting two well-tailored ones instead, he says, and this approach could be more appealing to the private client.

That is just what private bank Pictet et Cie. claims as its competitive advantage. Pictet has always been an open architecture firm, says Pierre Allan Wavre, who heads the Geneva, Switzerland-based bank's family office, in that it does not make investment products but only invests money for its clients, and its sole goal is to cater to the needs and expectations of its clients, both in terms of delivering superior performing products and offering personalized advice. Over the years, Pictet has developed an expertise in a range of asset classes, namely Japanese equities and emerging market stocks and bonds, and the bank prides itself on selecting the best of the best in these as well as other investment areas, from the broader financial market, Wavre says.

The Pictet family office manages money for ultra-high-net-worth individuals across the globe, and such fortunes need to be managed on an open architecture platform, Wavre says, as clients must have access to the best products in the market. At the same time, the advisory role of a private bank is paramount, and incomparable to what a universal bank can offer. This is where Pictet's forte lies. Indeed, personalized advice is very important to private clients, and Wavre feels a universal bank cannot ever hope to replicate this, by the very nature of its business model.

"The larger, more universal banks are trying to put across the message that they offer an advisory role in addition to the breadth of products that they have," Wavre says, "and yes, this might be true, but what is their business model? It remains sales-driven, so in a large organization, the more products you sell, the better for you, and this is the bottom line."

The idea that sales drive all the business lines of a universal bank, private wealth management included, is not uncommon, and it is something that larger institutions that have private wealth management businesses are constantly striving to redress. The problem is partly due to having just too many products, Hutton says. More products need more expertise and a greater number of advisors, but more than that, they are also expensive to produce, which means there is greater pressure upon bankers and advisors at larger institutions to sell them. Indeed, the greatest challenge to a larger bank is striking the right balance of products, Hutton says.

Many universal banks in the wealth management business have recognized this and are trying to get people to view them as being less focused on making sales, and more as concerned parties providing the kind of objective, personalized advice that private banking clients want. Credit Suisse, for instance, which offers a service called Preferred Advisors to its US private banking clientele, places a great deal of emphasis upon personalized interaction with clients, and selects advisors that can offer just that kind of customized service.

To its advantage, the wealth management business in the US is small, says Peter Aliprantis, managing director and head of the Preferred Advisors program; it operates with only 284 advisors that have been hired from boutique firms rather than large wirehouses--something clients like a great deal.

In addition, about 80% of the $7 billion in assets under management in the Credit Suisse Preferred Advisors program are invested with outside managers, Aliprantis says, thereby upholding the bank's commitment to having a truly objective, open architecture platform.

"We think of ourselves as consultants more than anything else, and we always place the clients' best interests first," Aliprantis says. "A lot of clients have come to us because they have not been able to receive the special services they want from other, larger institutions. We have the advantage of being smaller and more boutique-like, so we can provide the more personal kind of service that private clients are looking for."

In addition to providing personalized attention to clients, a bank like Credit Suisse has the means to provide clients with access to the kinds of superior investment products that they expect. But it also has the capacity to produce top-notch investment products itself, and if they meet a client's requirements, then an advisor can certainly propose them, Aliprantis says.

"We're not going to stop a client from buying a Credit Suisse product if it is outstanding, and if we're doing what's right for a client, " he says. "We're not out to sell our stuff, but if our products fit the bill, then we can certainly suggest them."

By definition, the business model of a universal bank is such that it cannot just offer third-party investment solutions on account of its size and scale, agrees Michael Strobaek, global head of investment solutions in global wealth management at UBS in New York. "Our clients have the right to ask us for third-party products and they will ask us for them, but we can also produce in-house products, and not for the sole goal of selling them," Strobaek says. "Our business is really to produce and select both top quality products and portfolio solutions for our clients, and if we are asked to seek third party managers, we will, but we also have superior in-house offerings."

At the end of the day though, the way in which a private wealth management business functions on an open architecture platform depends a great deal upon clients themselves and what they want, and until now, only a minority appear to have demanded full freedom of choice, Partridge says. Most clients, he says, still expect a bank to use its in-house capabilities for a major part of their assets.

Of course, clients do still value their freedom to choose, and so open architecture will continue to expand, driven by clients and by banks that see themselves as conduits to the broadest possible product range. But this evolution is likely to be limited, and this is evidenced by the experience of the top end of the wealth market, Partridge says.

"At the top tier of the wealth market, clients with family offices frequently use objective, specialist consultants and family office professionals to select managers and funds," he says. "They take an open architecture approach, but what is most surprising is that only a minority of ultra-high-net-worth families have set up their own family office, or make use of multi-family offices. Instead, most still maintain private banking relationships with a number of banks and asset managers."

But even if the use of open architecture is still limited, it is clear that more and more high-net-worth clients have been expressing the desire to have their money managed on such a platform, UBS's Roussin says, and if firms do not offer this in some way, shape or form, then clients will easily up and leave to go somewhere else.

"We have to do what clients want, because clients are the guiding light in this business," Credit Suisse's Aliprantis agrees.

It is up to banks, therefore, to ensure that they are as well equipped as possible to meet their clients' needs in terms of successfully combining sound, personalized advice with product excellence. This in turn will broaden their client base through customer satisfaction and recommendation, because at the end of the day, there is no better salesperson than a happy client.

Savita Iyer is a freelance journalist who has long covered different aspects of the global financial services industry. She is based in Mysore, India and can be reached at siyerwriter@yahoo.com.

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