Unlocking Real Value Blog

Is Open Architecture in Danger of Cuts?

Published inFUNDfire – An Information Service of Money-Media, a Financial Times Company
Written by Andy Klausner, CIMA, CIS, the founder of AK Advisory Partners LLC., a strategic consultancy serving the wealth management industry.

Open architecture should not be a victim of the current financial crisis. This form of investing has been synonymous with offering best-of-breed choices to clients. For sponsor firms, to cut back or hold off on this important competitive advantage in a reactionary manner would be a mistake.

Certainly wirehouses, RIAs, family offices, banks and regional brokerages, among others, have felt the pinch of the economic crisis – many if not all have made expense cuts to counteract reduced revenues, and staff downsizing has been all too common. There have also been cuts to product managers and product specialists who play a key role in strengthening fee-based open architecture platforms and getting advisors to use them. And no doubt many platform expansion efforts, such as unified managed account and unified managed household rollouts, that were planned before the crisis have been pushed back due to wider cost-cutting initiatives.

But as the economy has begun to shows signs of recovery over the past few months, many firms have begun to look forward and plan for the future. We have been encouraging clientsto begin talking more about their “Rebound Plan” – a forward-looking effort to demonstrate toclients how the firm has successfully weathered the economic turmoil and positioned themselves for long-term success. Bank of America’s reported decision to attempt to sell its proprietary money management arm, Columbia Management, while keeping a large minority stake in BlackRock, is an example of how a company can strategically plan for the future in a pro-open architecture way.

But uncertainties do remain. One example is the continuing ambiguity surrounding Morgan Stanley Smith Barney, where it is unclear whether the combined operation will sell proprietary product from Morgan Stanley Investment Management. Wealth management sponsors that have made smart and necessary cuts can and should still offer open architecture as part of their value proposition. Remember, as firms look to grow in the future, the winners will be able to pick up advisors (whether through acquisition or recruiting) at the expense of those firms that have deemphasized investment platforms. Top-notch advisors are used to operating in an environment of open architecture platforms. I do not believe that they will settle for anything less in the future.

Realistically, wealth managers that find it necessary to cut or hold off on offering vital services will probably be forced to merge with a rival or be sold outright. I believe that small to medium-sized firms are going to find it harder and harder to offer top-notch products and services as stand alone organizations. Clients are scrutinizing their advisors and the firms they do business with more carefully. Explaining “smart” reductions should be easy; but if your product and service offerings are not competitive, you are at great risk of losing clients.

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