Open architecture is a term used to describe a financial institution’s ability to provide both internal and external asset management capabilities. Think of it as working with a trusted partner who can help determine the appropriate asset allocation, money managers whether internal, external or a combination and ongoing monitoring of the portfolio. The goal is to provide access to a variety of investment vehicles without limiting the investment management selection to only one product provider.
With the financial markets becoming increasingly sophisticated, open architecture has evolved as a way for investors to access the ever-widening range of asset classes. Such a platform is especially well-suited for high net worth individuals.
“The more high net worth the client is, the more access they need to solution providers within the market,” explains David Skolnik, Comerica Bank’s executive vice president for wealth and institutional management.
Smart Business spoke with Skolnik about open architecture, the types of services that are available with such a platform and how to go about finding a suitable financial institution.
How can clients benefit from an open architecture platform?
Many firms have their own proprietary strategies in which they manage money, but they don’t offer access to other money managers that complement these strategies. An open architecture platform benefits clients because they have access to a wider range of money managers proficient in specific styles and asset classes. By rounding out their asset allocation and being properly diversified, volatility can be lessened while returns are maximized.
What types of offerings and services are generally available with an open architecture platform?
Every firm is different. The most limited offerings would be outside mutual funds combined with internal mutual funds or money managers. Firms with more comprehensive offerings would start with a robust planning process. The information gleaned from the planning process is used to determine an appropriate asset allocation and is helpful with selecting the appropriate money managers. Preferably, the firm should be able to monitor for security overlap and tax efficiency. This means, as the client’s advocate, the firm is ensuring that the various independent money managers are not allocating too large a percent of the client’s assets in a specific asset class or security. You want the firm to have a broad enough platform that it can take you through the planning process, asset allocation, manager search and selection and performance reporting. Also, it should be able to provide ongoing monitoring of the various money managers.
Can this type of money management system be used for tax-deferred accounts?
Absolutely. In fact, it is quite efficient since the account is tax deferred, you don’t need to worry about the tax efficiency of the account. Many business owners have a significant amount of their liquid assets tied up in their retirement accounts. Because they are focusing full time on their business’s day-to-day operations, the management of their money is secondary. An open architecture platform which allows a business owner to have his or her assets managed by a firm with access to a broad array of asset classes and money managers can be very valuable for tax-deferred accounts.
What are unified managed accounts and what benefits do they offer?
Unified managed accounts are relatively new. Firms that offer them are responsible for constructing a single portfolio based on the models provided by each manager. Portfolio decisions are customized for each client. For instance, if a client says he doesn’t want to purchase any tobacco stocks, it is easy to make sure that such a transaction does not take place. Tax optimization and rebalancing are more efficiently implemented by the UMA manager.
What type of questions should one ask when searching for a financial institution that offers open architecture?
The first question to ask is what objective capabilities does the firm offer. Second, does the planning advice whether it’s financial or estate planning feed into the building of the portfolio. Some firms have planning in one area and an investment manager in another area, so the information and software don’t feed into each other. Another question to ask is can the relationship manager execute on the advice that is being given. If not, you will be inconvenienced by getting advice and then having to go somewhere else to implement the advice. Finally, it is important to ask what team of professionals you will be interfacing with over time. This team should be able to guide you through various life cycles. For example, a younger client might be concerned about getting a loan for a first home and putting away money for a child’s education. As the client matures, he or she may be more concerned about proper asset allocation for retirement and estate-planning issues.
DAVID SKOLNIK is the executive vice president for wealth and institutional management at Comerica Bank. Reach him at (408) 556-5203 or David_K_Skolnik@comerica.com.