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| Bankers' Agenda |
Solving the Open Architecture Puzzle
Thomas M. Kostigen
01/01/2004
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Open architecture has nothing to do with Frank Gehry, but it is cutting edge. And we find it at, of all places, our private banks.
Like most banking industry jargon, the term "open architecture" actually represents a simple idea: Private banks that adopt it give their clients access to products and services provided by third parties—even if those  parties happen to be competitors. The ranks of these open architecture adherents have been growing in recent years as affluent individuals demand access to a wider variety of best-of-breed investments (hedge funds, private equity funds, structured investment products, and so on) than banks can provide in-house.
After several painful years of wealth destruction, the private bank clients’ tolerance for underperforming investment vehicles is at an all-time low. Investors now refuse to limit their investments to an in-house menu of products. Despite the punishing effect open architecture has on their bottom lines, the private banking industry has complied.
"These guys aren’t moving to open architecture because they want to. They are moving to open architecture because their clients are demanding it. It is absolutely market driven," says Jamie Punishill, an analyst at Cambridge, Mass.-based Forrester Research, which monitors the financial services industry. "Nobody at Goldman Sachs one day said: ‘Wouldn’t it be great if we didn’t manage all of our clients’ money.’"
Asset allocation statistics testify that open architecture is now the preferred approach—even if it is applied differently at different banks. The assets that banks allocate to third-party money managers have skyrocketed from less than $100 billion 10 years ago to more than half a trillion dollars today, according to the Washington, D.C.-based Money Management Institute. "It’s definitely recognized as something that they have to do," says Paul Fullerton, senior analyst at Cerulli Associates in Boston, a research firm.
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