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 [email protected].