What it means
Under a closed or proprietary model, a firm sells mainly its own funds, insurance policies or software. This can be profitable for the firm, but clients may receive products that are not the best available.
Open architecture changes this by letting the firm select from outside providers on merit. Wealth managers, investment platforms and banks use the model to widen choice.
An adviser might recommend a fund from one company for equities, another for bonds and a third for property. The firm usually carries out research to choose a shortlist, and clients benefit from the competition between providers.
The model has benefits for fees and quality. When many providers compete, there is pressure on costs, and clients can switch if a fund performs poorly.
For the firm, the revenue comes from advice, platform fees or a share of provider fees, not only from selling its own products. There are caveats, because some firms say they are open but still favour their own products or those of partners who pay for shelf space.
Clients should ask how products are chosen, whether any payments are received from providers and how many options are really available. Choice can also be overwhelming, and good advice is needed to use it well.
The term is also used in technology. Open architecture systems have published standards so that software from different suppliers can connect, as happens in open banking where data can be shared securely with approved apps.
The shared idea is that parts from different sources work together. Fees deserve close attention.
A client may pay an advice fee, a platform fee and the fund charges at the same time, and the total can exceed that of a simple proprietary product if the advice adds little. Asking for a single all-in cost figure, expressed as a percentage of assets, makes comparison with the old arrangement far easier.
In practice
Real-world examples.
Example
A private bank allows its advisers to recommend funds from across the market. A client is moved from the bank's own bond fund to a lower-cost fund from another manager, saving $2,400 a year. The bank earns an advice fee instead.
Example
An online investment platform lists over 2,000 funds from dozens of managers. Customers can compare costs and performance and switch easily. The platform earns a small percentage fee on assets held.
Example
A fintech company builds its app using open banking links so customers can see accounts from several banks in one place. The company does not own the banks and relies on shared technical standards. Users can add or remove providers without changing the app.
Formula
Calculation
Annual fee saving = portfolio value x (current fund expense ratio - alternative fund expense ratio)
Suppose a client has $500,000 invested in proprietary funds with an expense ratio of 1.2%. An open architecture adviser identifies comparable third-party funds with an expense ratio of 0.6%.
Current annual cost = 500,000 x 0.012 = $6,000.
New annual cost = 500,000 x 0.006 = $3,000.
Annual saving = 6,000 - 3,000 = $3,000, or 500,000 x (0.012 - 0.006) = $3,000.
Over ten years, with no growth assumed, the saving would be 3,000 x 10 = $30,000.Case study
Seen in the real world.
Summit Ridge Advisers is an illustrative, fictional firm that sold mainly the funds of its parent company. A review found that its funds cost 0.7% a year more than similar funds from other managers, and clients had started leaving.
The chief executive moved the firm to open architecture, with an investment committee choosing about 60 funds from 15 providers. Average client costs fell by 0.5%, saving a client with $400,000 a total of $2,000 a year, and the firm switched to a clear advice fee.
Revenue fell at first, as the firm lost its share of fund fees, but client numbers grew by 12% in two years. The illustrative lesson is that moving away from selling proprietary products can reduce short-term income but strengthen trust and long-term growth.
Watch out
Common mistakes.
- Assuming every firm describing itself as open offers unbiased advice, when some still favour their own or paid partners' products.
- Choosing a product on past performance alone, which does not predict future results.
- Overlooking the platform and advice fees that replace fund fees, which also affect total cost.
Questions
People also ask.
What is open architecture in investing?
It is a model in which a firm offers products from many providers and chooses them on merit, not just its own.
How does it reduce conflicts of interest?
Because the firm does not rely on selling its own products, it has less reason to recommend something that is not best for the client.
Is it only used in finance?
No, the term also applies to technology systems built on shared standards so parts from different suppliers can work together.
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