The Use of Open Architecture by Corporate Trustees

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The Use of Open Architecture by Corporate Trustees

By: Wilmington Trust

Today's investors are seeking comprehensive solutions to their family's financial dilemmas and are not satisfied with merely having someone sell them a product. They've realized that one producer can't do it all; however, finding the help that they want is not always an easy task. Conflicts of interest often occur when financial institutions offer only proprietary products or when analysts are pressured to appease the clients of their firm's investment banking department. Since objectivity is the key to meeting investors' wishes, what is the financial services industry doing to align its interests with those of its clients?

"Open Architecture" is a popular investing approach used by corporate trustees and financial institutions. This concept opens clients' options to best-in-class money managers, ensuring their advisors remain objective. It is a fee-based resolution to address clients' uneasiness over lack of objectivity and quality of service and advice. And to enhance these benefits, forward-thinking firms have created "investment strategy teams" to access the firm's collective expertise in answering clients' concerns, even if those solutions are not under the institution's in-house money management umbrella.

Open architecture is built on the philosophy that:

Asset allocation is a key determinant of return and should be based on a client's financial situation, stock valuations, and cyclical opportunities. This may entail positioning more of a client's assets into small-cap, mid-cap, international, or alternative assets such as hedge funds and private equity. The individual segments then complement each other and connect in ways that provide a highly customized investment management solution for each client's objectives.
Diversification should span market capitalization and independent portfolio managers' investment styles (growth and value) within each asset class. And, to reduce risk, no one category or manager should be so important as to pose a significant danger to the portfolio's overall return.
Even the best money manager's performance can fluctuate and fall behind the market and their peers' returns. Open architecture allows a trustee to easily terminate a poor-performing manager in order to deliver consistent advice across a broad range of economic climates. And to find the best solution possible, the institution may have to seek counsel outside its own area of expertise.
Actively managed investments combined with index funds may reduce benchmark risk while lowering costs and creating tax efficiencies in a portfolio.
Periodic tactical adjustments among styles and strategies based on what's happening to the economy and on the geo-political front may enhance performance.
For many of today's investors, open architecture is the only intellectually honest approach because there are no conflicts to refer business internally. Yet clients are provided with access to high-quality money managers selected and monitored by the financial institution's research staff.

Financial institutions that are listening to investors are using an open architecture investment philosophy to take their business to the next level. The result is a new definition for the term "trusted advisor" that provides the best advice possible without limitations on choices of investment options for their clients.

Updated: January 1, 2013

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.

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