Charlotte, NC Houston, TX Pittsburgh, PA Portland, OR

Family Office Exchange

Houston Roundtable

Open Architecture:The Question or the Answer?

Roy W. Nichol Managing Director

May 2006

2

Will the real open architecture firms please stand up?

“Pure” open architecture: No product, no revenue from anything other than client fees

“Semi-closed” architecture: Sharing manager fees; internal products with some outside managers

“Closed” architecture: Internal products only

There is no agreement about the definition of open architecture

The Open Architecture SpectrumFOX

3

Will the real open architecture firms please stand up?

Consultants

Multi-family offices

Outsourced CIOs

Managers-of-managers

Pension consultants

Wrap account programs

National trust companies

In fact, there is great confusion about the many different models

The Open Architecture SpectrumFOX

4

There are bad open architecture firms

Smart people versus non-conflicted people

Cookie-cutter approaches in a custom world

Retailing the work of research analysts

Giving institutional advice to private clients

It’s difficult to build a good open architecture firm

Open Architecture is Not a PanaceaFOX

5

The jury is still out on some larger firms, e.g.:

AMA/SunTrust

Ayco/Goldman

CTC/US Trust/Schwab

In-house OA units at banks, trust companies (e.g., Stolper/Hawthorn-PNC/Veritable

Wilmington Trust/Balantine

Firms are trying many different combinations

How Is Open Architecture Working Out?FOX

6

While the jury has brought in some death verdicts, e.g.:

Greystone/Morgan Stanley

Sterling/National City

Winter Capital/Citigroup

Merging open architecture boutiques with traditional firms is fraught with challenges

How Is Open Architecture Working Out?FOX

7

The jury is still out on some boutique firms, e.g.:

Ashbridge

Greycourt

Lydian

Monticello

Offit Hall

Spruce

This is where the real action is

How Is Open Architecture Working Out?FOX

8

The competitive landscape is changing beneath our feet

Traditional wealth management firms hold huge market share of legacy business

BUT:

Open architecture firms are winning a huge share of new business, roughly 85%*

This is why the traditional wealth management firms are worried

What Is the Competitive Threat?FOX

*Source: Capgemini

9

OA is eating the traditional firms’ lunch:

OA market share at 1/99: 0%

OA market share at 1/05: 35%*

This is why the traditional firms are worried

What Is the Competitive Threat?FOX

*Source: Capgemini

10

The OA client base is very desirable:*

@ 10% Forbes 400 families

@ 42% families with less than $50 million

@ 48% in-between: the core of the business is the centimillionaire next door

Clients in 20 states and 5 countries: a global business

73% families; 27% endowments/foundations

This is why the traditional firms are worried

What Is the Competitive Threat?FOX

*Greycourt client base breakdown

11

Competitive strengths of open architecture firms:

Low embedded cost structures

Focus on best investment practices

Avoid style rotation, fickle investor tastes

Market is moving to them

Benefit from big firm talent drain

Newer business models tend to be more efficient

Strengths of the Open Architecture Platform

FOX

12

Competitive challenges for open architecture firms:

Lack global research capabilities

Typically lower profit margins

Questions about scalability

Typically weak management

Problems developing young talent

Extra layer of fees

Difficult to “evolve into” from other platform

Client skepticism about experience

Challenges Associated with Open Architecture

FOX

13

The OA toolbox: What OA firms need to prevail in the intense competition:

Very senior client advisors

Deep family advisory experience

Demonstrated intellectual leadership

Without these you will be an also-ran or a regional player

Challenges Associated with Open Architecture

FOX

14

The OA toolbox: What OA firms need to advise VHNW clients:

After-tax approach to asset allocation

Dynamic asset allocation

Credible selection of best-in-class, tax-aware managers

Accurate, timely performance reporting

These are the bare minimum

Challenges Associated with Open Architecture

FOX

15

The best OA firms try to avoid “soft” services:

They bleed profitability

They rarely add value that families will pay for

To the extent that they do add value, you can’t compete with specialists

Are you operating a business or a “lifestyle partnership?”

Challenges Associated with Open Architecture

FOX

16

Sales-oriented cultures do not mix well with open architecture

High embedded costs eliminate strategic options

Fear of disintermediation

How to keep the OA guys away from clients?

Introducing Open Architecture Into a Traditional Wealth Management Environment

FOX

17

The most likely outcome: larger firms will find a way to integrate OA

Build HNW assets

Develop trusted relationships with substantial families

Use OA-developed knowledge to design new products

Diversify the revenue stream

The best of all possible worlds?

What Does the Future Hold?FOX

18

Consolidation

Consolidation

Consolidation

The “make” decision has often failed, leaving only the “buy” decision

What Does the Future Hold?FOX