institute for private investors open architecture: the question or the answer? gregory friedman,...
DESCRIPTION
3 Will the real open architecture firms please stand up? Consultants Multi-family offices Outsourced CIOs Managers-of-managers Wrap account programs Private trust companies Many different models… The Open Architecture Spectrum Institute for Private InvestorsTRANSCRIPT
Institute for Private Investors
Open Architecture:The Question or the Answer?
Gregory Friedman, Chief Investment OfficerGreycourt & Co., Inc.
June 2005
2
Will the real open architecture firms please stand up? “Pure” open architecture: No product, no
revenue from anything other than client fees
“Semi-pure” Open architecture: Allows use of Internally developed funds of funds products
“Semi-closed” architecture: Sharing manager fees; internal products with some outside managers
“Closed” architecture: Internal products only
No consistent definition of open architecture…
The Open Architecture SpectrumInstitute for Private
Investors
3
Will the real open architecture firms please stand up? Consultants
Multi-family offices
Outsourced CIOs
Managers-of-managers
Wrap account programs
Private trust companies
Many different models…
The Open Architecture SpectrumInstitute for Private
Investors
4
There are bad open architecture firms Smart people versus unconflicted
people
Cookie-cutter approaches in a custom world
Retailing the work of research analysts
Giving institutional advice to private clients
Hard to build a good open architecture firm…
Open Architecture is Not a PanaceaInstitute for Private
Investors
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
Wirehouse consulting units
Firms are trying many different combinations…
How Is Open Architecture Working Out?Institute for Private
Investors
6
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?Institute for Private
Investors
7
The jury has brought in some death verdicts, e.g.: Greystone/Morgan Stanley
myCFO/Harris (BofM)
OffitBank/Wachovia
Winter Capital/Citigroup
Merging open architecture boutiques with traditional firms is fraught with challenges…
How Is Open Architecture Working Out?Institute for Private
Investors
8
The competitive landscape is evolving… Traditional wealth management firms
still hold huge market share of legacy business
BUT:
Open architecture firms are winning a huge share of new business, roughly 85%*
This is why traditional firms are worried…
What Is the Competitive Threat?
*Source: Cagemini
Institute for Private Investors
9
The OA client base is very desirable:* @ 20% Forbes 400 families
@ 20% families with less than $40 million
@ 60% in-between: the core of the business is the centimillionaire next door
Clients in 25 states and 5 countries: a global business
This is why the traditional firms are worried…
What Is the Competitive Threat?
*Greycourt client base breakdown
Institute for Private Investors
10
OA is eating the traditional firms’ lunch: OA market share at 1/99: 0%
OA market share at 1/05: 35%*
OA market share at 1/09: 80%**
This is why the traditional firms are worried
What Is the Competitive Threat?
*Source: Capgemini**Source: Greycourt
Institute for Private Investors
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
Improving profit margins
Benefit from big firm talent drain
Newer business models tend to be more efficient
Strengths of the Open Architecture PlatformInstitute for Private
Investors
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
Open architecture isn’t perfect…
Challenges Associated with Open ArchitectureInstitute for Private
Investors
13
Disadvantages of pure open architecture: It’s very difficult to pull off
It’s especially difficult to “evolve into” OA from another platform
It’s a management challenge in an industry notably lacking in management
Can you make money doing it?
A botched open architecture launch leaves no room for recovery
Challenges Associated with Open ArchitectureInstitute for Private
Investors
14
Disadvantages of pure open architecture: Investment management is increasingly
a commodity item
Extra layer of fees
Far from where the rubber meets the road
Client skepticism about experience, intellectual capital
Challenges Associated with Open ArchitectureInstitute for Private
Investors
15
Alternative assets: conflicts vs. capabilities
Everybody wants hedge fund exposure
Challenges Associated with Open ArchitectureInstitute for Private
Investors
16
Persistent low-return environment
Who will prosper in a low-return world?
Challenges Associated with Open ArchitectureInstitute for Private
Investors
17
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 ArchitectureInstitute for Private
Investors
18
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 ArchitectureInstitute for Private
Investors
19
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 ArchitectureInstitute for Private
Investors
20
Culture always
defeats strategy
Sales-oriented cultures don’t mix well with open architecture
Introducing Open Architecture Into a Traditional Wealth Management Environment
Institute for Private Investors
21
High embedded costs eliminate strategic
options
Many financial firms have priced themselves out of the OA market
Introducing Open Architecture Into a Traditional Wealth Management Environment
Institute for Private Investors
22
Fear of
disintermediation
How to keep the OA guys away from the clients?
Introducing Open Architecture Into a Traditional Wealth Management Environment
Institute for Private Investors
23
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?Institute for Private
Investors
24
Consolidation
Consolidation
Consolidation
The “make” decision has often failed, leaving only the “buy” decision
What Does the Future Hold?Institute for Private
Investors
25
Gregory Friedman
Chief Investment Officer
Greycourt & Co., Inc.
(503) 226-0470
Fax 503-226-0471
www.greycourt.com
Contact InformationInstitute for Private
Investors