In this guest commentary, a senior Swiss EAM executive argues that the return of in-house products isn’t necessarily negative.
For as long as many can remember, one term has shaped the world’s wealth management sector: “open architecture”. It captures the idea that a truly independent wealth advisor should not be restricted to recommending funds from his or her own business. Instead, the advisor should look across the entire field. The term gained traction because firms knew it would impress clients – sometimes more in marketing than in hard reality. The question is how to put this approach to work in reality, with the necessary controls. How can it help advisors frame clients’ expectations? The topic gains new salience amid signs that firms are returning to their own “in-house” products and services. So what has changed?
The views expressed in this guest commentary are those of the author.
The promise of open architecture
Around 20 years ago, a promising term electrified the investment product realm: open architecture. Positioned as a game-changer in investment selection, it stood for unified access to a broad spectrum of offerings. Multiple providers would sit on a single platform. It promised to shatter the confines of traditional proprietary products and offer investors an array of options.
Observers lauded open architecture for its democratising potential: investors should get the best solutions, whatever the source. This approach starkly contrasted the prevailing practice at that time of institutions pushing their in-house products.
Today’s financial landscape is experiencing a “back to the roots” shift, impacting the independent wealth managers in Switzerland. They now face a rising wave of operationally advantaged bank-owned products, challenging their commitment to a neutral, open investment approach.
Why the shift back to in-house products?
A key reason why banks lean towards in-house products is to amplify the allure of their assets under management. Moreover, regulatory shifts, especially the cessation of retrocessions, have diminished the appeal of third-party products. These shifts compound pressures on banks to showcase growth and sustain profitability amidst falling custody and trading fees. Such circumstances might underscore the uniqueness of wealth and independent fund managers if no distinct challenges were involved.
Interestingly, in-house products typically boast a much higher loan-to-value ratio than external investment funds. Banks often cite greater familiarity with internal solutions. Yet, this rationale is puzzling, as volatility and liquidity should be paramount in LTV assessments.
Another compelling case for in-house products revolves around trading and custody costs. In-house products offer a considerable pricing advantage, with trading expenses substantially lower than third-party offerings. Swiss wealth managers feel this difference acutely when they wish to continue engaging with external products.
Balancing the scales
It’s important to clarify that the re-emergence of in-house products isn’t necessarily a negative trend. These offerings are competitive, backed by rigorous research, and tailored to meet specific market demands.
However, the key is balance. Its pioneers saw open architecture as a cure for the limits of proprietary offerings. It gave investors a broader selection and unbiased advice. As the pendulum swings back to in-house products, banks must preserve the choice, transparency and value that open architecture championed.
The financial landscape may have evolved, but the core principles remain timeless: value, choice and clarity for clients.
Whether through in-house products or a blend of offerings, the focus must stay on unbiased advice. Clients’ needs are diverse, and the world changes fast.
Source: WealthBriefing
Source: https://vapa.ch/banks-shift-from-open-architecture-to-in-house-products-whats-driving-change/ · vapa.ch
