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Banks’ Shift From Open Architecture To In-House Products – What’s Driving Change?

Disclaimer: The views and opinions expressed in the vapa Swiss independent wealth management blog posts featured on this page are solely my own and do not necessarily represent the views of any institutions or organisations I may be associated with. These posts are intended to share personal insights and perspectives and should not be interpreted as official statements or positions of any affiliated entities.

The author of this guest commentary, who is a senior figure in the Swiss EAM industry, argues that the re-emergence of in-house products isn’t necessarily a negative trend.

A term that has been around the world’s wealth management sector for as long as many can remember is “open architecture” – capturing the idea that a truly independent wealth advisor should not be restricted to recommending funds from his or her own business, but look across the entire field. The term gained traction – sometimes more in marketing and advertising than in hard reality – because firms know that it would impress clients. A question is how can this approach be put to work in reality, with the necessary controls, and in ways that enable advisors to frame clients’ expectations? This topic also takes on new salience amid signs that firms are moving back to offering their own “in-house” products and services to clients. So what has changed?

To discuss this topic is Patrick Stauber, chief executive of the Swiss external asset manager Marcuard Heritage. The editors are pleased to share these insights and invite readers to respond. If you wish to do so, email /">. Remember that the usual editorial disclaimers apply to the views of guest writers.

Around 20 years ago, the investment product realm was electrified by a promising term: open architecture. Positioned as the game-changer in the investment selection process, it underscored the unified access to a broad spectrum of financial offerings from multiple providers on a single platform. It promised to shatter the confines of traditional proprietary products and offer investors an array of options. 

Open architecture was lauded for its democratising potential, aiming to provide investors with the best possible solutions regardless of 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 involved were to exist.

Interestingly, in-house products typically boast a much higher loan-to-value ratio than external investment funds, often attributed to 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. Open architecture was envisioned as a panacea for the limitations of proprietary offerings, offering investors a more comprehensive selection and unbiased advice. As the pendulum returns towards in-house products, banks must maintain the spirit of choice, transparency, and value that open architecture championed.

In conclusion, while the financial landscape may have evolved, the core principles of providing clients value, choice, and clarity remain timeless. 

Whether through in-house products or a blend of multiple offerings, the focus should always be on an unbiased approach to meeting clients’ diverse needs in a rapidly changing world.

Source: WealthBriefing

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Graphic illustrating the transition in the wealth management industry from open architecture to in-house financial products, featuring icons of Swiss banks, investment charts, and diverse financial products.

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