PAM Guide to Wealth Management

Open architecture and sub-advisory funds

Until the start of the 21st century, it was virtually unheard of for financial institutions to use and distribute products managed by another asset manager. This situation has been transformed through the development of open architecture and sub-advisory funds.

Open architecture is where a bank or insurance company sells an existing fund managed by another institution to its own customers.

Sub-advisory is where an asset manager, bank or insurance company outsources the management of a specific fund to a third party asset manager. The fund may retain its original branding, although there is increasing use of co-branding with the third party manager.

The difference between the two is that sub-advisory provides greater control to the asset manager, bank or insurer over the out-sourced mandate.

In theory, many independent financial advisers, stockbrokers and discretionary asset managers offer complete open architecture, as they should provide access to all unit trusts in the UK, as well as offshore funds and investment trusts.

Other wealth managers have not always provided open architecture. Competitive pressure, however, has meant that most private banks and an increasing number of retail banks and insurance companies now offer access to a growing number of third party funds. Even if a wealth manager has open architecture, however, you need to check the charges on third party funds. These can be higher than on their in-house funds.

Furthermore, the open architecture may be limited. Some wealth managers will only offer access to a handful of asset managers they have selected using their own criteria. Other wealth managers will offer a wide selection of asset managers but not a comprehensive list. Sometimes, the corporate relationships established between institutions can play a part in the manager selection process, especially those between larger banks and large fund groups. The motivation behind this can vary, but is often simply ease of access for the wealth manager to a broader range of investment strategies within one fund house, for example.

Complete open architecture can be beneficial, because it provides access to the best funds and fund managers and aids diversification.

Sub-advisory may also enable you to invest in institutional managers who are not normally marketed to retail investors. A number of major asset managers have out-sourced the management of funds to boutique managers around the world. Boutique managers are keen on this arrangement, because they do not want the expense of marketing and selling their funds themselves.

One way in which many banks and insurance companies have adopted open architecture and sub-advisory is through the introduction of multi-managers. As stated before, this can enable them to give their clients access to institutional fund managers in alternative investment classes normally only accessible to institutional investors.

Once you have decided on the type of asset manager you wish to use, the next step is to select an appropriate structure.

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