Banks and other large financial institutions frequently advertise their extensive knowledge of global markets and access to an array of opportunities. However, in practice, their real-world investment solutions are often less comprehensive and far-reaching than suggested. The solution set of their advisors is often limited by the institution’s desire for a product shelf focused on more profitable proprietary investment products, creating a model known as “closed architecture.” For example, several Canadian banks have recently decided to require their financial planners to sell in-house proprietary funds only.
In contrast, an independent portfolio manager who works in an “open architecture” model has no such restrictions. Open architecture portfolio managers are free to access a comprehensive range of investments from a wide variety of global financial institutions on behalf of their clients. In a true open architecture system, portfolio managers are not faced with any incentives or disincentives when it comes to selecting investment instruments for their clients, other than what is best for their clients’ portfolios.
An open architecture system provides numerous benefits for investors including:
1) Greater diversification
Savvy investors know that diversification is crucial to the construction of a sophisticated long-term investment portfolio. A well-diversified portfolio can better weather downturns while still participating in market upturns. By increasing the opportunity set available, open architecture allows an independent portfolio manager to better diversify their clients’ portfolios across a wide range of asset classes, sub-asset classes, investment strategies and managers.
A true open architecture portfolio management firm can access investments from the entire universe of investment vehicles including individual securities, exchange traded funds, low-cost mutual funds, closed-end funds, private pools, hedge funds, and private investments. This robust portfolio diversification can help reduce overall portfolio risk and increase the potential for superior risk-adjusted, after-tax returns.
2) Access to best-in-class expertise
While diversification is a foundational must when constructing an effective long-term portfolio, properly selecting from the gamut of available investment instruments to build out that portfolio requires deep expertise. In an open architecture model, independent portfolio managers can access and evaluate a variety of best-in-class investment managers beyond those within their own institution.
A true open architecture firm undertakes extensive manager searches across the full universe of available opportunities. The selected managers and their vehicles must meet rigorous due diligence requirements before they can be placed in clients’ portfolios. They are then monitored to ensure the manager and vehicle remains the best investment solution for the client.
An open architecture firm can also better capitalize on the rapid pace of innovation in the exchange-traded funds and specialty manager realms by actively seeking new vehicles that reduce costs, minimize taxes, and/or improve portfolio diversification.
3) Highly customized
Open architecture investing allows an independent portfolio manager the flexibility to build customized investment portfolios that are highly tailored to their clients’ specific needs and goals. They can select both broadly diversified and focused “niche” funds and combine them in a manner that best meets their clients’ specific investment objectives and financial situation. In addition, without any proprietary ties, they can adjust investment strategies and allocations more dynamically in response to a client’s liquidity needs, market trends, economic conditions, or changes in the client’s goals or risk profile.
4) Lower costs
With an open architecture model, investors may enjoy lower costs than those within a pre-set “closed architecture” model. This is particularly true since the advent and rapid expansion of low-cost exchange traded funds. An independent portfolio manager who is not restricted to any one provider can impartially evaluate the fees and costs associated with the potential instruments that might be used in a client’s portfolio relative to their merits. Because the manager is free to invest in any number of funds, they may also be able to access preferred “institutional” pricing for their clients. These advantages can help reduce their clients’ costs and improve their risk-adjusted investment returns over the long term.
Open architecture investing can provide several important tax benefits. Independent portfolio managers can optimize the tax efficiencies associated with their clients’ asset locations by strategically allocating a broader mix of selected investments across taxable, tax-deferred, and tax-exempt accounts. Managers can also better implement tax loss harvesting strategies by selecting from an unrestricted range of substitute investments to replace tax-driven sales. They are also free to choose from more tax-efficient investment vehicles such as index funds and ETFs, thereby reducing taxable events in their clients’ portfolios.
Greater choice also affords an independent portfolio manager more opportunities to select “niche” investments that align with their clients’ specific tax profiles and to adapt their strategies as needed.
Open architecture investing at Tacita Capital
Tacita Capital prides itself as a truly independent wealth manager that practices open architecture investing. We never offer solutions that we do not believe afford the opportunity for superior, risk-adjusted, post-tax long-term performance.
To learn more about how Tacita Capital’s open architecture investing can help elevate your portfolio, get in touch with us today.