They all boil down to being able to put your clients’ interests first.
In the world of wealth management, most firms operate under two basic structures: open and closed architecture. As an independent Registered Investment Advisor (RIA), it’s important to understand the difference.
Defining Closed and Open Architecture Models
With a closed architecture model, institutions offer only funds and investment products carried by their bank or investment firm.
A closed architecture can present several problems for investors, according to WealthDaiy.com. “Critics say closed architecture raises conflict-of-interest risks, enabling the fund company to bulk up on certain asset categories to raise profits.”
A closed structure can also have an adverse effect on you as an RIA. You might have limited flexibility and control over payout, and face restrictions because you can only offer the funds of a particular bank or investment firm. These funds may or may not be the best fit for your clients, but you have no choice in the matter. Clients might not even be aware that a vehicle from a competing institution could bring a better return on investment. Plus, if the same institution is managing all funds, it’s like putting all of your client’s eggs in one basket, even if the investments are spread across multiple funds.
4 Benefits of an open architecture for independent RIAs
Benefit #1: More choices, better returns
By contrast, open architecture means you can offer funds and vehicles carried by other banks and companies. “Open architecture…enables a provider to search for the best fund managers, rather than rely on a relatively narrow group of in-house investment managers. Casting a wider net offers a chance to find better returns and more diversification,” according to WealthDaily.com.
By offering “best in class” products, client portfolios have the potential to see a bigger return on investment, which brings more satisfaction for everyone.
Benefit #2: More independence
An open architecture is essential to being a thriving independent RIA, whether you are completely on your own or working with an established investment firm. You can have more control over how your business functions, your earnings, your time, and you have the freedom to offer the investments that will benefit your clients the most, rather than a pre-determined set of mutual funds or products.
Benefit #3: Build better relationships with clients
As an RIA working in an open architecture structure, you have the opportunity to completely own the advisor/client relationship. You offer the highest fiduciary standards by seeking out products that will best suit the needs of your clients. You build trust because your clients know you are not recommending a particular product simply because it is required.
Benefit #4: More transparency
Transparency in the investment industry has been a problem for years. Broker-Dealers are required to conform to a “suitability” standard when it comes to offering products. RIAs have an elevated standard called fiduciary, which means they are required to place the interests of clients first and foremost and to be completely transparent when it comes to fees. RIAs are also regulated directly by the Securities and Exchange Commission (SEC), whereas Broker-Dealers are self-regulated by the FINRA, an independent, industry supported organization. Becoming an independent RIA in an open architecture environment means eliminating the conflict of interest so often present in big Wall Street firms. This transparency results in a relationship based on trust and openness.
The open architecture model offers many benefits for dually registered independent RIA’s by allowing them to offer a wide array of the highest quality products that are the foundation of strong client relations.