Realists battle purists over how open to be

Customers demanding a variety of products from their banks have made a more open form of architecture in distribution inevitable in Europe. But to what extent banks should open up is still open to question, believe some of the continent’s leading voices in financial services.

Practitioners from a variety of European countries expressed their views at PWM’s second annual Open Architecture Forum held in London in November. Many distributors were clearly getting swept away by the movement for more openness. But a question posed by several calming influences was: is this something we are doing just so we don’t look silly in front of our competitors, or is it something that will definitely engender customer loyalty and feed through into improved profits from for the bank?

Europe’s powerhouses Credit Suisse and UBS were very gung-ho about the trend. The Swiss banks particularly so in the context of structured products, which are currently among their main contributors to revenue.

Here, the structures are often invented by rival banks. Yet because of the belief that derivative structures give definite results, rather than the mere hope of performance provided by mutual fund managers, the names of the providers are not disclosed to members of the public. It may be open architecture, but clients are not even aware they are getting a choice. The Swiss bank wants to control the brand.

This may not be pleasing to the eye of the open architecture purist, but it serves the bank’s bottom line. A salutary warning regarding profitability, the key focus of the forum, was also delivered by a leading independent consultant in this sphere. “If open architecture is inevitable, how do you make the decision on the route to take?” asked Mike Harding, managing director of Mercer Oliver Wyman, who discussed the possibilities of multi-management, sub-advisory arrangements and partnerships with restricted numbers of fund managers. “The key, from our point of view, has to be the most important route to profit.”

This means calculating exactly how much revenue will be lost from eroding manufacturing, and how much will be gained from commissions received from distributors. The question of how much open architecture to have should be directly related to this equation.

The view from Mr Harding is that no bank should be completely open, that product ranges made available to customers should be restricted, in the mode of a delicatessen rather than a supermarket, and that advisers are made available for a guided approach to all the options.

“The more choice you give customers, the less utility you give them,” said Mr Harding. He suggested the optimal ratio for profitable operation would be two-thirds proprietary products against one-third guest products. “Simply offering funds from other people is never the best solution.”