Avoid fully open architecture platforms, say fund selectors

How open should open architecture platforms be? Are limited or unlimited open platforms better?

Based on the comments made by speakers at AsianInvestor‘s Fund Selector Forum in Singapore last week, the consensus is to go for limited or “guided” open architecture, with completely open platforms viewed as costly for distributors and posing a risk to investors.

Karen Tan, head of global wealth solutions for Asia ex-Japan at Deutsche Asset and Wealth Management, who posed the question, said that while open architecture has its merits, the reality is that fund selectors are comfortable using only a handful of fund managers. One may not start the selection process with this intent, but the result tended to be this way, she noted.

Chandrima Das, head of fund solutions at Bank of Singapore, said her firm has about 60 fund providers, which is quite large in number for a mid-sized bank. But even with 10-15 funds in a portfolio, it still takes a lot of resources to operate and maintain the platform, not to mention that it is expensive.

She added it is not physically feasible to go through thousands of funds in the market but it owes its clients, especially those being charged for a fee-based advisory service, the best-of-breed products.

“From the client’s perspective it is good but from the bank’s perspective it is expensive and hard to maintain,” she said.

“So if a bank tries to implement an open architecture platform, I think economically it makes sense to outsource some of the process, both operational and investment.”

Deutsche’s Tan said that implementing free-for-all open architecture creates more risk, which translates to risk for clients. The quality-control standard suffers if there are too many funds, she said.

Roger Steel, president for new markets and business development at Sun Life Financial Asia, concurred.

“We find that if you put too many funds on the platform, financial advisers can't understand and can't distinguish one Asian equity fund from another,” he said. “Our philosophy is to be open but not to the point of having a completely open architecture.”

He also noted that Hong Kong regulators also don’t want fully open architecture platforms as they want distributors to have some oversight of funds.

“Unlimited is problematic as it’s a completely closed architecture platform,” Steel said.

Both Sun Life and Deutsche have asset management business units, but both firms said that there was a Chinese wall between distribution and asset management.

While this is good for clients, the pain for firms like Sun Life is on margins.

“In our pension fund [business] in Hong Kong, we do not own asset management [firms] but some of our competitors do and they make huge margins,” Steel said. “But for the customers it’s better to provide open choice. You can’t hope to be all things to all people. The problem with closed architecture is you are saying you can do all things to all.”