Open Architecture

Open architecture describes a financial institution’s approach of offering both its own (proprietary) products and third‑party products to clients. The goal is to let advisers recommend the best available solutions for a client’s needs, rather than being limited to the firm’s in‑house offerings. Properly implemented, open architecture reduces conflicts of interest and creates a more competitive, transparent market for investment products.

How it works

• Advisers at open‑architecture firms can select from in‑house and external funds and services.
• Compensation often shifts toward fees for advice or asset management rather than commissions tied to proprietary products.
• Firms assemble a broad mix of products to create diversified, goal‑aligned portfolios for clients.
• Increased client choice has pressured brokerage firms to compete on advice quality and fee transparency.

Benefits

• One‑stop access to a wider range of investment options.
• Greater opportunity to select best‑of‑breed funds for specific needs and risk tolerances.
• Improved diversification—reducing reliance on a single firm’s investment approach.
• Greater fee competition and transparency, which can lower costs for investors.
• Stronger alignment of adviser recommendations with client interests (when incentive structures support it).

Risks and downsides

• There is no single legal definition or standardized regulation of “open architecture,” so practices vary.
• Guided architecture: firms may discourage use of outside funds by imposing higher fees or commissions on external products, steering clients toward proprietary options.
• Hidden or layered fees can arise when third parties are involved, increasing overall costs.
• Organizational silos: some firms separate planning, advice, and implementation, which can prevent recommended strategies from being executed smoothly.
• Potential conflicts remain if product selection or placement generates revenue for the firm or advisers.

Questions to ask when evaluating an open architecture provider

• Will the advice integrate directly into portfolio planning and management?
• Can a relationship manager implement the recommended investments, or will you need to go elsewhere?
• How are third‑party funds selected and vetted?
• What fees apply to external funds (commissions, transaction fees, platform fees)? Ask for a full fee schedule.
• Are there revenue‑sharing arrangements or incentives tied to specific products? How are conflicts disclosed?
• Who will manage the relationship over time, and can the team handle different life and financial stages?
• How is performance reported—net of all fees and platform charges?

Practical due‑diligence tips

• Assume an extra layer of fees when outside managers or intermediaries are involved; request total expense examples.
• Ask for written disclosures of any compensation or incentive arrangements related to product placement.
• Compare the firm’s available third‑party products with open market alternatives for cost and performance.
• Verify that planning, advice, and execution are coordinated to avoid implementation gaps.

Conclusion

Open architecture can expand choice, improve diversification, and align adviser recommendations with client interests when implemented transparently. Because the term is not tightly regulated, investors should perform careful due diligence—focusing on fees, conflicts of interest, integration of advice and implementation, and the firm’s selection and oversight of third‑party products.