Reviewed by Aug 27, 2020| Updated on
What Is Open Architecture?
Open architecture is used to define the ability of a financial institution to deliver proprietary, as well as external products and services to clients. Open architecture means that a customer can meet all their financial needs and that the investment firm can act in the best interests of each customer. This may be done by providing the financial products best suited to that customer, even if they are not proprietary products. Open architecture helps investment firms prevent the conflict of interest that would arise if only their own goods were suggested.
Open Architecture Explained
Financial consultants who work with an open architecture approach to financial institutions will, theoretically, meet the needs of their clients better than consultants who work for proprietary institutions. In an open architecture setting, advisors receive a fee for their advice, rather than the commission they would gain in a proprietary environment.
Open architecture, at its finest, will boost the distribution and diversification of assets for the client, offer lower fees, and deliver better returns. It also encourages an atmosphere of increased confidence between customers and advisors.
Reasons for Open Architecture
A single brokerage may not sell all financial products that a customer needs, or that is in the best interests of a consumer. Yes, a higher customer income would typically mean a greater need for a broader range of goods and services.
Open architecture helps investors and their advisors to choose the best available funds and achieve the best possible investment outcome considering their requirements and perception of risks.
Brokerage firms and banks that restrict the options of customers through a closed architecture strategy, where investors can choose only the funds of that company or bank, put themselves at risk of client litigation over fiduciary negligence.