The investment chief for PNC Financial Services Group's wealth management division credits the company's early adoption of open architecture for its recent 8.08% growth in assets under management.
James P. Dunigan says he had no idea that open architecture would catch fire the way it has after the Pittsburgh banking company began offering nonproprietary products in late 1999. Assets under management grew from $45.2 billion at yearend 2002, when the company says it had really gotten its open architecture up and running, to $48.8 billion at June 30 of this year. Mr. Dunigan said the open architecture platform was crucial to this growth.
"I would say it would be very difficult from my vantage point for anyone to meet a client's needs and offer solutions without adopting an open architecture platform," said Mr. Dunigan, who is also an executive vice president at PNC Wealth Management. "My vantage point might be skewed, but when I see what clients are looking for, I believe that that requires open architecture."
PNC was among the first banks to move away from offering exclusively proprietary products when it made some top investment companies' products available through the wealth management division.
"The role of the investment adviser has changed significantly," Mr. Dunigan said. "They have moved from stock pickers to advice providers. Investment advisers must be focused on portfolio construction and risk management in order to improve their client retention."
Many banks are wary of open architecture because of its potential impact on proprietary assets under management, analysts said. "Basically, you are asking the head of trusts to fire himself," said Geoffrey Bobroff, an analyst at Bobroff Consulting in East Greenwich, R.I. "So naturally it is slow to take hold."
Mr. Dunigan agreed that company economic concerns have kept many banks from adopting open architecture.
"This is certainly a speed bump that slows a lot of banks down," he said. "No one wants to cannibalize their own business. Instead of worrying about losing proprietary assets as a piece of the pie, banks have to start to look for a bigger pie."
PNC's switch to an open architecture platform played no role in the Pittsburgh bank's sale of its 70% stake in the propriety fund arm BlackRock Inc., Mr. Dunigan said. Merrill Lynch & Co., the buyer, closed the deal last Friday. "The trend toward open architecture opened up opportunities for BlackRock to be used on other platforms," he said.
More banks are preparing to use nonproprietary products. A survey of wealth management executives released by SEI, an Oaks, Pa., asset management provider, says 57% offered a mix of proprietary and nonproprietary investment products and only 8% sold proprietary products only.
Mr. Bobroff said more banks are starting to adopt open architecture because executives are beginning to realize that more money is to be made as an investment adviser than as simply an investment manager.
"Banks, especially midsize and smaller banks, need to focus on the fact that they can collect more robust fees by aiding clients in asset allocation rather than just handling investment management activities," he said.
Mr. Dunigan said many banks, including PNC, are succeeding with a hybrid approach to open architecture that includes proprietary products in the mix. PNC manages a large-cap portfolio that includes core value and core growth components.
PNC was fortunate to adopt open architecture at the right time, he said, making its move in late 1999 and early 2000 just as a bear market began.
"I would never say that I was rooting for a bear market, but it ended up being a good time to implement that transition," he said. "In the 1980s customers wanted you to do investment management for them. In the bull market of the 1990s they wanted to do it for themselves. Today, clients want us to do it with them. That transition of extremes from a bull to a bear market was a wake-up call to clients and advisers on how to best deliver services."
"Clients emerged from the bear market, and they wanted to work with us," he added. "Our client-retention rates improved, and we built a strong book of business."
From here, Mr. Dunigan said, PNC is focused on continuing to develop the technology platform for its open architecture offering. The company is working to deliver a unified managed account, he said, on which customers can manage all of their investments - separately managed accounts, mutual funds, and exchange-traded funds - in one well-allocated portfolio.
