GREYCOURT

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Institute for Private InvestorsOpen
ArchitectureThe Question or the
Answer?Gregory Friedman, Chief Investment
OfficerGreycourt Co., Inc.June 2005
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The Open Architecture Spectrum

• Will the real open architecture firms please
  stand up?
• Pure open architecture No product, no revenue
  from anything other than client fees
• Semi-pure Open architecture Allows use of
  Internally developed funds of funds products
• Semi-closed architecture Sharing manager fees
  internal products with some outside managers
• Closed architecture Internal products only

No consistent definition of open architecture
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Institute for Private Investors
The Open Architecture Spectrum

• Will the real open architecture firms please
  stand up?
• Consultants
• Multi-family offices
• Outsourced CIOs
• Managers-of-managers
• Wrap account programs
• Private trust companies

Many different models
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Open Architecture is Not a Panacea

• There are bad open architecture firms
• Smart people versus unconflicted people
• Cookie-cutter approaches in a custom world
• Retailing the work of research analysts
• Giving institutional advice to private clients

Hard to build a good open architecture firm
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How Is Open Architecture Working Out?

• The jury is still out on some larger firms, e.g.
• AMA/SunTrust
• Ayco/Goldman
• CTC/US Trust/Schwab
• In-house OA units at banks, trust companies
  (e.g., Stolper/Hawthorn-PNC/Veritable
• Wilmington Trust/Balantine
• Wirehouse consulting units

Firms are trying many different combinations
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How Is Open Architecture Working Out?

• The jury is still out on some boutique firms,
  e.g.
• Ashbridge
• Greycourt
• Lydian
• Monticello
• Offit Hall
• Spruce

This is where the real action is
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How Is Open Architecture Working Out?

• The jury has brought in some death verdicts,
  e.g.
• Greystone/Morgan Stanley
• myCFO/Harris (BofM)
• OffitBank/Wachovia
• Winter Capital/Citigroup

Merging open architecture boutiques with
traditional firms is fraught with challenges
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What Is the Competitive Threat?

• The competitive landscape is evolving
• Traditional wealth management firms still hold
  huge market share of legacy business
• BUT
• Open architecture firms are winning a huge share
  of new business, roughly 85

This is why traditional firms are worried
Source Cagemini
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What Is the Competitive Threat?

• The OA client base is very desirable
• _at_ 20 Forbes 400 families
• _at_ 20 families with less than 40 million
• _at_ 60 in-between the core of the business is the
  centimillionaire next door
• Clients in 25 states and 5 countries a global
  business

This is why the traditional firms are worried
Greycourt client base breakdown
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Institute for Private Investors
What Is the Competitive Threat?

• OA is eating the traditional firms lunch
• OA market share at 1/99 0
• OA market share at 1/05 35
• OA market share at 1/09 80

This is why the traditional firms are worried
Source Capgemini Source Greycourt
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Strengths of the Open Architecture Platform

• Competitive strengths of open architecture firms
• Low embedded cost structures
• Focus on best investment practices
• Avoid style rotation, fickle investor tastes
• Market is moving to them
• Improving profit margins
• Benefit from big firm talent drain

Newer business models tend to be more efficient
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Challenges Associated with Open Architecture

• Competitive challenges for open architecture
  firms
• Lack global research capabilities
• Typically lower profit margins
• Questions about scalability
• Typically weak management
• Problems developing young talent

Open architecture isnt perfect
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Challenges Associated with Open Architecture

• Disadvantages of pure open architecture
• Its very difficult to pull off
• Its especially difficult to evolve into OA
  from another platform
• Its a management challenge in an industry
  notably lacking in management
• Can you make money doing it?

A botched open architecture launch leaves no room
for recovery
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Challenges Associated with Open Architecture

• Disadvantages of pure open architecture
• Investment management is increasingly a commodity
  item
• Extra layer of fees
• Far from where the rubber meets the road

Client skepticism about experience, intellectual
capital
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Challenges Associated with Open Architecture
Alternative assets conflicts vs. capabilities
Everybody wants hedge fund exposure
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Challenges Associated with Open Architecture
Persistent low-return environment
Who will prosper in a low-return world?
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Challenges Associated with Open Architecture

• The OA toolbox What OA firms need to prevail in
  the intense competition
• Very senior client advisors
• Deep family advisory experience
• Demonstrated intellectual leadership

Without these you will be an also-ran or a
regional player
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Challenges Associated with Open Architecture

• The OA toolbox What OA firms need to advise VHNW
  clients
• After-tax approach to asset allocation
• Dynamic asset allocation
• Credible selection of best-in-class, tax-aware
  managers
• Accurate, timely performance reporting

These are the bare minimum
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Challenges Associated with Open Architecture

• The best OA firms try to avoid soft services
• They bleed profitability
• They rarely add value that families will pay for
• To the extent that they do add value, you cant
  compete with specialists

Are you operating a business or a lifestyle
partnership?
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Introducing Open Architecture Into a Traditional
Wealth Management Environment
Culture always defeats strategy
Sales-oriented cultures dont mix well with open
architecture
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Introducing Open Architecture Into a Traditional
Wealth Management Environment
High embedded costs eliminate strategic options
Many financial firms have priced themselves out
of the OA market
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Introducing Open Architecture Into a Traditional
Wealth Management Environment
Fear of disintermediation
How to keep the OA guys away from the clients?
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What Does the Future Hold?

• The most likely outcome larger firms will find a
  way to integrate OA
• Build HNW assets
• Develop trusted relationships with substantial
  families
• Use OA-developed knowledge to design new products
• Diversify the revenue stream

The best of all possible worlds?
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What Does the Future Hold?

• Consolidation
• Consolidation
• Consolidation

The make decision has often failed, leaving
only the buy decision
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Contact Information
Gregory Friedman Chief Investment
Officer Greycourt Co., Inc. [phone] Fax
503-226-0471 gfriedman_at_greycourt.com www.greycourt
.com