GENEVA (Reuters) - Wealth managers are packing their shelves with products built by their competitors as rich clients demand top financial performance in every asset class regardless of who provides it.
The vast majority of products sold by any private bank are still manufactured in-house, studies show, but the habit of selling third-party products -- so-called open architecture -- is now widely accepted.
"You have to have open architecture; otherwise you cannot be in the market," said Dario Prunotto, the head of Unicredit's (CRDI.MI: Quote, Profile, Research, Stock Buzz) private bank in Italy, speaking at the Reuters Wealth Management Summit.
The emergence of hedge funds has forced private banks to buy products from outside. According to recent research, roughly a third of the business that wealth managers do in these sophisticated investments is through open architecture.
The vast majority of products still carry the bank's own brand. In discretionary accounts, which allow banks to manage a client's wealth without having to ask approval for each investment decision, 95 percent of the volume is manufactured in-house.
But increasing competition for some clients has forced private banks to open their doors to competitors even in less sophisticated products.
"In plain vanilla structured products, there is a big fight on pricing, and we sell a lot from competitors," said Anton Simonet, head of private banking at Dresdner Bank (ALVG.DE: Quote, Profile, Research, Stock Buzz).
But the bank would not consider selling the basic models that determine a client's general asset allocation if they were designed by a competitor.
"We would not have an open platform for ... asset allocation models. That is the core of private banking," he said.
Client demand for third-party products is one reason for the rise of open architecture. Conflict of interests is another.
Some large banks sold units that created funds to avoid the suspicion they were pushing the sale of in-house products that might not have been the best in their class.
The rise of open architecture is leading to margin pressure as banks have to pay their providers and is expected to lead to a short life-cycle for products as wealth managers continuously search for new high-margin products.
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