I’m afraid it might have been me. Not the business model, the term for it.

The business model got invented and reinvented a couple of times. Shortly after the ERISA(1) legislation was passed by Congress in 1974, trustees of pension plans realized that (a) they were fiduciaries with some serious potential liability, and (b) they didn’t know squat about investing money. Talk about an explosive combination.

So the consultants were born. In those days the consultants’ main claim to fame was a database of money managers. Pre-computers, it was extremely hard to find managers, and even harder to vet them. Consultants did that.

But consultants had a characteristic that, ultimately, proved to be much more important: they were objective. Before 1974, just about everybody turned for  investment management advice to firms that had serious conflicts of interest. Mainly, these conflicts had to do with the fact that the firms gave overall advice and also managed money and they could hardly be objective about how good they were at the latter. But there were lots of other conflicts.(2) Since consultants didn’t manage money, they could be objective about how the clients’ portfolios were doing and they weren’t hesitant to make changes as necessary.(3)

About ten years later, retail investors got into the act. In the mid-1980s, burned by churning of their accounts and propelled by a barrage of publicity about the dangers of using commission-based advisors, retail investors began to move in large numbers to fee-only financial planners and discount brokerage firms.

That left only one large group of investors still depending mainly on compromised advisors: wealthy families. In one sense, this phenomenon is easy to understand. Families often have legacy relationships with conflicted financial firms that are difficult to break, emotionally if not legally. In addition, at least until recently, wealthy families tended to be relatively isolated. The mass media had no interest in discussing issues of importance to only a few Americans (even though they controlled massive wealth), and privacy issues often prevented families from networking effectively.

But in a more important sense the continued dependence on conflicted advisors was unfathomable given the critical importance of capital to wealthy families. If a wealthy family loses its capital an irreplaceable loss has occurred that will affect the happiness of the family for generations to come.

Enter firms like Greycourt. When I launched the Greycourt business model in 1986 I thought I was doing something unusual and almost irreplicable, given the barriers to entry. As it turns out, only 18,999 other firms promptly adopted my business model.(4)

So that’s the history (in a nutshell) of the open architecture business model. But where did the name “open architecture” come from, and why would anybody apply that name to what a wealth advisory firm was doing? Like most of what happens in the world, it grew out of ignorance.

I had been reading a very interesting book – naturally, I can’t remember what it was called(5) – about the competition between the IBM PC and the Apple computer. This was the so-called “computer war” that raged during the 1980s. The author was making the point that while the Apple had more elegant technology, the PC ultimately dominated the market because it was “open architecture.” In other words, while only Apple could make an Apple, anybody could make a PC. Lots and lots of companies did, and the PC got better and better and cheaper and cheaper.

“Eureka!” said I. “This is exactly what Greycourt does! We don’t try to manage money better than everybody else, we let other people do the ‘manufacturing’ and we pick the best-of-the-best for our clients, just as customers pick the best-of-the-best computers.”

I immediately began advertising Greycourt as an “open architecture” financial advisor, and the term stuck. Unfortunately, I’d neglected to copyright it, so, as mentioned, only 18,999 other firms also call themselves “open architecture,” rendering the phrase meaningless. (When Goldman Sachs calls itself  open architecture, you know you’ve been transferred from the realm of the profound to the realm of the surreal.)

The trouble was, I was badly out of date, a Neanderthal, really, in my understanding of IT terms. Almost immediately I began hearing from my friends in the tech business, who told me that the phrase “open architecture” was passé, old hat, a term that applied only to hardware, about which no one cared. The correct term, I was informed, was “open source.”

Clearly, “open source” was even an better phrase, a much more precise description of what Greycourt was doing. But it was too late.


(1) Employment Retirement Income Security Act.

(2) See Greycourt White Paper No. 24 – A Modest Proposal:  Let’s End Conflicts of Interest in the Wealth Advisory Business, February 2003; Creative Capital (2004), chapter 7; The Stewardship of Wealth (2013), chapter 5.

(3) Unfortunately, some – maybe most – pension consultants took money from the managers they recommended.

(4) You think I’m kidding, but see Fiduciary Networks’ recent report entitled Brave New World of Wealth Management: Opportunities, More Competition, Demographics (April 2013), available at http://www.fiduciarynetwork.com/. FN estimates that there are 19,000 open architecture wealth management businesses, which FN defines as “fee-only billing coupled with completely independent and non-conflicted advice.”

(5) It might have been IBM: The Colossus of Armonk, or the first edition of Peter Norton’s classic, Inside the IBM PC.

Next up: Told You So

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.


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