1. Institute for Private Investors Open Architecture: The Question or the Answer? Gregory Friedman, Chief Investment Officer Greycourt & Co., Inc. June 2005

2. 2 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… The Open Architecture Spectrum Institute for Private Investors

3. 3 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… The Open Architecture Spectrum Institute for Private Investors

4. 4 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… Open Architecture is Not a Panacea Institute for Private Investors

5. 5 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… How Is Open Architecture Working Out? Institute for Private Investors

6. 6 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 How Is Open Architecture Working Out? Institute for Private Investors

7. 7 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… How Is Open Architecture Working Out? Institute for Private Investors

8. 8 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… What Is the Competitive Threat? *Source: Cagemini Institute for Private Investors

9. 9 The OA client base is very desirable:*  @ 20% Forbes 400 families  @ 20% families with less than $40 million  @ 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… What Is the Competitive Threat? *Greycourt client base breakdown Institute for Private Investors

10. 10 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 What Is the Competitive Threat? *Source: Capgemini **Source: Greycourt Institute for Private Investors

11. 11 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 Strengths of the Open Architecture Platform Institute for Private Investors

12. 12 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 isn’t perfect… Challenges Associated with Open Architecture Institute for Private Investors

13. 13 Disadvantages of pure open architecture:  It’s very difficult to pull off  It’s especially difficult to “evolve into” OA from another platform  It’s 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 Challenges Associated with Open Architecture Institute for Private Investors

14. 14 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 Challenges Associated with Open Architecture Institute for Private Investors

15. 15 Alternative assets: conflicts vs. capabilities Everybody wants hedge fund exposure Challenges Associated with Open Architecture Institute for Private Investors

16. 16 Persistent low-return environment Who will prosper in a low-return world? Challenges Associated with Open Architecture Institute for Private Investors

17. 17 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 Challenges Associated with Open Architecture Institute for Private Investors

18. 18 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 Challenges Associated with Open Architecture Institute for Private Investors

19. 19 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 can’t compete with specialists Are you operating a business or a “lifestyle partnership?” Challenges Associated with Open Architecture Institute for Private Investors

20. 20 Culture always defeats strategy Sales-oriented cultures don’t mix well with open architecture Introducing Open Architecture Into a Traditional Wealth Management Environment Institute for Private Investors

21. 21 High embedded costs eliminate strategic options Many financial firms have priced themselves out of the OA market Introducing Open Architecture Into a Traditional Wealth Management Environment Institute for Private Investors

22. 22 Fear of disintermediation How to keep the OA guys away from the clients? Introducing Open Architecture Into a Traditional Wealth Management Environment Institute for Private Investors

23. 23 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? What Does the Future Hold? Institute for Private Investors

24. 24  Consolidation The “make” decision has often failed, leaving only the “buy” decision What Does the Future Hold? Institute for Private Investors

25. 25 Gregory Friedman Chief Investment Officer Greycourt & Co., Inc. (503) 226-0470 Fax 503-226-0471 gfriedman@greycourt.com www.greycourt.com Contact Information Institute for Private Investors