An "old-line" multifamily office chucks out proprietary products altogether. Pitcairn, a multifamily office with a pedigree going back to the 1920s and a long track record as a core manager, has jettisoned its in-house asset-management program and moved to a wholly "open architecture" investment platform.

Jenkintown, Pa.-based Pitcairn says its move to true open architecture, coupled with its long-standing planning and trust capabilities, "represents a significant advance in the wealth-management industry and will enable Pitcairn to provide clients with enhanced investment programs that are tax efficient and customized to meet their individual needs."

In the money-management business "open architecture" is a slippery term. Some use it to describe the combination of outside investment products with in-house offerings. Others call that "enhanced" or "hybrid" architecture and reserve the "open" designation for investment platforms -- like Pitcairn's new one -- that are completely devoid of proprietary offerings.

"Pitcairn is a leader," says its chairman and CEO Dirk Junge. "We maintain that status by being sensitive to the needs of our clients and attuned to changes in the investment marketplace."

New partners

Leslie Voth, Pitcairn's head of wealth-management services, reiterates that Pitcairn's move to open architecture came in response to client demand. "Our clients' need for long-term planning and customization drives us to a model that will be in place in 50 to 60 years," she says.

Pitcairn supervises about $4 billion in assets for 94 ultra-high-net-worth households; it classifies 34 of them as multi-generational.

"Our clients are looking for objective advice; especially when it comes to the next-generation issues" says Voth. "They want access to 'best of breed.'"

Pitcairn has been tapping outside managers for about 15 years, so it already has an established roster of sub-advisors. But it's now working with Rockville, Md.-based investment-platform and research provider Fortigent to help it assess additional managers. Pitcairn has also called on Seattle-based overlay manager Parametric to strengthen its investment offerings.

Overlay management is the process of coordinating trades, managing cash flow and enhancing their overall tax efficiency of models-based portfolios.

Voth says Pitcairn spent about 18 months assessing platform providers and overlay managers. It chose Fortigent and Parametric because "both firms, like us, focus on taxable investors."

Fortigent's CEO Andrew Putterman says that bringing in a "prestige client" like Pitcairn "is clearly helpful us" from a public-relations viewpoint.

Rare bird

But more than its value in terms of bragging rights, working with Pitcairn is proving to be a significant learning experience, says Putterman. "We really are partnering together, but they provide the leadership -- and they're pushing us."

One result of Pitcairn's high standards, adds Putterman, is the development, with Fortigent and Parametric, of a "tax-efficient" unified managed account (UMA) program featuring "high-end boutique managers."

UMAs are fee-based, single-account investment products that typically feature combinations of separately managed accounts, mutual funds and ETFs.

Although open architecture might not be the norm among wealth-management firms, it's still far from novel -- especially among wealth-management firms founded in the last 10 or 15 years.

But Pitcairn is "one of the first of the old-line firms" to go that route, according to Alvin Clay III, CEO-designate of Devon, Pa.-based Davidson Capital Management, and CEO of Pitcairn until about 14 months ago.

In fact, with some exceptions -- St. Louis, Mo.-based Lowenhaupt Global Advisors comes to mind -- it's hard to think of another decades-old multifamily office without proprietary investment offerings.

Glass houses

Pitcairn started out in 1923 as a family office for the heirs of John Pitcairn, a Scottish immigrant to the U.S. who made his fortune manufacturing plate glass just as developments in engineering were making glass a ubiquitous element in skyscraper construction.

In 1987 a family rift put an end to the old Pitcairn family office and led within a few years to the creation by one faction of Pitcairn Trust, a commercial family office that became Pitcairn Financial Group in 2005. In 2007 the firm changed its name to "Pitcairn," period.

The Pitcairn family is still the firm's sole owner. Nearly a third of its client base is kin to Scottish John.

Pitcairn was a one-location business for years. In 2004, however, it opened a second office in St. David's Pa. In 2006 it opened an office in Tysons Corner, Va.

Old-school wealth managers have traditionally tended to keep a hand in proprietary investment products because it's good for the bottom line. Investment management is a fat-margin business, after all; wealth-management -- especially wealth-management of the high-touch, bill-paying, all-but-dog-walking variety -- isn't.

Managing assets was a way firms could afford to provide the more touchy-feely services they needed to provide in order to retain wealthy clients.

Now though, changes in fee structure are altering the old equation.

Less compression

"The fee implications of open architecture aren't as dramatic as they used to be," says Clay. "There has been much less fee compression in recent years so that firms can charge clients 150 to 200 basis points" for services based on assets under supervision.

In fact, Pitcairn has adopted a flat-fee structure "for family-office and investment services," according to Voth.

Fortigent's Putterman says that improvements in outsourcing options are also making it easier for wealth-management firms to eschew in-house money management. "They can do it now -- practically and cost-effectively -- and they can do it with outsourcing partners they actually team with."

And of course -- as any outsourcer will tell you -- working with competent vendors can free a wealth manager to concentrate on clients without having "to be an expert at everything," says Putterman. "That's something that Pitcairn gets."

However much it gets it, Pitcairn also understands that the changes it has made have profound business-culture implications.

Both things

"We know that," says Voth. "We're moving away from being a quiet, private family office. But we know the time was right for this change."

But Clay, who is buying into Davidson Capital Management in partnership with Boston Private Financial, doesn't think wealth firms have to charge full bore into open architecture.

"Clients want independence, objectivity and performance, not specifically open architecture," says Clay. "Open architecture just happens to be the industry's answer to that."

Davidson Capital Management provides in-house investment products, and Clay has no intention of changing that when he takes over as CEO next month. That said, he also plans to augment Davidson's offerings with non-proprietary investments.

"If you can demonstrate to clients that you're working in their best interests, I think you can do both things under one roof," says Clay. -FWR

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