The Shift Away From Open Architecture in Fintech

Lauren Laferla, PR & Content Marketing Manager
July 23, 2018
    

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In his recent white paper, “The Tailored Fit: How Advisors Can Use Technology to Mass-Customize Financial Planning,” Covisum President, Joe Elsasser CFP®, examines the shift from open architecture to full integration.

Open architecture has been prevalent in the financial tech industry for the past 10 years. The term “open architecture” represents the ability to connect multiple systems to each other. For example, you might have a health app on your phone that tracks the number of steps you take in a day. You might have another phone app where you log what you eat each day. Both apps ask for your gender, height and weight in order to process information accurately. Open architecture, in this case, would mean that the health app could get common information from the food log app, and vice versa, without having to enter it in twice.

Open architecture is essentially the ability to pull data from one system into another system without double entry and should not be confused with full, vertical integration. 

The challenge with an open architecture in fintech, is that it puts the responsibility for accumulating or consolidating information on the advisor. They're responsible for setting up and maintaining the connections between their different tools. They also need to create a coherent presentation for their client that incorporates outputs from multiple tools. 

In today’s environment, it is nearly impossible to get the assumptions from the various financial planning tools to agree, leading to inconsistencies in the plan. Each software decision engine calculates differently and uses a different set of assumptions. When you stack multiple tools, inevitably there's going to be some disagreements between outputs.

Full integration means that the calculation engine can solve the issues that occur when the output from one decision engine impacts a decision in another part of the plan. For example, a fully integrated tech stack could alert an advisor to the tax impact of changing a Social Security claiming strategy. 

Because, historically, planning tools were built to “demonstrate” the purchase of a product or investment strategy, they omit significant levels of detail that are highly relevant to the decision. In contrast, a vertically integrated decision engine that is built to evaluate all of the significant variables and actually recommend a course of action cannot hide behind oversimplified calculations. During the evolution of financial services, recommendations will require a human advisor to provide a filter, but ultimately an advisor’s role will be elevated to relating the optimal decisions back to the client’s life and helping the client understand and overcome any emotional influences that would otherwise prevent the client from doing what is in their best interest 

Financial advice is changing and the new environment creates two paths for advisors: either participate in a race to the bottom, maintaining current service levels while cutting fees, or increase the value delivered and identify ways to track and quantify that value. Much of the industry will be involved in a race to the bottom, but there will be significant opportunity for those who choose the latter path.

Learn more industry insights about the future of the financial industry and the tools that will be available to support advisors in our white paper.

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Posted by Lauren Laferla, PR & Content Marketing Manager
Lauren is a content marketing enthusiast with a love for storytelling - on camera, in writing, and through others. She has a robust communications background that includes: public relations, content creation, internal communications, digital marketing, and copy editing. Driven and motivated, Lauren holds a bachelor's degree in English and is an avid reader.