‘Open’ and ‘Closed’ describes different types of investment ‘architectures’ — the way, in other words, that the whole business of you buying an investment is handled by the professionals.

The open model offers higher flexibility but higher costs, while the closed model offers less choice but lower costs (usually). Here’s everything you need to know about the two models.

So what’s the difference between Open and Closed investment architecture?

Open architecture gives you full access to the investment market. You can invest in your broker’s own products if you like, but you are also free to invest in everybody else’s.

With Closed architecture, you may only invest in the broker’s suite of in-house products.

Why does it matter which model is your investment broker using?

Are you really getting the choice of investments you think you are? Or are you being guided towards investments that make money for other people without you even knowing it? Is your broker passing on expensive costs that could be avoided by simply opting for an in-house fund?

Open vs. Closed architecture is about choice, transparency and returns. It’s important that you know what you’re dealing with, because, if things go south, you could end up paying fees you don’t need to or even see your entire investment disappear due to unregulated negligence.

Which is better for you? “Open” or “Closed” investment architecture?

Of course it depends what you are looking for – as a rule of thumb, the more sophisticated you want to get, the more “Open” you want your investment architecture to be.

“Open” architecture has become increasingly common as clients demand more choice. It means that your broker is free to service your financial needs without one hand tied behind their back. Your broker is not tied to delivering in-house products. Active fund managers are a key area where more choice means potentially far more successful investment.

And let’s not forget about the enhanced risk management that “Open” investment can offer – as investment analyst J. Cafariello points out, with closed architecture, “even if you spread your investments across multiple funds you are still technically putting all of your eggs in just one basket.”

Closed architecture meanwhile means cutting the middlemen out of investment and doing everything in-house. It is therefore a generally cheaper way of doing investment business and a Closed broker also enjoys greater control over your investments — which can work hugely in your favour if they know what they’re doing.

Even more importantly, Closed architecture doesn’t expose you to the roguish elements of the open market.

Open investment architecture is unregulated and exposed to abuse – you can even end up with what is known as ‘guided’ architecture, where brokerages ‘guide’ you towards their own products by adding more costs to the competition. Sure, that’s why you have a broker — to run the numbers. But you, as the client, need to understand exactly what is going on or you are vulnerable.

The bottom line

Whether you are working with an ‘Open’ broker, a ‘Closed’ broker or an ‘I still don’t understand what they do’ broker, reinforce your own financial plans by running the numbers yourself. And if your broker can’t explain the ins and outs of an investment to you so that you totally understand, it’s their problem, not yours. The onus is on your broker to make cost and return projections crystal-clear.

And then it doesn’t matter whether the investment structure is ‘Open’ or ‘Closed’ – because you, as the investor, are as clear as day about where your money is going and when you will see it again.