Best Practices for Your OCIO Search

For generations, successful endowments, foundations, and non-profits used in-house chief investment officers (CIOs) to direct their investment programs. But in today’s market, this approach has become challenged by the complexity of available asset solutions and limitations of resources. The Outsourced Chief Investment Officer (“OCIO”) model has become a way of life to many endowments and foundations globally, and many boards have found that outsourcing the CIO role provides them with far more flexibility and a higher level of skill at a lower cost. We have outlined the best practices for conducting an OCIO search.

What is an OCIO?

The OCIO model is the practice of delegating investment oversight, management and administration to a third-party provider. Through these services, the organization works with the third-party provider to manage their investment portfolio and, hopefully, optimize performance and reduce administrative burden.

The trend for outsourcing grew in importance after the financial crisis of 2008 when many non-profits found that their in-house-generated investment portfolios didn’t hold up to the market drop any more than riskier (and higher-return) portfolios. Since then, the move toward OCIOs has only accelerated, and this trend doesn’t show any sign of slowing.

Five Key Benefits of Outsourcing CIO Services

Properly implemented, outsourcing an investment program’s oversight can help an organization address a lack of internal resources, risk management challenges, the need for timely decision making, and portfolio complexity. Boards that have outsourced the CIO role report a myriad of benefits, but five of the most common include:

• Improved cost-effectiveness, especially for smaller boards and foundations that may not be able to justify the cost of an in-house CIO;
• Manager expertise in the increasingly complex regulatory and reporting requirements that have been implemented over the last decade;
• Deeper risk management and better responsiveness to unexpected economic scenarios;
• Fresher ideas and a resistance to the “group-think” that can often impact in-house teams; and
• Enables trustees to focus on improving institutional governance and strategic portfolio concerns.

Factors to Keep in Mind During Your OCIO Search

Even if you’re convinced of the benefits of an OCIO, choosing the right OCIO provider to fill this role can be just as intense as hiring an in-house CIO. There are a few factors that are important to keep in mind during this process; devoting some extra research and effort on the front end can ensure a smoother transition.

Conflicts of Interest are Common—Qualified OCIOs Have a Comprehensive Plan

Because asset management firms and other OCIOs serve multiple clients in various industries and may have other lines of business, some conflicts of interest are inevitable. A high-quality OCIO will have a detailed disclosure and conflict avoidance plan in place to ensure that all clients are properly apprised of any potential conflicts. You should confirm if the OCIO has a financial incentive to include or exclude any particular investment manager, and watch for those who are selling their own products. If a prospective OCIO doesn’t have a good answer to the question “what is your protocol to address conflicts of interest?”, you’ll want to continue your search.

Assessing Compatibility is Key

Even the most highly-qualified OCIO may not work out if its goals and style just aren’t compatible with your organization’s culture. When choosing an OCIO, you’ll want to look for a firm or individual who has significant experience in managing portfolios of comparable size and complexity to your own. While large OCIO firms may be perceived as desirable, the partnership may not work for small to mid-sized organizations. Having the right qualifications is key, but finding a firm with the right fit is paramount.

Look for Proof of Performance & Effective Risk Management

The industry-wide move toward OCIOs over the last decade means that more displaced in-house CIOs have set out their own shingles or joined OCIO firms. While many of these CIOs are highly qualified to steer non-profit and institutional portfolios, others may not have the experience or flexibility necessary to meet your specific needs. Ask your prospective OCIO to provide proof of market-beating performance and details on their risk management process and results. In the historic market run-up since the Great Recession, simply providing double-digit annualized returns over the last decade isn’t always enough. It’s important to ask if they have a history of generating returns appropriate to the risks taken and meeting client expectations.

Pricing and Fees

OCIO Providers should be able to provide a detailed schedule of costs and fees. There are multiple levels of fees to assess, including the advisor’s management fee, management fees and expenses of underlying investment vehicles, performance incentives, especially in the alternatives space, and custody charges. There are indirect forms of compensation, such as soft dollars for proprietary managed portfolios, securities lending revenue and referral fees. Your organization needs to have a complete picture of who is being compensated from your valuable assets.

Why an OCIO Search Consultant is Important

If the process of choosing an OCIO is beginning to sound almost indistinguishable from that of hiring an in-house CIO, your organization can likely benefit from using an OCIO search consultant to streamline matters. These consultants essentially serve as matchmakers between organizations and OCIOs, performing due diligence inquiries of the OCIO and seeking detailed information from the hiring organization to ensure that the final candidate provides the best possible fit. However, be wary of consulting firms that act as a search consultant as well as an OCIO provider, as it is a clear conflict of interest and can lead to biased results.

Search consultants can take the following duties off your plate, among others:

• Evaluate the benefits of outsourcing your CIO program to determine whether an OCIO is in your organization’s best interest;
• Help you create a plan for identifying and managing your OCIO relationship, ensuring that appropriate benchmarks are met, and reports are generated;
• Execute the search and analysis through the finalist meetings and selection; and
• Negotiate fees that are appropriate for the services provided and the level of expertise presented.

How PlanPILOT Can Help

PlanPILOT is an independent registered investment advisor (RIA), not tied to any funds or investment banks, and we offer OCIO consulting services to help you find the best-fit investment manager for your unique organization. Let PlanPILOT guide you through the time and effort-consuming process of selecting or evaluating an OCIO provider. We are fully committed to making the search for your OCIO provider easier and more efficient.

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