OCIO: an expanding trend in the investment industry

October 11, 2022

Discover what benefits an outsourced chief investment officer can offer to employee benefit plans.

Utilizing an outsourced chief investment officer (OCIO) is a fast-growing trend in the employee benefit plan, endowment and foundation marketplace. As there are many organizations lacking the capacity for a full investment, compliance or trading staff, clients look to third-party consultants and advisors to make investment decisions and manage their portfolios. 

 

What is an OCIO?

When fund sponsors and trustees partner with an OCIO, they’re delegating investment management authority to an experienced investment consultant or advisor. Depending on the relationship, the OCIO may direct all or some of the organization's investment functions, including asset allocation, manager selection, trading and cash movement.

Deciding if the OCIO model is right for your plan will depend on each situation. Whether it’s due to increased regulatory requirements, market volatility or the need for more sophisticated investment strategies, there are a variety of reasons a plan sponsor may find value in using an OCIO.

 

Investment expertise

The expertise an OCIO provides can be a significant benefit to your organization’s investments. An OCIO specializes in making investment decisions and choosing strategies that help achieve maximized results. Many organizations that don’t have the resources to staff this expertise in-house will choose to partner with an OCIO.

“As the assets in a portfolio get larger, or the investments utilized become more complex, internal decision makers may become uncomfortable with directing investments and decide to outsource this function,” says Cale Schultz, vice president and national consultant relations manager at U.S. Bank.

With your OCIO taking care of the necessary daily investment tasks, such as timely trade execution and monitoring managers, client time is freed up to focus on strategic and day-to-day responsibilities in running the organization.

“While working with an OCIO in a discretionary capacity will often be more expensive than working with an advisor in a non-discretionary capacity, it may be worth the extra fees if the alternative means having to hire your own investment staff,” says Schultz. “It’s important for clients to weigh their options.” 

 

Efficiency in a fluctuating market

In an unpredictable market, the OCIO model gives the advisor the authority to efficiently implement investment changes. With a non-discretionary advisor, the process to make a change to the portfolio can be lengthy. One of the main tenets of the OCIO model is to decrease the time from investment idea to implementation. With investment discretion, an OCIO provider can implement their investment idea without seeking approval from their client’s board of directors or plan committee. This allows for more efficient portfolio change execution.

"The OCIO can take advantage of optimal trading conditions to make favorable investments quickly and efficiently."

“Rather than sending letters of direction that have to be reviewed and approved by the client before trades are placed, the OCIO firm can immediately execute the trades they want to place by coordinating transaction settlement directly with the custodian or trustee,” says Karl Wilson, senior vice president and national retirement manager at U.S. Bank. “The OCIO can take advantage of optimal trading conditions to make favorable investments quickly and efficiently.” 

 

Regulatory and compliance requirements

In an evolving regulatory landscape, the expertise of an OCIO can also help clients address regulatory and compliance requirements.

“At the end of the day, the fiduciary responsibility to manage a portfolio still lies with the client or named fiduciary of the plan governed by ERISA,” says Wilson. “But an OCIO can help keep the portfolio in compliance and provide investment expertise to even the largest of plans and investment portfolios. As the OCIO lifts much of the burden, clients still need to have a process to monitor the performance of the OCIO against its objectives.” 

 

Portfolio diversification

Smaller plans can realize benefits of portfolio diversification when working with an OCIO. Due to account minimums, a small plan may not be able to access certain investment products on their own. Working with an OCIO who may utilize other investment vehicles or execute different strategies may allow a client access to products that are a good fit for them. The end result can provide a more comprehensive and diversified approach for the portfolio as opposed to finding separate managers.

 

Considerations for outsourcing

Delegation of investment authority can be a sensitive issue. Careful consideration and understanding are fundamental for a relationship to be successful. Awareness of an OCIO provider’s fees, strategy, investment approach and execution is essential as these factors can vary from the traditional, non-discretionary approach with which your organization may be familiar.

 

No matter how you manage your employee benefit plan, U.S. Bank is here to support you with customized trustee and custody solutions. Learn more about our comprehensive offerings for institutional clients.

Related content

How digital platforms streamline client onboarding for investment funds

Your 5-step guide to financial planning

Key components of a financial plan

How much money do I need to start investing?

Why compound annual growth matters

A guide to tax diversification in investing

LGBTQ+ retirement planning: What you need to know

Retirement income planning: 4 steps to take

Good money habits: 6 common money mistakes to avoid

How grandparents can contribute to college funds instead of buying gifts

What type of investor are you?

Saving vs. investing: What's the difference?

Understanding yield vs. return

The unsung heroes of exchange-traded funds

4 ways to free up your budget (and your life) with a smaller home

Key considerations for launching an ILP

Do your investments match your financial goals?

Bull and bear markets: What do they mean for you?

Interval funds find growing popularity

A first look at the new fund of funds rule

3 questions to ask your equity, quant and CTA fund administrator

ESG-focused investing: A closer look at the disclosure regulation

How liquid asset secured financing helps with cash flow

The ongoing evolution of custody: Tips for renewing your custody contract

Start a Roth IRA for kids

How institutional investors can meet demand for ESG investing

Employee benefit plan management: trustee vs. custodian

OCIO: An expanding trend in the investment industry

4 benefits of independent loan agents

At your service: outsourcing loan agency work

What are alternative investments?

Investment strategies by age

How to start investing to build wealth

5 questions to help you determine your investment risk tolerance

What Is a 401(k)?

How to open and invest in a 529 plan

Economic forecast for 2024: 3 key things to know

Investing myths: Separating fact from fiction in investing

4 questions you should ask about your custodian

Rule 18f-4: The limited use exception

7 diversification strategies for your investment portfolio

Year end tax planning tips

4 major asset classes explained

ETF vs. mutual fund: What’s the difference?

Effects of inflation on investments

4 times to consider rebalancing your portfolio

Can you take advantage of the dead equity in your home?

Get more home for your money with these tips

How you can take advantage of low mortgage rates

What types of agency accounts are available for investors?

How to use debt to build wealth

Do I need a financial advisor?

4 questions to ask before you buy an investment property

How do interest rates affect investments?

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.