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.
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.
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 who do not 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 day to day 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.”
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.
“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.”
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. ”
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.
Delegation of investment authority can be a sensitive issue. Careful consideration and understanding is 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.
Whether you are working with an OCIO, U.S. Bank offers customized trustee and custody solutions to institutional clients. Visit us at usbank.com/itc.