The market for Outsourced Chief Investment Officer (“OCIO”) services has boomed over the last decade. Today, OCIO assets under management are by some estimates nearly $1.5 trillion, 2.5 times the level of just seven years ago[1]. What’s more, industry estimates are for double digit annual growth among endowments and foundations over the next several years[2].
Despite the increasing adoption of OCIO services, the transparency of fees and expenses remains a challenge. This complexity arises from the diverse nature of OCIO offerings, which often lack standardized definitions. When comparing OCIO provider fees, it is important to note that while engaging a manager for a specific strategy, such as U.S. equity, allows for straightforward comprehension of fees and related expenses, OCIO providers employ a wide array of investment structures to construct comprehensive portfolios. These structures range from straightforward ETFs, index funds, and mutual funds to more complex arrangements like privately placed commingled funds, single manager strategies, and, in certain cases, hedge funds and private equity fund-of-funds.
Expenses can vary dramatically not just by asset class or strategy, but by fund structure as well, so it is important to understand how any prospective OCIO provider seeks to implement your policy portfolio – remembering that the devil is in the details.
Below are five key questions to ask an OCIO that can help you make apples to apples comparisons:
- What is included in the OCIO advisory fee? More specifically, are there “a la carte” services that the OCIO charges that are outside of the advisory fee?
- Does the OCIO receive any other compensation or is it limited to the advisory fee? This is most common if the OCIO allocates to its own proprietary products, or if it receives revenue sharing from managers or other platforms.
- How is the OCIO providing allocations to alternative strategies? For example, if the OCIO is providing such allocations via fund- of-funds structures, are the fully disclosed fees inclusive of the fund-of-fund provider as well as the underlying managers?
- How does the OCIO provider charge for private, illiquid strategies? That is, are you being charged fees on your committed capital, or only that which is invested? It makes a big difference.
- What is included in fund expenses? Is it just custody, or more inclusive of audit costs, performance reporting, etc.? Everyone pays these expenses, but they are rarely consistently disclosed.
Fees and expenses are always an important consideration in selecting an OCIO provider and asking detailed and probing questions of potential providers is critical in a diligence process.
