When choosing an Outsourced Chief Investment Officer (OCIO), there are eight key factors an organization should consider for increasing the likelihood of a good fit and successful partnership. These key factors can serve as the framework for an organization’s request for proposals (RFP) to gather relevant information, adequately compare OCIO providers and ultimately make the choice that is right for them.
Capabilities and Flexibility
- Investment Philosophy and Process: Ensure the OCIO’s investment philosophy aligns with your organization’s goals. This includes considerations such as: do they favor active or passive management, do they include allocations to illiquid/private assets in portfolio construction, what is their approach and philosophy to risk management, what is their manager selection process like, and what other due diligence practices do they undertake. Additionally, there may be considerations regarding roles and responsibilities: who does what, who is ultimately accountable, and who takes the lead on certain aspects of policy development, asset allocation, and other strategic decisions.
- Implementation (Systems, Technology, etc.): It is important to understand the OCIO’s methods for investing client assets, such as asset allocation and access to certain asset classes. In terms of portfolio construction, options range from single portfolio funds to fully customized solutions, and some approaches in between. There is also another aspect of flexibility to consider. Some organizations may realize they need to evolve their approach over time if the OCIO or consultant they are currently using cannot provide flexibility to their investment approach or offer additional solutions or customization.
- Operational Support and Other Resources: Many times, organizations seek an OCIO that can provide support beyond the investment function. If this type of relationship is attractive to your organization, it is critical to ensure the OCIO has the necessary resources and systems in place to meet your organization’s needs, including operational support such as cash flow management, portfolio rebalancing, capital calls and distributions management, performance calculations, reporting and audit support investment stewardship reporting for donors and other stakeholders, as well as resources to support staff and the board regarding fiduciary education and best practices may also be important services to consider.
Track Record
- Performance and Reporting: As fiduciaries, performance is one of, if not the most important consideration, especially for long-term institutional investors who are looking for evidence of long-term investment success. Organizations should look for an OCIO with a track record that reflects their ability to help an institution achieve intergenerational equity. Complementary to performance is reporting on performance. Understanding how an OCIO records, benchmarks, and reports on performance encourages transparency, timely and appropriate course corrections and exploration of emerging opportunities, and shared accountability. This supports your Investment Committee (IC)/Board to perform its own fiduciary duties.
- Experience and Expertise: Again, an OCIO’s ability to generate returns is key. Evaluating the OCIO’s experience with organizations like yours is an important step. This includes (but is not limited to) asking questions about their understanding of your operating model, how they work through the unique challenges and opportunities that face organizations of your size and geography, public policy impacting your sector, and your goals and specific needs.
Partnership
Choosing an OCIO is more than just establishing a client relationship, it should be recognized as an important long-term partnership that requires full transparency, open communication, shared values, goals, and expectations. Unlike shopping for a new laptop or TV, engaging in a process to identify, evaluate and work with an OCIO should be taken seriously and the extensive process should be undertaken with extreme thoughtfulness. After all, a good partner will support your organization’s aspirations and growth while serving as a rock when times are uncertain. A good way to ascertain whether an OCIO is going to be a good partner is to review their client base and seek references. Speaking with current or past clients can provide valuable insights into their performance, client service, and other crucial aspects of the relationship. Typically, how an institution treats others can be indicative of how they will treat you.
Leadership
An OCIO should be a good investment partner, but sometimes your institution may need leadership. Whether that leadership manifests through research, experience, or the ability to convene smart people from all over to gather and share ideas, resources and best thinking, an OCIO can provide key thought leadership and access to emerging trends and best practices that your organization didn’t even know it needed. Additionally, having an OCIO providing leadership in times of high turnover may be a way to support stability, keep track of long-term strategic investment priorities and goals, and maintain institutional memory.
Firm Structure and Business model
For some organizations seeking an OCIO relationship, the firm’s structure and business model are important to consider. Some questions to ask: Is the OCIO a part of a bigger financial institution, bank, insurance company, or larger asset management firm? A joint venture/partnership? Is their OCIO business one of many departments or business verticals? Are they based nationally or internationally? Are they for profit or nonprofit? Does the OCIO have proprietary investment products they offer to institutional investors? Are they mainly fund of funds? These and other types of questions may signal how important your type of business is to them, how they staff it, and other critical aspects that may impact how they partner with you.
Geographic Location
Some organizations have a desire or preference to work with providers who have a local or regional footprint, or at the very least a local or regional perspective that aligns with their own. It is important to understand if an OCIO has a “presence” in your region, what that means, and how that may or may not add value to the partnership. Do they have adequate staff coverage in your area? Do they have an office in your city/region? Do they understand any strategic, operational, regulatory, legislative, and other challenges and opportunities relevant to your geography? Alternatively, other organizations appreciate partners with a national and global perspective, which allows their partner to bring perspectives, resources, and best practices that a local provider may not be privy to or able to access. As your organization begins to evaluate OCIO partners the importance of location is something that should be discussed.
Fees
As the OCIO provider field grows and becomes more competitive, fees are always a priority consideration. Organizations want more services and want to pay less, causing fee compression in the marketplace.
When evaluating OCIO providers organizations should look for clear and transparent fee structures. Ensure you understand all costs involved and how they compare to the value provided. If a provider quotes you fees that are significantly less than others there is a good chance some fees are not being disclosed upfront so you may want to dig deeper. Ultimately, like anything else, you get what you pay for, so understand that “performance net of fees” is a more important indicator than fees alone, especially if your needs and the value you are looking for is considerable.
The Team
Many organizations consider their OCIO as an extension of staff and IC, serving as an important strategic partner. Whether you define it as cultural fit or have other considerations, your organization should consider the OCIO’s company culture and the dynamics of the team that will be working with you. A good cultural fit, or more precisely, the make-up of the team that your organization will be working with, can enhance collaboration and ensure a smoother working relationship. Especially from a diversity, equity, and inclusion standpoint, this may be important for your organization. For example, if you are an organization that serves women and girls, it may be important that your OCIO investment team reflect your mission and demographic in that way. If you are a Historically Black College or University (HBCU), having a racially diverse and representative OCIO team may be an important consideration.
In conclusion, the process of choosing an OCIO provider should account for the specific needs of each institution. By considering the key factors described here along with others that may be important to you, your organization will have a better understanding of the providers they are evaluating and in turn make a well-informed decision when choosing an OCIO that aligns with your goals and values.
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