Benefits of Using OCIO Services
Outsourced Chief Investment Officers (OCIOs) are third parties that provide the functionality of an in-house CIO to wealth management firms, family offices, and other types of investment firms like foundations and endowments. They bring industry-leading expertise to investment decisions, reducing exposure to loss, managing risk, and managing returns for the long-term. But when asking what does OCIO stand for, the answer is a lot more than its acronym.
The bottom line: OCIOs help Registered Investment Advisors (RIAs), financial advisors, wealth managers, and other partners optimize their investment offerings and operationally manage the actual investments day-to-day. In this article, we’ll provide a brief overview of what OCIOs are and describe the specific ways they benefit financial advisors.
What is an OCIO?
An OCIO is an individual or organization that can manage any or all investment decisions for its clients. OCIOs handle everything from overall governance to granular portfolio management.
In investment management, the OCIO definition revolves around outsourcing, but they can fulfill all the executive functions that an internal CIO would. They are fiduciaries who take on some or all accountability for decisions. Contracts determine the specifics of an engagement with an OCIO, meaning that they may take over as much or as little control as is needed.
Ultimately, OCIOs are partners who assume the responsibilities a traditional CIO would hold.
What is the purpose of OCIO?
RIAs and other organizations bring in OCIOs for the same reasons they would recruit a CIO and his or her team. That is, the purpose of an OCIO is identical to that of a CIO and supporting analysts and researchers. They develop and oversee investment policy and decisions. The specific duties of an OCIO vary widely depending on client needs, but they generally assume responsibility for governance across all investments because this is what most (but not all) clients want them to do.
An OCIO can also play a key role in focused contexts. For example, defined contribution OCIOs often focus solely on DC plans and related niches. These uses can be particularly effective, as shown by the rapid growth in OCIO usage among corporate pension funds since 2015.
Why is an OCIO important?
Simply put, OCIOs are important because they provide essential oversight functions that RIAs need, especially when scaling—and often more efficiently and effectively than an internal option would.
The chief reasons OCIOs are important are summed up in the following OCIO services:
Overall investment strategy development, deployment, and adjustment
Portfolio construction and management, including diversification efforts
Careful and conflict-free manager selection, oversight, and termination
Robust risk management, including due diligence
This is not an exhaustive list, but it does comprise the high-level value-adds of using an OCIO.
Why RIAs Should Consider Using an OCIO
An outsourced chief investment officer empowers RIAs through their depth of expertise, breadth of experience, and overall availability of resources. Through these arrangements, OCIO services allow RIAs to focus their attention on their core competencies while leveraging their specialized capabilities to enhance decision-making, risk management, and performance.
Let’s take a close look at some of the advantages in more specific detail:
OCIOs Provide Expertise and Specialized Knowledge — OCIOs bring a wealth of experience in investment management, asset allocation, risk management, and portfolio construction to the CIO role. The fact that OCIOs can comprise teams of experts rather than a single individual means that there is greater potential for volume and diversity of expertise.
OCIOs also leverage their expertise in selecting and managing managers — In a recent survey of what RIAs look for in asset managers, the most desirable quality (43%) was wisdom about best practices regarding other advisors. Other highly-valued assets like assistance on client events (40%) and knowledge about advanced planning techniques (36%) also revolve around experience and expertise. OCIOs are well-positioned to deliver on all these fronts.
OCIOs Offer Scalability and Efficiency — Because of the up-to-date industry knowledge, expertise, and other resources they offer, OCIOs can help RIAs scale their investment capabilities rapidly. Technology platforms, research capabilities, and general infrastructure all enable efficient growth without the need to build and maintain a costly in-house investment team.
Staff is one of the largest expenses of running an RIA firm, and a CIO is likely to be among the highest-paid members of your staff, if not the highest. For reference, annual CIO salaries across the US range between $213,263 and $564,021 on average, and it doesn’t stop there. There is also the cost of additional staff an experienced CIO will likely want to hire on. OCIO costs vary widely, depending on a host of variables on both the RIA’s and provider’s sides. Despite this, they are typically dramatically lower than that of an internal CIO, which is why so many small and medium size RIAS use OCIOS these days.
Benefits of Working with an OCIO: Taxable-Accounts Case Study
As a concrete example, take the question of how to effectively minimize taxable exposure in taxable accounts. It’s a complex problem requiring detailed quantitative analysis and expertise. Taxes are more important that even most advisors even realize.
At Markin Asset Management, in the tax brackets that our advisors encounter most often, taxes on mutual fund gains distributions in recent up years have totaled more than 100bps. In those years, our strategies can and have reduced tax burdens to less than 20bps without distorting portfolio composition. We construct strategies that systematically seek lower taxable capital gains by algorithmically controlling taxable turnover without significantly altering portfolio composition. This is just one example of how Markin’s OCIO expertise can bring value to RIA clients.
OCIOs Help To Enhance Investment Strategies
One of the most direct impacts OCIOs have on their clients, including RIAs, financial advisors, and wealth managers, is their ability to shape and enforce sound investment strategies. OCIO providers draw on their expertise and close collaboration with RIAs (if desired) to tailor sophisticated investment programs to their clients’ needs.
Immediate impacts of sound strategic advisory from OCIOs include:
A broader perspective, featuring dynamic exposure to less correlated risks
Access to diverse opportunities across asset classes that may change over the business cycle as opportunities and risks evolve
The ability to leverage economies of scale
Whatever the primary goals are—growth, capital preservation, income and yield, total return net of taxes, or anything in between—OCIO services help RIAs achieve them by improving existing strategies, introducing better ones and managing all the operations, day-in and day-out.
OCIOs Streamline Risk Management and Compliance
An OCIO provider can help RIAs identify, assess, and mitigate risks. They provide investment, operational, and other forms of due diligence.
Another area where OCIO services are especially beneficial is in managing regulatory compliance needs. Unlike other outsourced service providers, OCIOs assume fiduciary responsibility for RIAs. They are typically registered with the Securities and Exchange Commission (SEC) themselves and will ensure all mandated reporting and assessment procedures are accounted for. OCIOs make compliance a seamless, efficient process.
OCIOs Let You Focus on Client Servicing
Perhaps most importantly, working with an OCIO allows financial advisors to focus their attention and energy on client-facing activities and responsibilities. An OCIO can assist on a case-by-case basis in relationship management and financial planning, but these matters are often best left to employees who have already established a strong rapport with clients.
OCIOs make the internal team’s job easier by allowing them to deliver the best outcomes, which is a win-win-win for clients, managers, and the firm.
An OCIO Can Help You Achieve More
Ultimately, the value an outsourced chief investment officer can bring to financial advisors and wealth managers is baked right into the OCIO definition. By outsourcing top-level governance to a team of industry-leading experts, RIAs stand to improve their investment offerings, enable faster growth, manage risk, and improve client relationships. Enhanced client satisfaction, in turn, mean brighter futures for all parties involved.
To explore the potential of OCIO services with Markin Asset Management, get in touch today.
Sources:
Chief Investment Officer. Corporate Pension Sponsors’ Use of OCIO Services Is Growing, While Interest in Risk Assets Wanes, Research Finds. https://www.ai-cio.com/news/corporate-pension-sponsors-use-of-ocio-services-is-growing-while-interest-in-risk-assets-wanes-research-finds/
RIA Intel. This Is What Advisors Want From Their Asset Managers. https://www.riaintel.com/article/2bkbkikdbmud0j9eqbr40/practice-management/this-is-what-advisors-want-from-their-asset-managers
Salary.com. Chief Investment Officer Salary in the United States. https://www.salary.com/research/salary/alternate/chief-investment-officer-salary
Transition to RIA. Q63 – What Are The Largest Expenses Of Running An RIA?
https://transitiontoria.com/what-are-the-largest-expenses-of-running-an-ria/