Understanding the OCIO Model
An outsourced chief investment officer (OCIO) is an external individual or team of experts that replaces or supplements the function of an internal chief investment officer (CIO). It’s a comprehensive solution that can govern all elements of a Registered Investment Advisor’s (RIA) investment strategy, assuming fiduciary responsibility and optimizing outcomes. In short, OCIOs help their partners achieve their goals more efficiently.
This is part of the reason OCIO usage is on the rise among RIAs and institutions. For example, 33% of endowments and foundations surveyed in 2022 reported using OCIOs, up from 28% in 2021 and 24% in 2020. [1]
Below, we’ll break down how the outsourced chief investment officer model works.
How Does an OCIO Work?
OCIO providers are brought in by an RIA or wealth manager to take over some or all of the strategy and execution behind investment decisions. Some key elements of the OCIO process include:
Reviewing the RIA's initial investment objectives and levels of risk tolerance
Crafting bespoke investment strategies aligned with the objectives of various client types
Selecting and delegating the appropriate managers for each assignment
Constructing portfolios and managing their exposures long-term
Accounting for risk management and compliance requirements
The amount of responsibility retained by the RIA varies depending on the engagement, but OCIOs can and often do take complete control. Unlike consultants and other outsourced options, OCIOs are typically accountable for investment performance, and they operate independently of service providers. This creates fewer conflicts of interest—and better focus on performance monitoring, risk monitoring and investment results.
Benefits of an OCIO for RIAs
The biggest reason RIAs should consider outsourced chief investment officer services is that they bring investment capabilities that an RIA would find difficult or costly to replicate given their size or business focus and they bring differentiation that can help retain existing clients or attract new clients.
The top benefits of working with an OCIO for RIAs include their ability to:
Provide investment expertise in various specialties
Maximize scalability and cost-effectiveness
Enhance investment capabilities and resources
Manage risks and regulatory compliance considerations
Allow the RIA to focus on core competencies and client relationships
Enhance differentiation that increases client retention and/or attracts new clients
Ultimately, OCIO providers give firms an edge over their competition in an increasingly challenging climate for RIAs because OCIOs’ goals are aligned with those of their partners. [2]
What Are the Objectives of an OCIO?
OCIO providers are fiduciaries dedicated to maximizing the value an organization creates for its clients. Within RIA engagements, OCIOs’ primary aims include achieving the RIAs’ objectives, managing risk, maximizing efficiency, and placing clients at the center of decision-making.
These core objectives of OCIOs define OCIO asset management and investment strategies.
But what is OCIO investing? In a nutshell, it’s the same investing process that an RIA with a fully staffed investment team or other institution would pursue on its own, with central governance overseen by an unbiased team of experts.
Achieving Investment Objectives
First and foremost, OCIO providers are dedicated to helping RIAs meet their own objectives, meeting and exceeding client expectations through expert strategy and deployment.
Depending on the specific goals RIAs have, OCIOs can help them:
Preserve capital and prevent loss during volatile market cycles
Generate consistent returns with sound adjustments to risk exposures
Meet long-term investment growth goals by balancing preservation with appropriate risk-taking
Bring expertise on how to adjust client portfolios for pre- and post-retirement clients to improve client satisfaction
OCIOs are dedicated to helping RIAs meet their objectives, no matter what they are. As a result, OCIO asset management is customizable to the exact needs and means of a wealth manager’s clientele.
Managing Risk and Volatility
OCIO providers also help RIAs manage risk and maximize outcomes in the face of volatility through a variety of means, such as bringing systematic diversification and risk-management to the table. One reason firms trust the OCIO’s is that they help investors navigate the often murky waters of rapidly changing asset classes. They help client portfolios thrive and survive in risky environments through allocation strategies that seek out less correlated risks that preserve investments in promising opportunities.
This is because the best OCIOs practice adaptive or systematic risk management. Rather than being off-put by the potential of volatility in liquid markets, sound OCIO guidance pursues quantitatively informed, dynamic exposures to these high-reward risks—which consistency elsewhere and robust diversification mitigate.
Enhancing Operational Efficiency
OCIOs leverage cutting-edge technology and analytical tools to streamline investment strategy, processes, and all elements of decision-making. They help make RIAs’ daily operations run smoothly and in a way that is more focused on core activities and capabilities.
Another area that OCIO providers optimize is compliance. All RIAs are required to register with the US Securities and Exchange Commission (SEC). Many are also subject to state and local-level regulations, and industry-specific mandates or client expectations may dictate transparency and other requirements that are challenging to meet. OCIOs, who are themselves SEC-registered, are well-positioned to help RIAs meet all reporting and other standards applicable to them.
Delivering Client-Centric Solutions
Maybe the most important OCIO objective is taking an RIAs clients’ expectations and demands seriously and devoting as many resources as possible to making sure they’re met or exceeded.
OCIO providers put RIA clients at the center of all decision-making by:
Understanding each client needs and objectives
Customizing portfolio construction and ongoing management to meet those needs
Ensuring regular reporting and transparent communication
Ultimately, the outsourced chief investment officer model provides value by assuming an RIAs’ and their clients’ objectives as its own. OCIO providers help you meet your objectives more easily as a wealth manager.
Responsibilities of an OCIO
Outsourced chief investment officer services are beneficial to RIAs because the model ensures that the RIA’s objectives become those of the OCIO. To the extent desired, OCIOs assume the responsibilities of the RIA, including but not limited to accountability for investment decisions.
Working with a quality OCIO partner like Markin Asset Management will help you meet and exceed your clients’ expectations for growth, consistency, capital preservation, and more—all while improving the efficiency, effectiveness, and differentiation of your firm.
To learn more about the value OCIO providers create for RIAs, get in touch with one of our expert team members today.
Sources:
[1] Chief Investment Officer. Endowments, Foundations Increase OCIO Use, but Underutilize Alts. https://www.ai-cio.com/news/endowments-foundations-increase-ocio-use-but-underutilize-alts/
[2] RIA Intel. Is This the End of Smaller RIAs? https://www.riaintel.com/article/2bg0s6wqugnjbeh242ayo/wealth-management/is-this-the-end-of-smaller-rias