5 Questions Advisors should know about OCIO services

If you flashback thirty years ago there were very few institutional investment strategists available for financial advisors. Typically, these advisors would create their own asset allocation from a group of mutual funds.

If the advisor was lucky enough to grow their business, the time they had available to properly asset allocate dwindled. This problem was solved by the outsourced strategist solution where an advisor could hand over the keys of money management to a trusted third party.

Fast forward thirty years, with the exponential growth of TAMPs, and now financial advisors are handed a new problem; How do you decide which strategists to use?

That responsibility manifests itself in wearing a ton of hats as an independent business owner. Often, these can get in the way of the passion advisors have for helping people with their financial wellbeing.

One of these hats is the due diligence function. The need for good diligence on the strategists that an advisor uses can make or break the long term client investment experience they are trying to create.

Outsourcing this function is relatively new to the independent advisor world. How does an advisor even start the research process for an Outsourced Chief Investment Officer (“OCIO”)?

It can be hard to know who to trust, but good decisions always start with education. The internet is littered with blog posts, podcasts, and promoted content discussing the validity of OCIO services for independent advisors, but they are often simply directing advisors to their own services.

Here are some key questions advisors should know about the OCIO functionality and how it can impact their advisory business.

1. What services does an OCIO provide?

The big multi-strategist platforms like Envestnet, Orion Portfolio Solutions (formerly FTJ FundChoice), AssetMark, etc. typically offer, at a minimum, only rudimentary level OCIO service.

Here are the possible services an OCIO can provide:

  • Initial and ongoing due diligence of third-party investment strategists. Nearly all platforms provide this basic service.
  • A custom and curated list of investment strategists.
  • Creation of optimal models based on the need of a specifics advisor and/or their client.

There are typically additional fees associated with each added service. These additional services can be great value propositions to an individual advisor. 

2. Who provides OCIO services?

There are huge firms like PNC, Mercer, and Russell. These are primarily focused on the Defined Contribution, Non-Profit, and Municipal space, where OCIOs have been commonplace for decades.

The concept of an OCIO for individual advisors has recently risen in popularity because advisors are demanding it. They simply don’t have the time or expertise to devote to this requirement.

It’s a dirty little secret in our business that most advisors don’t have access to the tools or have not been trained how to complete a due-diligence process on the investment strategists or models available in the marketplace.

The primary source of OCIO services for individual advisors is still primarily the multi-strategist TAMPs. I fully expect there will be smaller firms that focus on this process for advisors, but we just aren’t there yet.

3. How does an OCIO benefit an individual advisor’s business?

The two biggest reasons individual advisors should use OCIO services are to harness their expertise and avoid wasting precious time.

Advisors realize that spinning their wheels trying to find an outsourced investment strategist is futile, as most platforms have hundreds of strategists to choose from.

The rise in OCIO services for individual advisors is correlated to the rise in the use of TAMPs and the need for advisors to have an objective and consistent due-diligence process to satisfy their fiduciary responsibilities.

Source: Pensions and Investments, Cerulli Associates

The SEC often focuses on the connection between suitability and the investment solution provided. With the rise in advisors using multiple strategists, the combinations of models are being called into question too.

The ability to have an OCIO to work with and provide the diligence and reasoning behind these model combinations can reduce the stress of these critical investment decisions.

4. What is the OCIO process for finding and combining strategists?

Each OCIO will have their own process. However, there will be many common components within the qualitative and quantitative reviews.

From a quantitative standpoint, it’s all about the numbers. Understanding risk, reward, correlation and the client experience is critical for this part of the review.

OCIOs typically use research tools like Morningstar, Zephyr, AdvisoryWorld, and YCharts. The cost typically runs from a few thousand to upwards of $20k each year!

Qualitative factors should include things like firm structure, communication, program design, and the context of their returns/expectations.

We discussed this very topic on a recent Conquer Risk podcast episode:  Firm CPR: How to Find a Good Manager (S1 E23).

5. What does it cost?

OCIO services that are provided within a multi-strategist TAMP can be included in the cost of using the TAMP. This is often considered part of the platform fee charged to each client.

To outsource directly to an OCIO, the costs vary dramatically. There is no easy answer or range.

The quantitative software alone, can cost thousands each year. Unless an advisor is willing to put a ton of time into the equation, they won’t get any magic answers from software or the qualitative variables.

An OCIO will typically charge based on performance, AUM, or services rendered but please make sure to do a thorough comparison of cost vs. service.

How can OCIO services get better for advisors?

As the TAMP business continues to scale, hands-on OCIO services are increasingly being allocated to larger RIA firms. At the same time individual RIA owners with less than $50M AUM struggle to justify the expense of hiring an OCIO.

This is where a boutique TAMP focused on the small to mid-size RIA space can really make a difference.

When the subject of scale isn’t an issue, smaller TAMPs can offer:

  • In depth due diligence on all strategists, both initial and ongoing.
  • Transparency into the results, insights and processes behind the reviews.
  • The ability to create a custom and curated strategist list tailored for each advisor.
  • The time, ability and expertise to optimize model combinations.

It simply comes down to where your business fits on the TAMP totem pole. The less AUM you have the more likely you will be relegated to the standard pre-built allocation set.

However, for those advisors craving granular customization then the hand holding of an OCIO will be critical.

If you’d like to learn how Potomac fills this role for our clients on the Union UMA platform, we invite you to download piece on Combining Strategists.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.