The perfect match: Choosing the right outsourcing partner

Hello everybody. I'd like to welcome to the SEI webinar today to discuss OCIO growth and some of the opportunities when you go through evaluation processes when you're seeking out an OCIO. My name's Mike Kina. I've been with SEI for 32 years now, and I'd like my colleagues to introduce themselves and their experience. Dale. 

Great. Thanks so much, Mike. Pleasure to be here. My name's Dale Campbell, relationship manager. I've been with the firm since 2006, seen a lot of change through the years in the market, so happy to be here to talk through that relative to the OCIO landscape today. Great. Kathy? 

Hi, I'm Kathy Oldfield. I'm a senior relationship manager within the institutional group at SEI, and I've been working with institutional nonprofit clients in excess of 25 years. 

Great, thanks Kathy. So just a little bit of background. The OCIO business today is roughly $2.5 trillion according to a recent study done by ri, and it's anticipated that it'll grow to be over $4 trillion. So it's become quite crowded in the OCIO space and evaluations have become challenging for institutional investors like yourself. So today I'm going to have a series of questions that I'd like to ask my colleagues to help you with that challenge and to help you understand some of the things that maybe aren't top of mind when it comes to evaluating OCIO. So with that, I'm going to have a couple questions starting off with the notion of specialization. I know with all the different types of OCIOs and different types of clients, clients have different needs, they have different requirements on investments, different requirements on liquidity. So maybe Dale, you could start us off, talk about how should these institutional investors think about specialization when they're evaluating different types of OCIO providers? 

Absolutely. If we think about it and understanding a client's needs really from the highest level, their goals, objectives, and risk tolerances, and that drives the discovery process from both the client understanding the OCIO and the OCIO, understanding the client that allows us then to become very specific relative to what they need through time. But without defining those foundational items, it's difficult. And for example, if we think about a 2008 scenario with one of my clients understanding their goals and objectives, they were not with SEI during that time period, but after that, they came to us and we discovered that the goals and objectives and risk tolerances weren't actually aligned properly. So that allowed us to unpack that and help them set up for success in the future where it was very difficult them to come out of that 2008 period and be successful in the future. So again, going back to that customization relative to the specifics for that client, and I would always argue that that risk tolerance is of utmost importance and even sometimes more important than the upside potential in an asset allocation. 

Great, thanks. And maybe Kathy, to kind of stand the topic of specialization. When we think about the types of nonprofits, right? There's foundations, nonprofits that are private in nature, there's healthcare entities, there's cultural institutions, there's just a variety of types. But if we take a segment such as universities, are all universities the same? Can you count with the same approach as a partner with the university since they're similar in nature relative to some of those other entities? 

Well, Mike, I'll start by saying one size does not fit all. And using higher education as an example, we see higher education institutions varying in their needs for an OCIO solution. For example, you may have one higher ed institution whose financials are excellent, they've got a good financial posture, they can afford to implement a more growth oriented portfolio, their liquidity needs are not high. That may allow for them to use alternatives in their investment implementation. And then we might pivot to another type of higher education institution that perhaps they're having some challenges within the organization. They're not getting the number of students coming in that they'd like. We know that financial aid is a huge component of dollars going out of the organization. Perhaps there's some cost issues that they have to manage and there's unforeseen liquidity needs where they're making draws on the endowment that are unexpected or higher than normal. So we would think about implementing a very different type of investment solution for them to accommodate or meet those needs that particular institution has that differs from one that has perhaps a more stronger financial posture. 

Great. Great. So specialization sounds like it's important even within a segment is kind of what I'm hearing from you. 

Absolutely. 

Maybe if we switch topics and talk about the stakeholders, do you typically deal with boards, investment committees, staff or some kind of mix? And how do you go about that process as an OCIO provider? 

Yeah, so we deal with all the stakeholders in an organization. When you think about the board, the investment committee, and then the staff, all of them have very different and unique needs and they digest information differently. So we have to think about when approaching a board, how we're going to communicate with a board may be very different than how we communicate with an investment committee. Investment committees typically want to get into the granularities around governance, the portfolio market behavior expectations going forward in the market. The staff typically the CFO office, they have very different needs and we have to accommodate those needs and communicate those needs or communicate to them those needs in a very different way than perhaps we would do with the board. 

Great. Dale, how about the frequency? How often should OCIO be meeting with these various stakeholders and does it vary by organizational type and what's your experience there? 

Absolutely. At a minimum, we're meeting with our investment committees quarterly and likely then with the board at a shorter timeframe at a board meeting on an annual basis, but then on a day-to-day basis, I think this is what sometimes gets lost with providers is that the extension of the staff that an OCIO could provide and help that's on a day-to-day basis, that there's interaction from a staff standpoint with the provider and the OCIO and then taking a step back, we think about stakeholders that Kathy mentioned, but also in a community foundation it would be donors in a university, it might be the students or a healthcare organization, it could be ratings agencies, and what do their needs, what are those needs relative to the investment program that we're putting together. It's really important. It goes back to the original discussion point of what's the objective and risk tolerance for each of those stakeholders and how do we design an OCIO solution and investment program that meets essentially the mission target and then fulfills the needs of all of those stakeholders.

And how do you deal with change from your clients? So I'm assuming there's a lot of volunteers that sit on these boards that govern these nonprofit entities and the people are going to change. So how do you as an OCIO partner sort of deal with that inevitable change that's going to occur to the human capital on the other side? 

Change is constant and we know that. And so when Kathy and I and our other relationship management team talk about how we navigate that and thread that needle, it's a continuously educational project through time, right? It's understanding the clients changing on their boards and committees, and it's that helping them understand the OCIO solution and why they're in this model, why they're in this program and about what the firm thesis is behind that. That's a constant. So we're meeting and greeting them during different events through the years. We certainly have the investment committee standard meetings, we have webinars that we have new education for board members, and we continue that through time and again, making sure that everybody understands that linkage. 

And if I could add to that, as organizations, committees and staff change, we in partnership with clients have to be able to adapt because things change at the organization. Investment committees perhaps change over time and they have different views and perspectives on risk and return. So we all have to be able to adapt to changes. 

Good. Great. Great. Let's shift gears and talk about capabilities of OCIO provider. There's certainly probably in our audience, if you were out there looking up the types of OCIOs you could work with, everyone's going to say they have a great investment process. Everyone's going to say probably they have a high touch client service program. I doubt they would say that they're not going to see their clients and they're bad investors. So those are kind of table stakes. I guess what other types of capabilities, Dale will start with you, do you think an OCIO provider should be able to provide in order to create a strong partnership with their clients? 

Sure. We talk about it in different pillars of asset management, technology operations, and if we dissect for example, one of those, it would be investment management and solutions and understanding what those stakeholders that we just talked about might need. Again, ranges for example, in a community foundation from a donor perspective might be that they want to provide capital for something over the next year or so. Well, that investment strategy looks very different, short-term in nature than an endowed strategy that maybe would give to the foundation or the community in perpetuity. So those two different types of investment strategies and understanding those objectives and risk tolerances are something that a provider needs to truly understand and then create. It's not just that one size fits all that we talked about of here's your one investment program and everyone will be satisfied with that. 

Got it. When we talk about OCIOs with different investment approaches, are there inherent biases, Kathy, that perhaps an OCIO might have? So for instance, are some more heavily involved with alternative assets versus passive, and how should someone that's evaluating OCI really think about those types of providers and their expertise? 

Yeah, so yes. I mean different OCIO providers will all take a different approach to an investment solution. So when an organization is evaluating an OCIO, it's really important that they understand exactly that OCIO provider's approach and Mike and out. Quite often, we'll see when you have a finals presentation, you might only have 30 minutes to present, and it can be challenging at times to really understand what that OCIO provider does. And I think what we'll maybe perhaps talk about this in a few minutes is expanding that time and due diligence in understanding those investment approaches and the unique or the differentiation around them. 

When organizations evaluate OCIO partners, there's certainly a lot of time spent on asset management capabilities and investment capabilities. Tell me a little bit about how you should think of an OCIO partner when it comes to technology and operations. Kathy, maybe we'll start with you on the technology side. How should these investors think about those types of capabilities as the world continues to become more and more advanced? 

Well, Mike, technology is critical in regard to overall OCIO solutions. So when we think about technology, what an organization should be incorporating into their evaluation is portfolio risk management, investment risk management. We think about IPS compliance, rebalancing capabilities with technology, transparency for the client, and then lastly, real-time access to information and technology can enhance all of this and provide solutions around all those different metrics. 

Great. Dale, do you have any examples of what you might experience with your clients when it comes to real-time information with this technology that Kathy had mentioned? 

Sure. If we think about the transparency and risk management and the ability for us to understand security level detail on a daily basis in a strategy and being able to proactively communicate that to a client, for example, during the regional banking crisis or even during the 2008 financial crisis, when we had the ability to understand what's in a portfolio before a client called us and asked us that we would be proactive in reaching out and say, you have this exposure. How does it apply to you? Here's the risk level, here's what we're doing about it. Because we could take immediate action if necessary, versus if you didn't have that technology or you didn't have that dialogue, you might have to wait until the quarter end meeting to understand what you're holding, and by then it likely is too late. 

Great. How about if we talk about the other component, which is operations. If I'm a nonprofit entity, an example, and I want a very bespoke type of investment, maybe it's in the private markets or in some illiquid asset class, are there any operational components that an OCIO might be able to deliver or maybe you've done for your clients to help? 

Kind of on the operational side of things, definitely. And increased efficiency in thinking about the operational capabilities that we have for our clients in creating the hedge fund of one or the private equity fund of one and bespoke to the needs of the client, understanding their needs, their goals, objectives, and risk tolerances, and then creating that fund structure. So that structure is what we're talking about from an operational capability, and then delivering that to the client is highly effective in coming to market and then being efficient in that, and you don't have to rely on a third party to implement that strategy. It also then ties back to that technology aspect is because we have that viewability into those strategies, what are you holding? What are the risk levels of that? And then that communication, that two-way street back and forth with the client to help them understand what they're invested in and what that operational capability has created for them. 

Wow. So literally your clients could be the only investor in that type of vehicle. So as their initiatives change through time, you can then adapt that portfolio because of that operational structure that you bring them. Is that fair to say? 

That's exactly right. And then again, remembering that they can understand what they're invested in and then as a relationship manager understanding the goals, we can tailor that strategy going forward as those goals and objectives or risk tolerances change. 

Let's shift gears to a topic that in my experience has become more and more challenging for institutional investors and it's really evaluating cost and value for that cost. What are some of the best practices? Dale, we'll start with you on evaluating costs. If I'm an institutional investor who's looking at a variety of CIOs, do I just kind of look at the fee and say, this one's more expensive than that, or what's best practices around that? 

Sure. No, it is not just looking at one fee. The components of the total fee are what matters. And understanding that and having an OCO that's transparent and wanting to provide you that information is important. So when I think about components of a fee, you have an OCIO fee, you have an investment management fee, you might have a custody fee, you might have a LA carte fees for marketing or donor services. And when you wrap all of that together, you actually have your total fee, total cost of implementation. And that's really important to evaluate from provider to provider, not just a single fee that somebody puts in front of you and says, that's your OCIO fee, because there are potentially those other fees. And you need to be empowered to ask the question, what is my total fee? Not just what is my OCIO or investment management cost? You need to ask that question, and that's really important. And the OCIO should then absolutely be transparent in laying those out for you and helping you understand that. 

Got it. So Kathy, maybe shift to you on fees. When someone's evaluating OCIO and they take into consideration everything Dale talked about, is there a value that perhaps is worth paying a premium for one organization versus another? Or once you get these total fees, is it as simple as kind of stopping there? So tell me about the value and how do you kind of evaluate that around fees? 

Yeah, and then just adding to Dale's saying, so he commented on the different components that are included in your fee and the important word there, what's included. Okay. So when evaluating fees of an OCIO provider, you have to understand what is included. We talked earlier about different stakeholders and some of the servicing beyond just the investment committee or the staff. And I'll defer again to a community foundation donors. There might be some additional support that's needed to help with the donor base. So yes, when a client or a prospect is evaluating fees, there is value in understanding the fee levels and what they encompass the additional services that you are getting within that fee. 

Okay. So it sounds like there's a lot specialization, customization, fees, a lot of stakeholders. How does the evaluation process then work? Is it a pretty quick process? How should potential partners of yours think about evaluating from a time perspective? 

Well, I would start by saying it shouldn't be a quick process because this is a very important decision that an organization is making. So there's certainly the formal piece of the evaluation, which is typically an RFI or an RFP, and then what we call a finals presentation where different OCIO providers come in, they present. But in evaluating an OCIO provider, it can be difficult to do that in 30 45, even 90 minutes. So it's really important to begin the process ahead of that, right, and having the conversations, having the transparency, making it actually, I say more holistic in nature. I often think about, once again, the different stakeholders at an organization, what might be important to an investment committee might not be as important to the CFO office at an organization. Quite often we find that once a client has partnered with us that the CFO office has some very different needs than the investment committee, and perhaps it makes sense for CFO office to do a separate, what I call operational due diligence in the evaluation stage. 

Got it. Got it. Dale, what's your perspective on the processes? Are you typically afforded enough time? Do you have enough connectivity to these stakeholders? I know there's a lot of advisors and search firms that oftentimes help make the process more efficient, but do you get the time afforded that you really need when you're going through that evaluation with all these stakeholders? 

Sure, I think you can be efficient, but that doesn't mean rushed to your point, Kathy. And so having a dialogue that's open and ongoing from even before a formal RFI or RFP process and understanding the landscape, understanding the different providers, and then as you kind of narrow that field down to a number that you'd like to potentially engage with, then reaching out and having a personal connection and starting that, and a consultant can help you with that. Or if you're doing it on your own, you should have that ability and feel empowered to do that. But that dialogue needs to be a little bit more informal, I think through time. And if we think about the structure process, I think that structure process does not afford us enough time to understand both the nuances of a client and the client to understand the nuances of the provider and if they're able to actually deliver the specific information and solution that they need. And then even after that finals presentation that we all know well of what's that ongoing dialogue and that follow-up meeting with the CFO, the staff, or I'd even take it a step further and think about the marketing teams primarily at a lot of the nonprofits, they have different needs, and is the provider able to meet those needs? That's a very different conversation than what would be uncovered potentially during a finals meeting with an investment committee member. 

Great. Great. So we talked about the evaluation process. It sounds like there should be a lot of touch points. There are a lot of stakeholders, and through that evaluation, you need to definitely address the unique needs of each cost is obviously important. It sounds like transparency of cost as well as understanding those total fees per what Dale commented on. And then this notion of specialization and really understanding the client types that Kathy touched on. We did get another question that came in prior to our webinar that someone sent in. So I'll pose this to you all, and it really says, with all of that going on, what's kind the number one priority that someone should think about when they're evaluated OCIO? If you had to kind of pinpoint one thing, Dale, stability. Stability through time. Having an organization that has seen the financial crisis and even before that, through the time periods that we have today, understanding how client's needs change. And the only way you do that is having the viewability of that through time. So stability is really important in this landscape. And then working together and creating the partner. You invest so much time and energy into this process and it's a long process and you want a provider that can deliver from experience and also into the future of being proactive and having the foresight to understand what's coming down the pipeline. 

Great. And we have one other question that was submitted prior to the webinar and it really says, think about the role of the client in this process, Kathy. How should they think about things on their side as opposed to the OCIO provider? What should clients be doing to make sure this partnership could be successful? 

First thing that comes to mind is communication. Communication is key. Quite often when there is a new OCIO relationship, there's a lot of discovery, right? There's a lot of unknowns. It's getting to know each other. So communication really helps to build that relationship, ensure that we're going to have a smooth transition and ongoing relationship. That's really important. And I'd say that would probably be the most critical piece from the client side in ensuring that it's a successful partnership. 

Great. 

Dale, anything to add in closing? 

It's absolutely important from that perspective to have that open and ongoing dialogue because it was, we always say, we can't help you and provide the best solution unless we know what's going on within the organization. You are there day in and day out, and we need to understand that to be able to help you better. 

Great. Great. Well, I want to thank both of you for your time today, your insights, hopefully for the audience. It's provided some value to you as you carry out your mission and focus on your organization. There's a lot of great choices out there, and we wish you well throughout the end of the year and going into next year and meeting your overall goals and objectives. Thanks for joining SEI today.