Worldwide OCIO assets under management are expected to grow 7.5% annually to reach $3 trillion by the end of 2025.1 Investors embrace the OCIO model for a number of reasons, including improved governance, increased market volatility and investment complexity, seeking better access to specialist managers and the potential for improved risk management. When evaluating OCIO providers, the assessment criteria often heavily weighs fees, so an accurate and detailed review is critical. However, the OCIO fee assessment process is often broken in that it tends to focus on one aspect of fees and minimizes total fees for investment management. An accurate comparison can be challenging with the growing number of OCIOs and lack of industry standards or guidelines around reviewing fees.
OCIO fees over time
Thirty years ago, when the concept of transitioning from a traditional non-discretionary consultant to a discretionary/OCIO was new, costs were often presented as a bundled or all-inclusive basis point fee to simplify the decision. The bundled fee combined the OCIO advisory fee and all investment manager fees.
A lot has changed with the growing popularity of the OCIO model, which has led many investors to seek a third party professional to assist with their evaluation. These professional firms push providers to unbundle their fees to create greater fee transparency, revealing both the OCIO advisory fee and investment management fees separately. This is a critical part in comparing OCIOs, but does add an additional layer of review to an already complex process.
We believe fee transparency is unequivocally a best practice for fiduciaries and must remain part of the evaluation process. The initial push may have created an unintentional consequence—an overemphasis on the OCIO fee and a subsequent reduced emphasis on total costs. In most cases, the investment manager fees are significantly greater than the OCIO fees yet evaluators tend to minimize them in the fee assessment process. This can cause an investor to select a provider based solely on a lower OCIO fee without fully understanding the total costs of the overall implementation, which, if higher, results in less dollars to fund their financial goals or support their mission.
A look under the hood
Not all OCIOs deliver the same services and an accurate comparison needs fee transparency. If a provider is not transparent, you need to ask more questions to understand what you are getting and, more importantly, what affects the fee. As an industry, the fee assessment process needs to shift. Rather than trying to compare OCIO fees as if they are a commodity, you can take a deeper dive into evaluating the full costs of implementation. This requires time and a more thorough understanding of all of the services proposed and fees involved, as well as the impact of your chosen asset allocation. In many cases, it's harder to compare providers using the same criteria because those services and implementation will vary drastically.
Understanding the total fee
At the end of the day, the investor’s total cost is non-debatable. Looking exclusively at the OCIO fee and not fully understanding the investment manager fees is a mistake, as it obscures what is usually the larger portion of the costs borne by the organization. The investor needs to decide the premium they want to pay for the services provided and how important they are for their organization.
Whether conducting a review of OCIO providers on your own, or utilizing a professional firm for assistance, be sure to spend the time to consider the total cost in your evaluation process. Take note of investment manager and strategy fees, as well as any additional ad hoc fees such as travel costs, additional asset allocation studies or special research projects you may want, as providers may charge extra for them.
Do not lose sight of the fact that a custom portfolio designed to meet your organization’s rate of return, with acceptable volatility levels and liquidity needs is best in trying to achieve the results you need. The OCIO should utilize an open-architecture approach to bring you an appropriate mix of asset classes. Lower investment costs could also result from outsourcing as an OCIO provider can often leverage their assets under management to negotiate lower fees from managers. This underscores the importance of considering all the costs in your evaluation of OCIO providers.
1 "OCIO Providers See Greater Demand Ahead from Nonprofits and Health and Hospital Systems," Cerulli Associates, cerulli.com.
Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. There is no guarantee that risk can be managed successfully, Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.