Reviewing fees can be confusing, but it's an important part of your outsourced investment management (OCIO) evaluation. Fees are often heavily weighted in the evaluation criteria, so an accurate and detailed review is critical. But comparing fees can be challenging with the growing number of OCIOs and lack of industry standards or guidelines.
Not all OCIOs deliver the same services, so you need fee transparency for an accurate comparison. If a provider is not transparent, you need to ask more questions to understand what you’re getting and (more importantly) what impacts the fee.
Don’t lose sight that only the right portfolio can help you meet your goals. Your OCIO should have full scope, bringing you an appropriate mix of asset classes. How they combine the asset classes to get the appropriate allocation is what matters and significantly influences the fee.
Know exactly what to look for in these 3 areas of fee review:
1. OCIO fees — overseeing the management of the portfolio
The OCIO fee encompasses much more than meets the eye. Think about what you're getting when you compare OCIO fees. Are the services included really the best fit for what you need to achieve your goals? A few things to consider:
- Resources and infrastructure Does the firm bring seasoned experts, well established processes and sophisticated technology to support a strong governance structure?
- Risk management — Can the firm perform risk modeling that supports investment decisions and also provide a holistic view of risk across your portfolio(s)? Does it invest in both internal and external technology?
- Advice and asset allocation — Are spending and asset allocation studies and investment policy reviews included for no extra fee? Will the asset allocation be tailored to your specific goals?
- Research and due diligence — Is the firm staffed with dedicated teams and technology in an effort to ensure that the best investment managers in each asset class are incorporated in your portfolio and performing for you?
- Integrated reporting and website — Is custom, timely reporting and daily access to your account available via web portal?
- Alternative oversight — Alternative asset classes typically come with benefits. Less liquid asset classes need extra time and an experienced team to pay close attention to funds. Providers with resources dedicated to this space may charge a separate OCIO fee for that additional responsibility because of the human capital needed to access unique managers.
2. Manager fees — Taking a closer look at the investment strategy and the manager fees
First, the fee charged for a given manager can vary depending on the OCIO's level of assets and specific arrangement with the manager. An established OCIO may be able to negotiate more favorable fees due to a relationship or level of assets invested. You can gain access to talented, specialist managers at an often lower cost.
The direct cost of a manager is straightforward, but the implementation is critical to keep in mind. While it's most often a percentage of total assets expresses in basis points, some asset-classes require more attention. The type of asset classes and the weightings of each impact the fee.
Be sure to consider:
- The level of active vs. passive management can obviously affect fees. Passive investing is less expensive and may make sense for more efficient asset classes, such as US Large Cap.
- The level of alternative investments also impacts overall manager fees. These strategies can be complex and can be more expensive to manage than traditional public assets. That said, they can be a critical element in helping to achieve your performance goals or manage risk. Alternatives require additional monitoring and intense due diligence. The risks you take on can be lessened with more thorough due diligence.
- Fund structure can affect manager costs too. You will find a variety of fund structures offered within the OCIO model, including comingled funds and separate accounts. While separate accounts may offer the maximum customization, that customization comes at a cost. Ask yourself if it's needed. In some cases, comingled funds may bring top-tier manager, and can be implemented within a custom allocation. You still get the OCIOs best thinking, but at a lower cost due to economies of scale. A good OCIO will be able to offer a variety of structures to best meet your needs.
3. Administrative fees
Administrative fees can vary based on the type of products included in the portfolio. Like all other manager fees, some asset classes have higher or lower fees than other others. This fee is tied to the investment management of the products in your allocation.
Need help making an apples to apples evaluation? Request a fee comparison.
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.