Outsourced Chief Investment Officer (OCIO) services are a significant and growing part of the Endowment and Foundation and nonprofit landscape. These services can provide an important function in the oversight of investment portfolios for the right type of client. We explore the benefits, challenges and considerations for this type of arrangement below.

What is an Outsourced Chief Investment Officer?

An Outsourced CIO is a third-party firm which will serve as an extension of an organization’s staff, assisting with all or some of a portfolio’s investment-related management processes. Clients can engage an OCIO to handle virtually all duties associated with the operation, administration and management of an investment portfolio. Unlike traditional investment consulting services where final decision-making authority rests with the client, the OCIO assumes these duties along with the appropriate fiduciary responsibilities.

What services are provided by an OCIO?

An OCIO can assume authority over all investment-related decisions and actions, including:
• Portfolio structure
• Investment manager hiring and terminations
• Trading
• Portfolio rebalancing
• Adherence to the client’s Investment Policy Statement (IPS)

An OCIO also plays an important role by assuming responsibility for operational and administrative functions which can include:
• Contracts, subscription documents and agreements (manager, limited partner, etc.)
• Cash movement
• Monitoring and payment of portfolio related fees and expenses
• Custodian relationship
• Reporting
• Audit support

Benefits of working with an OCIO company

An OCIO consulting relationship can benefit the staff, committees and board of an organization. Staff may see a substantial reduction in their day-to-day workload through offloading of operational and administrative functions to the OCIO. This efficiency may free up time to work on their other core responsibilities while having confidence the investment related duties are in the hands of a fiduciary.

Nonprofit boards and their working committees are filled with incredibly passionate, talented, dedicated individuals that may or may not come from an investment background. Outsourcing the investment function allows the experts to build, monitor and maintain the portfolio under the direction of the investment committee. An OCIO relationship also allows the investment committee to allocate time to portfolio level governance and long-term strategy. Furthermore, they can focus on their understanding of what is happening in the markets to determine what that information means for their organization and what the OCIO is doing about it.

A challenge when considering an Outsourced Chief Investment Officer

Investment committees populated with investment professionals or organizations with dedicated, internal investment staff may find hiring an OCIO firm a bit more challenging. There can be reluctance in handing over these responsibilities and for these reasons and others, it is important to note that OCIOs may not be a great fit for every organization.

So, what type of organization could use an Outsourced CIO?

Nearly any organization that has oversight responsibility for investible assets could use the services of an Outsourced Chief Investment Officer. Within the nonprofit/tax-exempt world, these could include:
• College and University endowments
• Charitable foundations (public, private, community or corporate)
• Healthcare organizations
• Religious institutions
• Associations
• Cultural institutions (museum, symphony, ballet, opera)
• Senior living and continuing care facilities

What makes a good OCIO?

The easy answer here is a good OCIO delivers investment returns that are in-line or exceed the expectations of their client while taking appropriate levels of risk. What can be equally important is working with a partner firm that operates as if they are the investment office of their client. Every client situation is unique and working with a firm that listens, responds and helps guide their client to the best solutions for their organization is incredibly important to the long-term success of the relationship.

Every good OCIO needs to understand the specific needs of each client. Unique considerations are anticipated and integrating them into the investment portfolio can create alignment with the organization’s overall mission. Some of these unique considerations include liquidity needs, Environmental, Social and Governance (ESG), Diversity Equity and Inclusion (DEI) and legacy or illiquid investments.

That said, an organization’s needs, goals and objectives may also evolve over time. Staying engaged with the investment committee and board, asking the right questions and ensuring that a proper governance structure is in place will help provide the best possible chance to meet the long-term needs of the client. This engagement is especially important during volatile market periods. Lessons learned from the dot com bubble, the great financial crisis and COVID are reminders that markets can be incredibly volatile, and it is during these periods that a good OCIO will be in constant communication with their clients helping navigate turbulent times.

Are OCIO service models flexible?

The short answer is yes, or at least they should be. There are arrangements where a client may want to retain the authority over a certain administrative function, or the committee may want to retain some authority over alternative investment decision making while they learn the space. These exceptions are generally easy to accommodate given proper communication at the outset of the relationship.

What responsibilities remain with the client?

A client’s investment committee and ultimately their board will always be responsible for determining the overall goals and objectives of their organization. While the OCIO will work closely with the client on establishing risk and return parameters, liquidity needs and restrictions, the final responsibility remains with the client. Oversight of the OCIO as well as accountability for its long-term performance is also an explicit obligation of the board or investment committee.

The services OCIOs provide continue to evolve and grow in the Endowment and Foundation and nonprofit arena. With boards and their committees being pressed for time and resources, considering the use of an OCIO investment consultant like Fiducient Advisors may bring significant advantages to nonprofit organizations.

As always, for more information on our OCIO consulting services, please feel free to reach out to any of the professionals at Fiducient Advisors.

The information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Fiducient Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Fiducient Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.