By Austin Fitch, CFA®
Morgan Smith, CFA®
- An OCIO is an investment professional or firm that can be leveraged by an organization or financial advisor to help develop and oversee their investment framework.
- Research indicates a growing number of financial advisors are leveraging OCIOs to help them better navigate the complex investment landscape while gaining access to a team of analysts with processes and software to develop customized solutions for their clients.
- OCIOs do not replace a financial advisor’s relationship with their clients and should instead enhance that relationship by improving the client’s confidence that their financial advisor has developed a unique financial plan tailored to their financial goals.
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Navigating heightened market volatility and an evolving regulatory landscape has become the new normal for many financial advisors, all while managing the operational and administrative responsibilities that come with being a business owner. An increasing number of financial advisors are turning to an outsourced chief investment officer (OCIO) to help systematize their investment management processes and procedures in hopes of gaining back valuable time in their day to focus on helping their clients address their financial goals.
WHAT IS AN OCIO?
An OCIO is an investment professional or firm that can be leveraged by an organization or financial advisor to help develop and oversee their investment framework. The financial advisor can decide to retain some or all of the fiduciary responsibility and then choose to delegate other duties to the OCIO. This arrangement allows the financial advisor to leverage the knowledge of specialized investment professionals to complement their existing process – without hiring a full internal team of research analysts and portfolio managers. The OCIO acts as a trusted consultant to a financial advisor’s investment management process and complement their business.
WHAT ARE AN OCIO’S PRIMARY FUNCTIONS?
OCIOs offer customizable services that can help financial advisors expand and deepen their investment process. Depending on the advisor’s practice and the complexity of their needs, OCIOs typically provide consultative solutions within three primary areas:
- Scaling the investment process: OCIOs offer financial advisors the capability to scale their investment process by implementing a modern, customizable approach to managing portfolios without sacrificing the value they bring to their clients. Outsourcing ongoing manager monitoring, fund due diligence, and other time-consuming responsibilities can unlock time for a financial advisor to focus on growing their practice.
- Providing unique investment solutions: When markets experience volatility, clients may become anxious about meeting their financial goals. Leveraging an OCIO focused on the changing risks and objectives across an investor’s lifecycle can allow advisors to offer their clients customized solutions that seek to keep clients focused on their long-term goals and avoid potentially damaging investor behavior.
- Improving governance: A collaborative OCIO can help a financial advisor create a defined, documented, and deliberate process for building and managing portfolios – which is essential in a complex regulatory environment. OCIOs aim to provide comprehensive risk management by assisting in developing an investment policy statement, guiding quarterly investment committee meetings, and providing daily investment oversight and ongoing research. Advisors working with OCIOs can collaborate on detailed documentation of their portfolio construction and due diligence process.
HOW CAN A CLIENT BENEFIT FROM THEIR FINANCIAL ADVISOR USING AN OCIO?
One of the top reasons a client leaves their financial advisor is dissatisfaction with the advisor’s services1. A close bond with an advisor can drive client satisfaction, and often takes valuable time to create and foster. OCIO relationships can contribute to this critical business variable.
Leveraging an OCIO’s resources can give advisors time back in their day to return client phone calls or emails, conduct more client meetings, and other client-centric activities, rather than focus on investment management. Clients can benefit from an OCIO model because not only will their advisor have more time to spend on them and their financial goals, but they will also have another team monitoring the portfolios and the outcomes.
Additionally, OCIOs can provide timely thought leadership and research to equip advisors with important insights for fielding client calls and emails regarding market turbulence or other investment concerns.
WHAT TYPE OF FINANCIAL ADVISOR CAN WORK WITH AN OCIO?
Most financial advisors can implement an OCIO framework, and research indicates a growing number of financial advisors2 are leveraging OCIOs to help them better navigate the complex investment landscape while gaining access to a team of analysts with processes and software to develop customized solutions for their clients.
We have identified two types of financial advisors who make strong candidates for leveraging OCIO support:
- Financial-Planning Focused: OCIO models may be a good fit for financial advisors who prioritize amplifying their core value proposition of offering clients wealth management that meets the goals and objectives of their individual clients. Planning-focused advisors may prefer to spend their time holistically servicing existing client relationships or prospecting for new ones, rather than having to pore over the investment solutions.
- Advisor as Portfolio Manager: Investment management is an important component of a financial advisor’s valueproposition, and many advisors handle all portfolio-building and management responsibilities independently.However, once they reach a certain level of assets under management, they may benefit from outside supportto scale their investment process and fiduciary responsibilities. An OCIO relationship can help financial advisorsoffload specific functions while maintaining control of the overall process.
1“Why Clients Leave Their Financial Advisor”, Morningstar, June 7, 2023
2“OCIOs Realize Greater Adoption from New Client Types”, Cerulli Associates, August 7, 2023.
HOW SHOULD I SELECT AN OCIO?
In general, when beginning the OCIO selection process, a financial advisor may want to consider the OCIO’s investment philosophy, capital market assumptions, asset allocation framework, and due diligence process to ensure they share perspectives and goals.
From there, the financial advisor can choose from a spectrum of the OCIO’s service offerings to pick and choose what works best for them, their business, and their clients’ needs and goals.
DO ADVISORS GIVE UP CONTROL WHEN THEY WORK WITH AN OCIO?
The degree of OCIO support depends on the relationship that a financial advisor feels will best complement their service offering. If desired (and depending on the OCIO that a financial advisor chooses to work with), the advisor can maintain complete control in the decision-making process. This approach ensures that the financial advisor is directing the investment process, with the OCIO complementing the advisor’s business.
IF I USE AN OCIO MODEL, WILL MY CLIENTS EXPERIENCE FEWER MARKET DOWNTURNS?
All investing involves risk. An OCIO’s approach to handling market downturns depends on their investment process and risk mitigation philosophy. Some OCIOs have extensive experience designing risk mitigation strategies for volatile market environments, while others may focus more on traditional asset allocation and longer-term outlooks. Financial advisors can work with their OCIO to ensure the their clients’ financial goals are solved for throughout various market environments, while also addressing specific risk appetites and objectives.
WILL AN OCIO REPLACE THE VALUE OF AN ADVISOR?
In short, no. An OCIO does not replace a financial advisor’s relationship with their clients. The client-advisor relationship is unique to those two parties and an OCIO should not disrupt that. An effective OCIO should enhance that relationship by improving the client’s confidence that their financial advisor has developed a unique financial plan tailored to their financial goals. The financial advisor is often best equipped to determine and implement an appropriate investment strategy to address those goals.
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