Why Should an Organization Consider an OCIO?

 

Very few organizations have the scale to build their own in-house investment management team.

 

Instead, many depend on their board or trustees to oversee their investments, with investment decisions implemented by in-house employees in a part-time capacity.

 

This can lead to slow reactions to market changes. For example, often assets can’t be reallocated until voted on at the next board meeting. Plus, many organizations also have limited expertise in institutional portfolio management. This lack of professional speed and experience may negatively impact an organization’s investment outcomes.

 

This is where an OCIO comes in. The role is a function, not a single person.

 

“In concept, it’s not unlike having someone manage your personal portfolio,” said Bill Dove, Senior Institutional and OCIO Portfolio Manager at 1834, a division of Old National Bank, “But an OCIO is a team that does it for an institution.”

 

An OCIO first works with an organization to access, understand and document institutional and investment goals and develop an Investment Policy Statement, along with a strategy for asset allocation and implementation. Organizations often benefit from OCIOs in four main areas.

High Level of Attention and Expertise

An OCIO has full discretionary power, which means nimble managers who monitor an organization’s portfolio daily, and who can act as the market moves. Their decision-making is informed by their client’s organizational goals and backed by their years of experience.

 

Part of the role of an OCIO is also to keep the client well-apprised of their portfolio. The OCIO will attend all board and other relevant meetings, give regular reports on investment performance and immediately respond to sudden market changes, while keeping the client informed.

Strong Portfolio Options at Scale

OCIOs are part of a larger investment firm or bank. As a result, OCIOs typically have access to alternative investment options such as hedge funds, real estate investments and private equity. Most organizations simply can’t get a seat at the table for these options otherwise.

 

With the resources to research and vet these complex opportunities, an OCIO can make recommendations to their clients based on their organizational needs—and can use its scale to execute an investment plan involving them. OCIOs often manage customized strategies for an organization. 

 

Even with more commonly available securities, OCIOs can often leverage their institutional size to lower transaction costs. In short, by hiring an OCIO, an organization gains access to a scale of investing prowess that is very difficult to replicate in-house.

More Time for Employees and Board Members

Employees, board members and trustees should focus on the skills that put them in their roles in the first place.

 

When in-house employees take on portfolio management, either as a small part of their existing role, or layered on top of their existing responsibilities, it may end up as the worst of both worlds. Often, these employees end up spending less time on their core job functions, where their actual expertise benefits the organization, while spending more time as underqualified portfolio managers.

 

Similarly, there are precious few hours of board meetings per year. Plus, board members, by definition, are extremely busy people. If they are spending their time working through investment proposals themselves, they’re not spending as much time focused on bigger organizational priorities.

 

By hiring an OCIO, an organization gains professional portfolio management while giving back time to employees, the board and trustees.

The Assurance of Working with a Fiduciary

OCIOs are fiduciaries, required by law to manage an organization’s funds in the organization’s best interest. For example, 1834 is regulated by the Office of the Comptroller of the Currency (OCC). Our compliance requirements as a regulated bank bring elevated standards to ensure our clients’ investment programs are properly managed.

 

One area where this frequently shows up is in an organization’s risk tolerance. It should always be top of mind when adjusting a portfolio. Many organizations without formal in-house teams may end up with well-intentioned but overextended employees working part-time to achieve the appropriate risk tolerance. With millions of dollars in assets under management, this is not an ideal scenario.

 

In contrast, OCIOs bring expertise not just in portfolio construction, but in all the other aspects of managing investments. As fiduciaries, OCIOs are trained and experienced in spotting major risk factors in a portfolio – much more so than most in-house employees. This layer of professionalism, experience and skill is extremely valuable to many organizations.

What’s the Difference Between an Investment Consultant and an OCIO?

Some aspects of each relationship are the same. Both an Investment Consultant and an OCIO work with their clients to develop an Investment Policy Statement, both can help with capital market assumptions and strategic asset allocation. Both research investment managers. The difference is in the execution.

 

“Investment Consultants were the first iteration of this concept, where they’d bring their research and ideas to key decisions makers within an institution,” said Dove, “But the consultants don’t usually have discretionary ability, so you’re missing a key factor in bringing the plan to life.” 

 

When you have an Investment Consultant, the actual investment responsibility remains with an organization’s board or trustees. This creates a potentially problematic limitation in the speed of decision making. For example, if a natural disaster caused the price of oil to rise suddenly, an Investment Consultant could only give the board a recommendation on how to act—it would be up to the board to mobilize and implement the recommendation. By the time that happens, the moment may have passed.

 

In contrast, an OCIO in the same scenario could immediately adjust an organization’s portfolio, while looping in key organizational individuals on the process – and why certain adjustments to the portfolio may benefit the organization. In today’s complex markets, with frequent external shocks, having this ability to adjust in real time can be extremely beneficial.

 

There are two additional key differences between Investment Consultant and OCIOs. Investment Consultants don’t have access to proprietary investment capabilities, while OCIOs do. This gives OCIOs the ability to build more customized, specialized portfolios that may better align with an organization’s overall goals.

 

And, lastly, while OCIOs are held to very high fiduciary standards, Investment Consultants have limited fiduciary responsibility, since they are not actually managing an organization’s money. This means they have less stake in assuring that an organization’s portfolio aligns with its goals – and in providing recommendations in the organization’s best interest. 

Ready to Talk About an OCIO for Your Organization?

Deciding to onboard an OCIO is a major step for any institution. But it also may make sense – institutional investments are a key part of most organizations’ long-term future. They deserve professional, daily attention. Unless an organization has the resources and scale to develop their own dedicated in-house team, an OCIO can be a very strong, more cost-effective alternative.

 

At 1834, our Institutional Services team can serve as a trusted financial partner – and we offer OCIO services. Please connect with us to talk about your organizational needs. We’d love to learn how we can help.