Outsourced Chief Investment Officer — or OCIO — services are a growing trend among financial advisory firms as a valuable way to level up their business. These services enable advisors to optimize the way they work by streamlining operations which, for most advisors, means increasing productivity and having more time to focus on strategic growth and building deeper relationships with clients.
Defining OCIO
Independent advisors, particularly RIAs, can find themselves spending a disproportionate amount of time on investment management functions such as due diligence, manager research, portfolio construction, rebalancing, proactive tax management, and other investment-related work. OCIO providers take all or some of those functions over on behalf of the firm, helping to improve the experience that advisors deliver to clients.
The concept isn’t new but has been gaining attention as the wealth landscape evolves and advisors are searching for new ways to differentiate themselves. OCIO was first embraced by institutional investors and high-net-worth individuals and families who preferred not to have their own team of investment experts and chose to delegate to an experienced third party while retaining control of the investment strategy and allocation.
Today, a range of OCIO services and providers means that advisors can usually configure services to meet their needs. OCIO providers generally offer a full menu of investment management capabilities, such as model portfolio, custom indexing, manager selection, reporting, billing, compliance, trading, cashiering, tax optimization, rebalancing, and client-facing services like consultations and market calls.
OCIO can help advisory firms solve a number of challenges within their business and when it comes to serving clients. Let’s dig deeper on what those challenges are.
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Challenge: Providing Clients with Professional Expertise
Through OCIO services, advisors gain access to teams of research, asset allocation, and investment specialists to help build, implement, and manage client portfolios. That means tapping into the superior depth and breadth of resources of professional money managers, such as a defined investment approach, deep manager research, and due diligence, access to specialists and CFAs, portfolio rebalancing and optimization technology, and more.
That depth of expertise is likely unmatched by an advisor and the value of it can be meaningful when passed along to clients. Investors are seeking out wealth experiences that are personalized, leading advisors to find new ways to offer customizable strategies without having to hire teams of people to manage them.
Challenge: Offering Customized and Institutional Investment Strategies (at Scale)
As clients continue to pursue wealth solutions that are personalized to their goals, advisors need to keep pace with customizable wealth solutions and services. With an OCIO provider, advisors expand their value with institutional-grade investment management and specialized investment strategies to help meet the needs of higher-value clients, such as:
- Custom indexing, tax alpha, and other specialized investment strategies
- Cashiering and money management
- Tax harvesting and optimization overlays
- High-net-worth offerings
An OCIO partner also broadens the range of investment options advisors can leverage for client portfolios. Experienced providers have vast networks and can tap into a wide array of money managers, including those with specialized strategies, institutional investments, or access to niche markets. Advisors with access to more strategies can build more diversified portfolios, manage risk, and create more personalized experiences for clients. OCIO providers often work with advisors and their clients to understand their growth challenges and the best ways to help clients reach their goals.
Challenge: Efficiently Implementing Investment Decisions
Research points to key differentiators between average-producing financial advisors and top-producing advisors and among the biggest factors is time management. One study notes that top-producing advisors who work 50 hours per week allocate far less time to investment functions like portfolio management, research, administrative, and back-office duties.¹
Amount of Time Allocated to Business Functions¹
Percentage of Time Allocated | Avg. Producing Advisors | Top Producing Advisors |
|---|---|---|
Managing Portfolios | 12% | 7% |
Research | 12% | 5% |
Back-Office Operations | 8% | 1% |
Partnering with an OCIO provider enables advisors to rethink how they spend their time and gives them the ability to confidently outsource investment management functions, like portfolio construction and management, due diligence, and operational tasks like rebalancing and trading. Unless a firm is very large and has dedicated resources, outsourcing the operational functions can help advisors do business more efficiently, giving them more time back to focus on clients.
Challenge: Managing Compliance and Risk
As the regulatory landscape continues to become more and more complex, risk mitigation becomes more and more important. OCIO partners can provide a deep assessment of the operational and investment risks associated with a manager, strategy, or product, as well as adherence to applicable regulations and industry best practices. This valuable information can help advisors reduce compliance risks, ensure adherence to fiduciary responsibilities to make informed decisions, and better manage the potential risks that could impact client portfolios.
OCIO providers continually maintain and review their investment policies, have clear visibility into a portfolio’s holdings at any given time. A solid, established investment approach and process helps keep the organization aligned with its investing mandates, despite market volatility.
By outsourcing with an OCIO services provider, advisors can feel confident that the risk guidelines and compliance parameters they want to maintain are being followed. OCIO providers also maintain full documentation of information they gather.
Challenge: Executing Deep Manager Due Diligence
Conducting comprehensive due diligence on potential money managers demands considerable time and resources.
Outsourcing this critical function means advisors can tap into the focused expertise and specialization of dedicated due diligence teams that have in-depth knowledge and experience to evaluate investment managers, their strategies, performance, risk management, and compliance. Plus, OCIO providers can often provide a more comprehensive and in-depth analysis beyond what advisors may be able to develop with in-house resources.
Due diligence is a key function handled by most OCIO providers and they often have extensive networks, industry connections, and access to a wider universe of investment managers for consideration. Plus, they are better equipped to properly evaluate a bigger range of managers across various asset classes, geographies, and investment styles, widening the pool of potential candidates for advisors.
Challenge: Managing Expenses
There are costs for OCIO services that vary depending on the services offered and the size of the firm. According to Kitces, the cost of outsourcing services is trending down as the model becomes more prevalent.² In many cases, firms may find leveraging OCIO services to be more cost-effective than handling investment functions in-house. Between the costs of hiring and training in-house resources, maintaining the various tech platforms, and the cost of time spent by advisors handling operational responsibilities, OCIO services could actually be more cost-effective.
Challenge: Delivering Better Client Experiences
Advisors today must navigate challenges like meeting client needs for more personalized strategies, changing regulatory requirements, and persistent market uncertainty. One of the biggest reasons advisors leverage OCIO services is to free up time to focus on their business and their clients. According to Kitces, the average independent financial advisor only spends about 9 hours a week on business development.³ Freeing up several additional hours a week means advisors can devote more hours doing the things that have the most impact on their business.
The argument has been made that advisors spend “too much time” on investment management or “not really that much time” on investment management. Kitces research shows that only half (50%) of the typical advisor’s time is actually spent on client-related activities.³
As the wealth landscape evolves and advisors face more complex investment needs, changing regulations, and ever-increasing market volatility, many are leveraging the expertise of OCIO service providers to help them unlock new opportunities and deliver better experiences to their clients.
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