OCIO vs. Traditional Investment Management: Key Differences and Considerations

The wealth management landscape has seen significant evolution over just the past few years. Things like technology, geopolitical factors, and investor mindset shifts have accelerated change in the industry like never before. For investors, it means different priorities and goals from previous generations. For advisors, it means assessing the ways they can deliver on their value and help clients reach their goals.  

For many advisors, traditional investment management is still part of the core value proposition they offer for clients. Building and managing investment portfolios—everything from manager due diligence and research to ongoing oversight and every other aspect of investment management in between—is handled by the advisor or in-house resources.

But for an increasing number of advisors and firms, outsourcing those services has become the key to growth, scalability, and being able to deliver better experiences to clients. Both approaches have merits. So how do you know which is right for you and your clients?

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What Exactly is OCIO?
While the offering can vary from one provider to the next, outsourced chief investment officer services—collectively coined as OCIO—can include all functions of investment management. Advisors who partner with OCIO providers essentially outsource all or part of the investment management duties they provide to clients.

The concept of outsourcing investment management was first embraced by institutional investors and high-net-worth individuals and families who preferred not to have their own team of investment experts. Instead they delegated investing to an experienced third-party while retaining control of the investment strategy and allocation.

Today, OCIO services are usually customizable to a firm’s needs and include everything from research and due diligence to investment technology, portfolio construction, optimization, and management, to trading and rebalancing, to tax management, specialized planning strategies and solutions. OCIO providers generally offer a full menu of investment management capabilities that they can take on and help advisory firms solve a number of challenges, 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.

Benefits of OCIO
OCIO has seen significant growth in the past few years, with more and more providers coming into the market. In fact,  OCIO assets in the US reached $2 trillion in 2021 and are expected to reach $3 trillion by the end of 2025.¹ And for good reason. Outsourcing provides a myriad of benefits for firms and advisors, some of which also have a positive impact on investors as well.

1. More efficient use of time
Most advisors would agree that time is their most valuable asset. According to Kitces research, only half (50%) of the typical advisor’s time is actually spent on client-related activities.²

OCIO providers take on the responsibilities of investment management, enabling advisors to be more efficient and reallocate their time. One study found that financial advisors who outsource gained nearly 8 hours a week—time that could be spent on client relationships.³

2. Depth of resources
Leveraging OCIO services, advisors gain access to teams of research, asset allocation, and investment specialists to help build, implement, and manage client portfolios. As investors continue to seek out wealth experiences that are personalized for them, advisors need a scalable way to offer those customizable strategies without having to hire teams of people to manage them.

3. Consistent investment approach
The depth and breadth of investment resources that OCIO offers—a well-established investment approach, deep manager research and due diligence, access to specialists and CFAs, portfolio rebalancing and optimization technology—can help advisors to offer greater visibility, clarity, and confidence for clients about their portfolios.   

4. Expanded capabilities
With an OCIO provider, advisors expand their value with institutional investment management and specialized investment strategies, such as:

• Custom indexing, tax alpha and other specialized investment strategies
• Cashiering and money management
• Tax harvesting and optimization overlays
• High net worth offerings 

Some OCIO teams will work with advisors and their clients to understand their growth challenges and the best ways to help clients reach their goals.

What is Traditional Investment Management?
Sometimes referred to as “Rep as PM,” traditional investment management generally means that the advisor—or an in-house team—does all of the work involved with researching, building, implementing, and maintaining client portfolios. That includes manager due diligence, suitability requirements, manager recommendations, portfolio construction, trading, reallocation, tax harvesting and optimization, rebalancing, reporting, and other investment related functions.

Benefits of Traditional Investment Management
Traditional investment management is how most advisors operated until OCIO started to gain traction in the mainstream market. It’s probably what most investors expect of their financial advisor and it offers several tried and true advantages for firms and advisors.

 1. Advisor value and control
As the wealth landscape evolves and portfolio management becomes more easily commoditized, many advisors center their value on managing client assets in-house, preferring to maintain full control over the asset they manage. For some advisors, their value lies in the deep understanding and engagement of client investments and aligning with client goals and behaviors.

 2. Costs
There are fees for OCIO services and for some advisors, depending on their business model, the value does not outweigh the costs. OCIO providers may offer better pricing for larger firms with more assets so depending on the size of the firm, the cost could be a significant reason to maintain traditional investment management methods.

OCIO vs. Traditional Investment Management: A Comparison
Growing your business means balancing between establishing new client relationships and delivering the best experiences and outcomes for clients. Being bogged down in investment management and operational tasks can limit your ability to grow but handing over control of client portfolios might not be the right path for some advisors.

Considerations for Outsourcing with OCIO Services
A 2020 research report from InvestmentNews noted several reasons advisors choose to turn the work of asset management over to an outside provider, including:

• Freeing up time that can be reallocated to other business building functions
• Access to institutional-quality capabilities
• Expanded expertise and advanced planning strategies⁴

Considerations for Traditional Investment Management
Some advisors still see portfolio management as a core component of financial planning. The InvestmentNews report also listed the top reasons for not using an outside service for portfolio management, including:

• The strength of in-house investment research
• Flexibility for advisors and clients
• Costs⁴

Control
While outsourcing relinquishes control of some aspects of investment decisions, it is a partnership. The OCIO is hired by and works for the firm, but responsibility for the performance of the outsourced portfolios falls to the OCIO. Advisors may position their OCIO partnership as part of the value they bring to their clients, helping investors to feel more confident in knowing their assets are backed by a team of experts.

A deep bench of expertise can provide peace of mind for clients, help alleviate stress and reduce the tendency to make irrational decisions that may come from investing. Plus, some OCIO teams will work with advisors and their clients to understand their growth challenges and the best ways to help clients reach their goals.

Customization
OCIO providers usually offer a menu of services that firms can pick and choose from, depending on their needs. But some firms may find that their current technology or in-house teams are sufficient and may be looking for specific capabilities through an a la carte offering. If they are not able to create a customized OCIO offering that is tailored to the needs of their firm, they may choose to continue managing client assets themselves instead of outsourcing. Likewise, advisors may choose to manage client portfolios because they believe that their clients warrant a level of personalization not offered by outsourcing.

Risk
Firms partnering with an OCIO provider retain some fiduciary responsibility but entrust fiduciary responsibilities to the provider, helping to spread out risk and increase governance. With traditional investment management, the advisor and firm assume total fiduciary responsibility.

Choosing Between OCIO and Traditional Investment Management
Both outsourcing and traditional investment management approaches have pros and cons. To follow the best path, firms should consider their specific needs and goals.

How important is growth?
Firms at an inflection point for growth should consider their ability to deliver scalable, consistent experiences to their clients. If taking on more clients means increasing costs through additional investments in things like more in-house resources, additional tech, or additional expertise, it might make sense to consider OCIO services. Delivering more nuanced and personalized strategies, navigating changing regulatory requirements, and persistent market uncertainty, make OCIO an appealing proposition for a growing number of firms.

What about the costs?
Advisors concerned about the costs associated with OCIO services should note that more than half of advisors who currently outsource their investment management report their operating costs have declined since they began outsourcing, with 40% seeing declines in costs of 5% or more.⁵ The costs can often be offset by the operational efficiencies created by using one. An OCIO offers a team of seasoned experts and systems to manage investment portfolios more efficiently and may cost less than hiring, training, and implementing in-house resources.  
 
How valuable is time?
One of the most prevalent reasons to leverage OCIO services is to free up advisor time to focus on clients. According to Kitces, the average independent financial advisor only spends about 9 hours a week on business development.² Freeing up several additional hours a week means advisors can devote more hours doing the things that have the most impact on their business.

While OCIO services offer an increasingly popular solution to navigate complex financial environments, optimize investment performance, and manage risks, its merit largely depends on the goals and strategy of the firm. For some advisors, taking a hands-on approach to managing their client assets in-house is still a key component of the value they deliver and how they serve their clients.

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¹Source: U.S. Outsourced Chief Investment Officer (OCIO) Market Outlook, Cerulli Associates, April 2022
²Source: Kitces.com, How Do Financial Advisors Actually Spend Their Time and the Limitations of Productivity, March 2019
³Source: ThinkAdvisor, Advisors Happy With Outsourced Investment Management: Survey, March 2022
⁴Source: Investments & Wealth Monitor, Outsourced Chief Investment Officer: An Industry Disruptor, February 2019
⁵Source: Adhesion, Why More Advisors Are Considering Outsourcing Investment Management, June 2022

OCIO services offered through TownSquare Capital, LLC, an Orion Company, a Registered Investment Advisor.