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  • Brian Schroeder

Greater OCIO Power Demands Greater OCIO Accountability

No matter if you are a foundation, endowment, corporate pension or multi-employer benefit plan, there are 3 compelling reasons to hire an independent monitor if you’ve hired an Outsourced Chief Investment Officer (OCIO.)


The 3 reasons all stem from practical, legal, and ethical implications of granting greater power, autonomy, and higher fees. The prudent path dictates not stopping halfway. An independent monitor will balance the power/accountability scale.


#1 PRACTICAL- No Longer Part of the Decision Process

Going OCIO means the client has intentionally and drastically reduced their role in the investment process. Previously, clients likely reviewed recommendations concerning asset allocation, manager hiring/firing and rebalancing and then voted to approve/deny. This involved studies, searches and interviewing to ensure you were completely informed about changes to the portfolio.


Clients knowing portfolio investments, managers, attribution, and strategies is a legal and ethical imperative; especially for those subject to laws such as ERISA. While the OCIO takes on greater responsibility and the client now has a professional they can point both fingers at when performance is bad, the client can never abrogate responsibility for the actions of the OCIO nor the investment results.


But the client is now hindered not knowing what the OCIO is doing and how they are performing (see #3 below.) An independent monitor will close this knowledge gap.


#2 LEGAL- The Liability Bar has been Raised

Do you know the Tibble v. Edison case? In a nutshell, the plan sponsor was sued under ERISA for imprudent choices regarding mutual fund share classes which impacted fees and performance to the disadvantage of the plan participants. It was appealed to the US Supreme Court and the participants won again.


The plan sponsor’s primary defense was they relied on advice from an investment professional. The US District court found, and the US Supreme Court upheld, that the plan sponsor had to ensure that their reliance on the investment professional’s advice was “reasonably justified.” The plan sponsor did not previously perform due diligence of their investment professional’s advice leaving themselves open to charges of fiduciary imprudence.


Recently, a settlement for an ERISA-based lawsuit required hiring an independent monitor. Prudent plan sponsors need to be proactive. An independent monitor will provide a layer of legal protection that every plan sponsor needs to ensure their reliance on the OCIO is always reasonably justified.


#3 ETHICAL- OCIO Performance Reports are Often Misleading

In my 12 years of performing due diligence on both non-discretionary investment consultants and OCIOs, I have found many tricks and gimmicks that make performance appear better. And there are two kinds of performance reporting “magic” I have encountered. They can be divided into lies of omission and lies of commission.


The lies of omission are standard fare in most performance reports. The practice of benchmark linking hides an investment consultant’s or OCIO’s ability to add value through asset allocation. Investment consultants do not provide aggregate $ value-add of their active manager selection. Nor do they prove their value-add from firing active managers by tracking post-termination performance. Finally, they do not report their rebalancing value-add, nor missed rebalancing opportunities.


The lies of commission are exactly that. I have come across many examples of OCIOs and investment consultants manipulating benchmarks to make relative performance look better. Read Is my OCIO Better at Dressing-up Performance than Generating it? to learn many of the unethical tricks used to fool their clients.


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