“Independently owned” and “not an OCIO competitor” are important traits when selecting a firm to monitor your Outsourced Chief Investment Officer (OCIO.) It is also critical that your OCIO monitor be free of conflicts of interest so that their sole motivation is to give the client honest and objective performance evaluation.
Monitoring firms that claim independence and objectivity, but also perform investment consultant and OCIO searches, actually are in a highly conflicted position. If a plan sponsor hires your firm for due diligence, performance review, governance review, etc., the analysis and report could be framed in such a way to generate a subsequent search to replace the OCIO being reviewed.
While the OCIO will be able to review the evaluation and respond to the harder objective & quantitative data in the monitor’s report, the softer and qualitative opinions can be biased towards the goal of generating a search to replace the reviewee. This 1-2 punch of review-then-search can create an increased revenue stream. There are many ways this can be accomplished, and here are some examples that can be used in almost every situation:
1. “Performance is good, but…” It may be that the OCIO has added value. But the reviewer could place that performance in the context of other OCIOs and claim there are many OCIOs that have a longer track record of better and more consistent performance.
2. “You can get a better deal on fees.” Fees vary, and sometimes you get what you pay for and sometimes you don’t. The reviewer can again put the current OCIO fee into context of what others are charging while simultaneously juxtaposing performance. Finally, the projected fee savings could justify the cost of a search for a new OCIO.
3. “Team and personnel are okay, but…” Depending on the methodology, philosophy and execution of the current OCIO, their personnel may or may not be adequate. For example, it may be that the OCIO believes in indexing all publicly traded asset classes. Therefore, they do not need a “robust and deep bench” when it comes to manager research. Similar critiques could be levied when it comes to asset allocation and alternatives. There’s always another firm out there with more horsepower, depth and breadth. But that doesn’t necessarily lead to better performance.
4. “Most other OCIOs…” There are many ways to skin a cat. Doubt can be created about the OCIO’s ability if they take a different or “unorthodox” approach from the mainstream. Being different can create short-to-intermediate term universe rankings far below median. Following the herd mentality feels safe, but never forget Warren Buffett’s contrarian saying, “When others get greedy, I get scared. When others get scared, I get greedy.”
These are just four examples that easily come to mind of how an OCIO monitor, that also provides OCIO searches, can steer the client towards either testing the market or commit to replacing their existing OCIO. The opportunity to subtly influence a client to grant subsequent work creates a clear conflict and is why I will not perform OCIO searches.