Implemented consulting or Strategic investment partner - Score your provider against five key factors

Your Outsourced CIO, also commonly known as an implemented consulting provider is mission-critical to your organisation’s long-term success. So they better be good. But how do you know if they are? Here are five key factors to assess their performance by.

With interest rates rising and inflation remaining at stubbornly high levels, not for profit investors are facing a double-whammy of higher operating expenses and potentially challenging investment returns. With the stakes so high, and resources increasingly limited, many organisations are turning to a strategic investment partner also commonly known as implemented consulting, to ensure they are able to effectively manage their investment program. It’s more imperative than ever that your implemented consulting provider step up to the plate—or it may be time to make a switch. And, it goes without saying that if you haven’t worked with an implemented consulting provider yet, we believe there’s never been a more critical time to consider outsourcing your organisation’s investment needs.

But how can you ensure that your current strategic investment partner—or the one you are considering choosing—will be up to the task at hand? After all, not all providers are created equally. Capabilities, skill set, depth of knowledge, resources and investment philosophy can vary sharply from one provider to the next.

To help provide you with answers to this all-important question, we’ve developed a questionnaire to guide you through an evaluation process of your current or potential outsourced investment partner. Think of it as conducting an annual checkup—or risk assessment—on your outsourced investment partner. Below, we share the five key factors we believe all outsourced CIOs should be assessed by. With over 30 years of experience managing the investments of non profit organisations, we have unique insight into what it takes for those in the industry to achieve their investment goals.

1. Does your partner provide ongoing strategic advice and direction that will impact your results?

We all know the deal: During the bidding process, potential providers promise round-the-clock communication, collaboration and attention to your organisation's needs.

But once the contract is signed, these types of promise can go unfulfilled. Think back to how engaged your provider has been with you since the ink dried. Have they truly given your organisation the personalised attention it’s needed as the days, months and years have ticked by? And, if you’re thinking about outsourcing for the first time, check and see if the provider even has the capabilities and resources to deliver on this promise in the first place.

This is a very important in today’s highly uncertain market environment. With fewer opportunities to carve out excess returns, every stone needs to be overturned to identify potential opportunities and potential risk. Doing this requires hands-on, daily portfolio oversight. Picking good managers and portfolio rebalancing on a quarterly cycle is no longer sufficient, and, quite frankly, no longer acceptable—especially in today’s volatile markets. A strategic investment provider will have grabbed the reins on day one and continuously be taking active, real-time ownership of your organisation's portfolio.

Beyond demonstrating a commitment to day-to-day portfolio management, it’s also instrumental that your provider be giving clear, direct advice on improving the portfolio's structure, in order to meet return expectations. If it’s your first time searching for an outsourced investment provider, ask upfront how they will go about doing this during the selection process. A skilled provider should be able to offer solid advice on both portfolio structure and allocation - and thoroughly demonstrate how they will optimise returns for your organisation.

2. Does your provider have strong risk management capabilities and ongoing fiduciary oversight?

It’s also critical for your outsourcing provider to have strong risk management capabilities. If you’re just starting down the OCIO path, make sure that the provider demonstrates this during the selection process. Remember that as fiduciaries, providers have a duty to manage all risk, including unintended risks that the organisation may be unaware of. A true fiduciary should be proactively identifying all unintended risks, and developing a plan to mitigate each one.

The importance of this cannot be overstated. Many times, unintended risk can prove detrimental to a portfolio’s short-term return objectives. By the time the risk has been mitigated, the damage is often already done. It goes without saying that fiduciaries must monitor all risks with a sense of vigilance, and ensure that the risks are managed out ahead of time.

Of course, it's one thing to say this, and another to actually do it. If you’re dipping your toes into the outsourcing waters for the first time, how can you determine if the investment partner bidding for your services will actually deliver on their promises? How will they identify some of the unintended risks that can occur in your portfolio when hiring multiple managers? Do they have insight into your total portfolio holdings—not just each manager individually? Ask them what the 1-in-20 risk event is that could detrimentally impact your portfolio. Then, ask how they would address this risk ahead of time. What capabilities have they built and what specific steps would they take to manage out the risks in real time?

Responses to questions like these are where the contrasts between different providers become more readily apparent. Successful portfolio management requires much more than just picking good managers. A true fiduciary partner will already know what risks have been taken, what exposures exist and exactly how each of these risks may impact performance. They'll stress their commitment to dynamic portfolio management and to making adjustments in real time.

By contrast, a provider lacking in these capabilities will go light on the specifics. They’ll talk of portfolio rebalancing or adjusting manager weightings at quarterly meetings instead, skipping over the fact that this effectively amounts to a set it and forget it approach, whereby portfolio adjustments are only made four times a year, regardless of daily market volatility.

3. How transparent are your OCIO provider’s fees, and what is their value/cost ratio?

It’s no secret that many an OCIO provider often has a complex fee structure. The exact breakdown of this structure, however, should be anything but secret.

Simply put, honesty and transparency over fees is crucial. A provider’s willingness to provide full fee disclosure upon request speaks volumes about their commitment to transparency. If they keep hiding fees from you, what else are they keeping you in the dark on?

A good Outsoured CIO will be entirely honest and upfront on their free structure, and will inform you well ahead of time of any changes in cost. They’ll be more than willing to dive into the nitty gritty, thoroughly explaining each fee you have questions about. You should demand no less. Ask what each fee is for, and the value it provides. Press the provider for additional details on charges that confuse you, and ask about costs you don’t see listed.

In addition, for those giving OCIO a go for the first time, during the fee evaluation period, it’s important to look at the total estimated fees based on the same assumed asset allocation—active and passive—for all providers. Too often organisations will only compare the outsourcing fees, assuming that the additional investment management fees will be the same across all providers. This is rarely the case, since providers that have a more substantial footprint in outsourced CIO solutions will likely be able to leverage their scale to significantly reduce the fees for the underlying investment managers selected, which will make their total estimated fees less.

Ask the provider if they can provide a total estimated fee based on managers they have actually implemented for other clients. Ask what other fees might impact the performance of their portfolio that aren’t clearly transparent. Ask what percentage of passive investments they have assumed in their investment manager fee estimate to ensure they haven’t gamed pricing.

A quality OCIO partner will not shy away from these questions. Instead, they’ll be able to clearly demonstrate the value behind each fee, and why the fee is worth paying for. Remember Warren Buffet’s old adage: price is what you pay, value is what you get. Premium services are worth a premium, but the value must be justifiable.

4. How well does the provider act as an extension of your staff, helping to ease internal workloads?

What good is any Outsourcing investment provider if they’re not taking work off your plate? After all, one of the reasons many not for profit organisations outsource in the first place is to free up more time and resources to address issues core to their business. It goes without saying that this offering has become even more paramount in the two-plus years since the COVID-19 pandemic hit.

Don’t be content with your current provider if they merely create zero additional work. The right partnership needs to be resulting in less overall work on your end. Has your provider taken the lion’s share of the workload off your back? Do they have the right systems and the right infrastructure to support what you’re already doing internally? How else are they helping ease your overall burden?

The right provider’s staff will be acting as an extension of your staff and doing all of the heavy lifting. They should be overseeing and providing all of the operational, administrative and audit support needed to ease your internal workload. They should be available 24/7. Their support should make you feel like you’re being given the white-glove treatment—which is exactly how your organisation should be treated.

5. Does your provider have experience and knowledgeable that pertain to your sector?

Last but not least, your provider should thoroughly understand the ins and outs of the not for profit sector. Remember, the financial health of your organisation is at stake—the current economic environment has resulted in challenging operating margins, which is why a strong investment program is needed to ensure the overall resiliency of your organisation’s financial plan. There’s no time for learning on the job. If you’re in the OCIO selection process, make sure this is not the provider’s first rodeo. Your partnership needs to be a sharing experience, not a learning experience. Tricks of the trade and lessons learned from previous engagements should be shared by the provider to make sure your organisation is on the right path.

How experienced is your provider in the industry? Ask yourself if they’ve demonstrated an understanding of the specific challenges unique to the not for profit sector throughout your partnership. Have they demonstrated an understanding of the impact of mergers and acquisitions activity on an organisations’ balance sheet? What about the impact of credit ratings? Have they shown this? Above all else, have they demonstrated an understanding of how not for profit organisations think?

Remember, a strategic investment provider will go beyond demonstrating their understanding of the pressures in the industry and what keeps you up at night. They should also be telling you the things you should be thinking about—the myriad of investment options at your disposal, and how each option may impact your return objectives. They should be well-versed in the day-to-day challenges of not for profit organisations, and should strive to take preemptive actions. How often has your provider done this over the course of your partnership?

The bottom line

How well did your OCIO provider score? When it comes to risk management prowess, strategic vision, fee transparency, resources and industry expertise, not all are on the same page. If your current provider isn’t exceeding your expectations in each of these categories, it may be worth exploring a new partnership. And if you’re just beginning your outsourcing journey, it’s well worth the dig to find a provider that positively checks all of these boxes.