Is your OCIO experience aligning with your expectations?

Executive summary:

  • The right OCIO provider will work with your organization to establish expectations at the beginning of the partnership. This includes an understanding of the likely distribution of results versus the average—both on the downside and upside.
  • We believe transparency, communication, realism, and a willingness to go the extra mile are critical attributes of the most effective OCIO providers.

We’ve all been in this boat before: You buy a new product, and somewhere down the line, there’s a problem. Something happens you didn’t expect. So what do you do? You pick up the phone, call customer service and cross your fingers for a positive outcome.

If the company places a premium on customer satisfaction and wants to ensure you remain a customer for a long time, they’ll identify and work to fix the problem, full stop. Simply put, they’ll go the extra mile to ensure that your experience with their product matches up to your expectations.

Case-in-point: I was grilling lambchops earlier this year, when suddenly the grease tray on my grill caught on fire. The food was scorched, and the tray was toast. My disappointment at ruining dinner was quickly replaced with embarrassment as I realized I’d neglected to clean out the grease tray since moving into the house. While short of the absolute worst case that would have involved calling the fire department, I was still disappointed and wanted to get my barbecuing strategy back on course by committing to regular grease tray maintenance. But I needed help. Avoiding the problem going forward meant I needed a new tray for my five-year old barbecue to get back on the right grilling path. So I called the barbecue manufacturer and explained what happened. Their response? Sorry for the mishap. We’ll send you another grease tray, free of charge. No problem whatsoever. My experience was outside the range of what they expected for their customers and they wanted to make it right. 

Was I satisfied with this level of service? You bet—to the point where I’ll never buy a grill from another manufacturer again. Things happen. Markets happen. What often matters more than the occurrence is the response.

Of course, we’ve all been subject to the opposite outcome in these types of situations—the one where the company doesn’t return your calls, refuses to admit there’s a problem, or places the blame entirely on you. This is a classic case of experience failing to align with expectations, and it’s not an acceptable outcome in any industry—be it gas grills or financial services.

This leads me directly to the meat (pun intended) of this article: How can organizations that have chosen OCIO (outsourced chief investment officer) ensure their experience working with an OCIO provider aligns with—or better yet, exceeds—their expectations? In other words, how can they get the barbecue treatment that I experienced? What might make them vow to never work with any other OCIO provider?

Let’s dig in and take a look, starting with establishing expectations.

The importance of setting the expectations right

First things first: In order for your OCIO provider to deliver the best possible experience, it’s critical to establish what your expectations are going into the partnership. What does success look like for your organization? Is success measured by achieving specific funded status outcomes or asset return goals? Or perhaps moving the needle toward providing greater financial security for your employees?  Regardless of the metric, investments involve risk. So getting expectations right up front should include an understanding of the likely distribution of results versus the average—both on the downside and upside. 

Whatever your answer, the right OCIO provider will work with you to define these measurements of success right out of the gate. They’ll make sure your investment philosophy is in sync with the strategy they execute on your behalf, and they’ll set up specific parameters that define both investment success and when there might be a need for course correction.

During this process, OCIO providers often model results over long-term horizons as a critical component of designing the right investment strategy. The output is typically a probability distribution around expected, downside and upside results. As actual results are accumulated over time, these ex-ante distributions can be used as a backdrop for realized results, giving the asset owner some sense of where ex-poste observations fall versus expectations.

And while it is important to look at expected results over the long term, long-term risk appetites are often tested over shorter periods of market disruption. It’s critical for organizations and providers to establish how disappointing short-term results might be over specific market environments. A geopolitical crisis or black-swan event can quickly test even the best laid of investment plans. So, establish how shorter-term shocks can impact your results and bake that into the design of your investment strategy so you have the confidence to stick to it in volatile times.

For example, let’s say your organization is a defined benefit (DB) plan sponsor with a goal of attaining 97% funded status. I’d argue a best-practices approach for you and your OCIO provider during the strategic planning phase would be to come up with a range of acceptable funded-status outcomes—for instance, achieving a funded status between 90% and 104%. This way, if your organization’s funded status dips to, say, 93% one quarter, you won’t panic, as you’ll have guardrails established. Because you’ve taken the time to set realistic expectations with your provider, you’ll know that a decline of that magnitude is still within the range of what you planned for and doesn’t jeopardize your pathway to full funding over the long-term.

Key attributes of an effective OCIO partner: Transparency, communication and realism

Let’s take this a step further, though, and say for the sake of argument that your portfolio performs worse than expected and outside the range of projected outcomes. In this instance, your experience is clearly out of whack with your expectations. What should you do?

If you’re working with the right OCIO provider, you shouldn’t have to ask this question. Your provider should have already come to you and initiated that difficult conversation. Above all else, the most effective OCIO providers strive to be fully transparent—in good and bad times. If something goes wrong, they’ll bring the problem to your attention right away and present potential course corrections. That’s true transparency—proactively admitting that a strategic change should be considered and presenting you with a plan for adjustment. Hope is not a great strategy when things go sideways. Transparency and communication are key to turning the tide.

And look, I get it. These types of conversations about underperformance are hard. In my 20-year stint as a chief investment officer at a public utility, I dealt with my fair share of them. The best providers I worked with were the ones who raised the problems directly, the ones who logically diagnosed the root cause and how they planned to address it. That’s because part of being a good partner is not always just saying, everything will be fine. It’s having the ability to be realistic, to flag when your own strategy isn’t working, and to admit that sometimes, markets can humble us.

Now, I would be remiss if I didn’t mention the other side of the coin—the times when your portfolio performs much better than expected. These types of outcomes can obviously make for far easier conversations, but should trigger the same kind of strategic soul searching and introspection because risk is almost always a two-way street.  Upside surprises should be as robustly evaluated as those on the other side of the distribution. 

Is your OCIO provider flexible and willing to go the extra mile?

Last but not least, I contend that in order for your OCIO experience to match your expectations, it’s imperative that you work with a flexible provider that will go the extra mile to help you meet your investment goals and objectives. What might this entail?

For one, it means working with a provider that doesn’t just show up once a quarter and report on how your portfolio did. This set-it-and-forget-it approach wrongly assumes that markets work on quarterly cycles—if only that was the case! If the past few years have taught us anything, if that’s markets can gyrate wildly from day to day and hour to hour, which makes frequent check-ins between an organization and its OCIO provider vital to achieving success.

The bottom line: It all boils down to a sense of partnership

An OCIO provider who values transparency, communication and flexibility makes for a natural strategic partner. They’re uniquely situated to act as an extension of your staff, working seamlessly with your team to help accomplish your investment objectives by setting a strategy that you can stick with when markets are unfriendly.  And if an unexpected issue arises or a problem bubbles up to the surface, the right OCIO provider will take ownership and grab the reins. They won’t dodge the work—they’ll work to get you back on a path to success. They’ll strategize, execute and implement.

The end result? Your experience may very well surpass your expectations.