What’s your organization’s investment succession plan?

Executive summary:

• Change is inevitable at all organizations—which is why it’s critical to have an investment succession plan in place when managing financial assets.  
• A small investment staff can create a big succession risk, but you don’t have to go it alone.
• Consider reaching out to a skilled OCIO provider so that when the inevitable does strike, the transition is seamless. A deeper bench of resources can cover a multitude of risks.

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It’s inevitable—regardless of whether you’re a defined benefit (DB) or defined contribution (DC) plan sponsor, a non-profit healthcare system, or an endowment or foundation. At some point in time, the top brass that manage your organization’s investments will no longer be with the organization, whether that’s through retirement, a job change, or a change in personal circumstances.  Then what? Who’s in charge of protecting your employees’ retirement savings or the growth of your organization’s investments? Do they have the requisite investment knowledge to do so while simultaneously acting in a fiduciary capacity?

One thing’s for certain—whether it’s people’s financial security or the financial health of the organization on the line, you better have a plan in place. This is why, as uncomfortable as the topic can be, we believe it’s vital for all organizations that haven’t already done so to fully address the issue of investment succession planning as soon as possible. For organizations that have already taken this step, we encourage you to read this article and then consider if it makes sense to re-evaluate any parts of your plan.

Below, we’ll share why we think most institutional investors should at least consider investment outsourcing as part of their succession plan. Let’s get started.

The importance of maintaining specialized knowledge

Institutional investing is rife with complexities. It takes a blend of deep expertise, specialized knowledge, and years of hands-on experience in the industry to successfully manage an organization’s investment program. Extensive experience in increasing returns, reducing risks, and managing costs are critical to helping achieve an organization’s investment goals. Take it from me, a former chief investment officer (CIO) at a large energy utility for nearly 20 years.

It’s for these exact reasons that many of my peers are still at the helm of their respective company’s investment programs as they approach retirement age. Simply put, the depth of knowledge they’ve accumulated from decades on the job isn’t something that can be learned quickly or easily transferred.

But what if that reliance on key man risk doesn’t have to be?

What if, instead of desperately searching for a replacement to manage your organization’s investments when the head of the program announces their departure, you had a trusted outsourced chief investment officer (OCIO) partner—one with a fundamental focus on OCIO—already waiting in the wings? A partner that could seamlessly step in and not only preserve the institutional knowledge within your organization’s investment program—but expand upon it?

Why OCIO makes sense as a succession planning alternative

We believe there are several advantages to using OCIO as a succession planning alternative, and chief among them is the fact that investment outsourcing is the very bread and butter of a skilled OCIO provider. For these providers, OCIO isn’t a line of work they dabble in on the side—it’s core to their very business model. Managing complex investment programs and implementing customized portfolio solutions for global institutional investors is simply what they do, day in and day out. Their business is fundamentally OCIO. So when evaluating whether an OCIO firm should be part of your company’s investment succession plan, ask yourself: Why not consider partnering with a firm that makes their very living doing this?

Another major advantage we see in utilizing an OCIO provider is that doing so drastically reduces the risks of institutional knowledge loss. The reason why is simple: when you hire an OCIO, you’re hiring a team, rather than an individual. Doing so mitigates the risk of all of your organization’s investment knowledge disappearing if the inevitable occurs. This is not a sales pitch. It's just a fact. Asset owner succession planning risk is diminished, because firms with robust capabilities have intentional redundancy, business risk management, and business continuity teams. They manage other related continuity risks as well—such as cybersecurity—with robust, vigilant purpose-built efforts.

Look, at my current job, I work side-by-side with about 1,700 people dedicated to improving the financial security of individuals and organizations—whether through managing a DB or DC plan or the growth of an endowment. If I leave, there are 1,699-ish other people standing by who can provide answers as well as I can. There is simply a much larger pool of expertise. So, not only do I have a drastically larger team of resources, the beneficiaries of my clients' plans do as well.

A small investment staff can create a big succession risk

The reality is that the risk of institutional knowledge loss is often much greater at organizations with smaller investment staffs. Non-profits, endowments, and foundations in particular tend to be thinly staffed in these areas. Many companies with DB plans tend to be in a similar boat, as the dwindling popularity of pension plans means organizations are less likely to have ample resources devoted to managing them. And let’s face it, if your investment staff consists of three people, the chances that the second-in-command is ready to take over running the investment function at the drop of a hat are logically slim. Building out a meaningful career ladder on a small team working in a non-core function is tough.

For many of these organizations, there’s also the issue of turnover on the investment committee itself. Some committees pick managers, some approve cash flows, some only approve an investment policy statement (IPS) and review staff-delegated items. In all of these cases, the committee members need to have succession planning for themselves. The fiduciary must determine their own succession plan and the plan for each operational node that has delegated responsibility. If that sounds like a headache, well, that’s because it is. A skilled OCIO provider can help sort this all out.

But my organization’s investment team is well-staffed. So why should we consider OCIO as part of our succession strategy?

Some of you reading this might be thinking, OK, I can see why OCIO makes sense as a succession-plan option for organizations with small investment teams. But what about for organizations with substantial investment staffs—like large endowments or certain large corporations that boast state-of-the-art asset management programs, for instance? Surely their succession risk must be lower?

Not necessarily. On the one hand, it’s true that the bigger the investment team, the smaller the risk that the entire team will depart en masse. But on the other hand, it’s equally important to see this through the lens of ensuring that your top-notch investment program remains top-notch at all times.

In this case, I’d argue that even if your organization’s investment program is staffed with skilled lieutenants who are more than able to step up to the plate if the leaders leave, you simply cannot have a deep enough bench of investment experts on hand. It’s just too risky not to. And maybe that deep bench includes a partnership with an OCIO provider—a firm that can step in at a moment’s notice and serve as an extension of your staff if you hit a rough patch.

Three additional OCIO benefits for succession planning

Besides the specialized investment knowledge and ample resources that come with hiring an OCIO provider, we see three other reasons why organizations should explore OCIO as a potential solution:

1. Economies of scale. OCIO can not only help with succession risk, but can also provide an opportunity to piggyback on a drastically higher level of investment scale. Most OCIO firms are almost always able to reduce costs for their OCIO clients. Their economies of scale result from the aggregate power of managing many plans, not just one. The net result? Your organization may be able to achieve its objectives more reliably, with improved risk management and succession-risk mitigation, all for less money.
   
   
2. It's not an all-or-nothing decision. Be sure you understand the shades of gray between insourcing and outsourcing—it's not an all or nothing thing. The best OCIO providers will meet clients where they are. Some clients see the greatest risk in manager contracting, so they may outsource most assignments, but keep actual manager selection decisions in-house. One way you could approach outsourcing would be to look at your greatest, lay-awake-at-night risks and just outsource those. Regarding succession specifically, a good idea for a firm preparing for a CIO’s retirement in the next year may be to just outsource risk management. This way, the firm can test the OCIO waters with this one assignment, and then potentially move further along the outsourcing spectrum.
   
   
3. Outsourcing can create valuable optionality. Let's look at two succession scenarios. In option one, you implement changes by retaining a new internal staff resource—either through an external recruiting and onboarding process or through promoting a junior member to the senior investment management role. In option two, you outsource to an OCIO provider.
   
   Now let's imagine, for whatever reason, you're unhappy with the results. Ask yourself: In which scenario is it simpler to make a change? In other words, is it easier to replace the new internal resource through firing and restructuring and re-recruiting and restaffing? Or is it easier to request a shift in the individual assigned to your OCIO mandate? 

The bottom line

Change is inevitable at all organizations—which is why it’s critical to have an investment succession plan in place when managing financial assets. But that plan shouldn’t have to be hard to execute. Consider reaching out to a skilled OCIO provider so that when the inevitable does strike, the transition is seamless.