Supercars vs. Uber drivers: Risk management for actual humans

Executive summary:

  • The complexity of some risk management platforms can lead to a steep learning curve for institutional investors, draining resources and creating stress.
  • We believe that for most firms, what they need is not a single product or pre-built platform. This is because the demands and constraints of each institutional investor are just too different.
  • We believe that some of the best OCIO providers are those that earn your trust one assignment at a time, instead of trying to upsell you on a large, complex solution. 

Not everyone should buy a Lamborghini to drive to the airport.

If you need to drive 220 miles an hour and demand doors that open upward instead of outward, and if you have a car budget in the millions, then maybe you’re the exception. But for the rest of us, a supercar is probably too much car, too much stress, too much money. It’s just too much.

The same logic may hold true when it comes to risk management platforms for institutional investors. Some respected and skilled asset managers pitch platforms that promise to transform the way institutional chief investment officers (CIOs) and their teams manage portfolios, manage risk, and invest. But, as a former CIO of a very large publicly-traded California utility company with a small-but-capable in-house investment team, there is really no way we could have put such a platform to use. We had a team of only three or four people. Such a tech-based risk management platform has a lot of complexity with a steep learning curve. Managing data requirements, learning new functionality, and shouldering the responsibility to get everything exactly right drains resources and creates stress. It’s just too much.

What did I really need? I needed more resources, more expertise, and, if I’m really honest, I needed those experts to do a little hand-holding. I needed them to actually walk my portfolio through the complicated stuff, like transitions and overlays and other risk management activities that my small-but-capable team was not able to manage, but that my portfolio needed in order to meet its goals. I didn’t need a Lamborghini that I had to learn how to drive. I needed an Uber driver who, once I told them where I wanted to go, would make sure I got there, on time and for a reasonable price. Having the Uber Black would have been even better!

And because I was good at my CIO job, that’s what I got, by working with a proven, tested provider who acted as an extension of my team.  They helped me get stuff done … rather than giving me more to do.

How can providers prove their value?

How do I know that provider was proven and tested? Because I tested them, the old-fashioned way. I hired them for one assignment—the first was as a consultant. They proved themselves to add value on that assignment, so then we used them for a small cap fund, which also went well. Two for two. They were earning our trust, so we added on a cash-management assignment. That worked, too. Then, when the global financial crisis hit, who did I turn to for help with an overlay? That same, now-trusted partner. Shortly after that, we called them in for a transition management project, then for FX. Now each time, I fulfilled my fiduciary responsibilities to consider other providers as well—and sometimes the right decision was to go another way.  But in many instances, the synergies across mandates were undeniable and compelling.

Finally, this same partner offered me a job. I climbed over the fence—leaving that small-but-capable three-person team and joining a team of 1,300 or so capable, dedicated experts, each committed to earning trust one risk-management assignment at a time.

From my new side of the fence, I like that trust-earning approach, because there is a simplicity to it. When trust is earned in relatively small bite sizes, more trust can be given. It’s the sort of temp-to-hire arrangement that assuages the concerns of board members and CFOs. From a client’s point of view, there is minimal risk that they are going to make a big strategic mistake by doing business with such a proven firm—such a personally known entity.

One size platform does not fit all

Last week, I was discussing this with my colleague Travis Bagley, the director of our transition management services, asking him why we don’t package this together as a single offering. Travis reminded me that we don’t sell products. He said, “We don’t go to market that way. We don’t think of having a set of products we’re trying to get you to consume. Instead, it’s a set of capabilities to help you solve the problems you’re going to face in the future. It’s an expansion of your team.”

I also have another confession to make: This metaphor about the supercar didn’t originate with me. The idea came from my colleague Samantha Foster, who previously oversaw investments and risk management of a large private California university. Sam was talking about often being pitched to by other large asset managers, whose products were well-known, tech-based portfolio management platforms. “I said no,” said Sam. “It was too much of a Ferrari for us to handle, and we’re not dumb! There was no “service” mindset. We needed Uber Black. I just wanted to tell someone where I wanted to go and have them actually help me get there.”

By the way, Sam no longer works for that billions-of-dollars endowed university. She climbed over the same fence I did.

For most firms, what they need is not a single product or platform. The demands and constraints of each institutional investor are just too different. With a pre-built platform, you’re going to buy either too much or not enough, or the wrong thing all together. With a strategic relationship—assuming that relationship is with the right partner who is good at a lot of things—you’re going to get what you need when you need it, and not pay for anything you don’t need.

Why not just work with several separate providers? Why not have one consultant, another transition manager, yet another overlay manager, an FX provider, risk aggregator, and one asset manager? Because of synergy. If you can find a provider who can earn your trust in many or all of these things and do many or all of them for you, then each action they take on your behalf will inform the other actions. If they consult on your portfolio (and do that well), they’ll have a deeper understanding of how a transition should occur. And that transition (assuming it too is done well) will build a foundation of knowledge when they need to do an overlay for you. One skill informs the other skills. Yes, such providers are rare, but they do exist. And the best ones will earn your trust each and every time.

One final story: Just recently, we had a publicly-owned portfolio in the eastern part of the U.S. who began as a transition-management client. At the time of that transition, they didn’t realize they were also in need of an overlay, but the transition brought that to light. After that, we helped them with cash management, then manager research consulting and, most recently, a factor-completion project. They currently don’t want any more than that. And the fact that we’re okay with stopping there is part of why they keep working with us. We’re not trying to cross-sell or upsell them, we’re providing solutions to solve their evolving challenges.

Our only sales pitch to them is proven value.