3 reasons why firms borne from consulting can make for better OCIO providers

Executive summary:

We believe firms with consulting foundations are well-positioned to serve as OCIO providers.
In our view, the innovations and perspectives that come from a consultant-driven approach benefit all OCIO clients, regardless of size. A key reason why is because firms with consulting mindsets are trained to look for the best solution for their clients—no matter where that solution comes from.
Firms with consulting mindsets also have the right combination of scale and access as well as extensive experience solving novel challenges—all due to their relationships with some of the most complex investment pools on the planet.

Most people wouldn’t put camera phones and OCIO (outsourced chief investment officer) in the same category, but the two seemingly unrelated innovations actually came into existence in similar ways.

How? Both were created in response to broader efforts to solve very complex challenges.

Let’s start with the camera phone. We take the notion of an image-capturing device on our phones for granted today, but the very idea was unheard of until the era of space exploration ushered in the need for cameras small enough to fit on spacecraft.

This innovation—integrating a tiny camera into a phone—has come to benefit the world immensely, with camera phones vastly improving the way information is collected and disseminated.

Likewise, a similar process played out in the financial services sector, with some of the largest innovations of the last 50 years developed to meet the demands of the largest, most sophisticated institutional investors. Addressing the challenges of these mega-investors can seem as complex as a moonshot, but the innovations resulting from that effort have benefited institutional investors of all sizes.

At Russell Investments, we’ve long had a front-row seat to these innovations, as we helped launch institutional investment consulting in the 1960s and today are one of the larger investment advisers in the world. After seeing how effective these innovations were in solving problems for giant investment pools, we decided to put our heads together to find a way to leverage them for a broader range of asset owners. Our solution? OCIO, or outsourced chief investment officer—a concept we helped pioneer in the early 1980s. OCIO allowed smaller asset owners to have access to the same innovative solutions benefiting large asset owners—including strategies that drove greater return on their investment and managed their overall risk more effectively—all while helping free up more time and resources for them to spend on core business activities.

Multiple solutions. One team.

We contend that many institutional investors in the market for an OCIO provider today need the benefits that come from firms like these—firms borne out of consulting. Why? Because consulting is a source of insight. Firms with a consulting foundation bring the experience that comes from solving complex challenges to bear for their OCIO clients. This consultative approach keeps them at the edge of innovation. This key benefit of insight-generation helps them craft cutting-edge solutions that can then be adapted and implemented for OCIO clients.

Beyond access to innovation, we believe that these firms have several other advantages. Perhaps the biggest one is that the capabilities that were developed to meet the needs of consulting clients are the same capabilities that underpin OCIO solutions.

In other words, OCIO firms borne from consulting don’t have one set of resources for non-OCIO clients and a different set for OCIO clients. The people providing strategic advice to consulting clients are the same people advising OCIO clients. And they understand how to adapt to clients with different levels of assets and resources without compromise. The net result of this is that OCIO clients have access to all the firm’s underlying expertise and capabilities—whether that’s strategic advice, manager research, portfolio management, robust implementation skills, technological prowess, or advanced monitoring and reporting datasets. At the best firms, each of these capabilities can be leveraged to provide best-in-breed service to clients regardless of where they are on the implementation spectrum—whether they prefer full OCIO, partial investment outsourcing or consulting. Simply put, we believe being a discretionary manager with a consulting mindset strengthens a firm’s suite of capabilities from different angles and allows it to be more in tune with the market.

Three key reasons why having a consulting mindset makes for a better OCIO

Next, let’s dive into three specific reasons why we believe an investment solutions firm borne from consulting has the most to offer to organizations looking to outsource the management of their investment programs.

#1: Experience with complex investment pools

First and foremost, many firms with a consulting foundation will have accumulated a wealth of experience working with some of the most complex investment pools on the planet. Notably, these massive investors, due to their size and complexity, tend to face challenges before others do. Inevitably, however, these same challenges will trickle down to other investors. From our vantage point, this makes having relationships with large investors all the more vital, as it allows these best-in-class firms to see what’s likely coming down the pike for other clients.

Knowing that these challenges will probably impact a broad range of clients allows these firms to get a head start on scaling the solutions they’ve developed for their large-investor clients for a wider client base. And because the team of people working on these large-investor challenges will be the same as the team of people working on other client portfolios, this is a very natural progression in thinking. We believe this benefits OCIO clients at these best-in-class firms, as the firms are able to get their arms around key issues ahead of time—and then design and implement solutions to help mitigate them before they morph into full-blown problems.

#2: Unconstrained thinking

Another reason why we think that OCIO providers with consulting mindsets make for better partners is because we believe these types of firms are more inclined to be totally unconstrained in their thinking. This is because at its core, consulting involves finding, or in some cases developing, the best solution anywhere in the market for clients—meaning that firms borne from consulting will have access to everything and anything they need in the market. For its OCIO clients, this means a firm can offer a seemingly unlimited range of potential tools and solutions that can be mixed and matched according to each client’s preferences.

We believe the best-in-class firms operate in this way, unconstrained in what the best approach to managing an institutional portfolio is—and that goes from asset allocation all the way down to individual manager selection. These firms don’t lean an investor’s strategic asset allocation (SAA) toward their investment management solutions. Instead, they take an open-architecture approach to solving problems for their OCIO clients.

And if best-in-class firms with an open-architecture approach don’t have access to the tools or capabilities that they believe will put their clients’ portfolios in the best position? They’ll bring in specialist underlying managers. Contrast this with the approach of other OCIO-only firms, where the range of options is typically more limited and clients are more likely to be boxed into cookie-cutter, one-size-fits-all, proprietary solutions.

We believe that best-in-class OCIO firms will be agnostic on what the solution is. They’ll strive to deliver solutions that are customizable and flexible, because they know that what works for one OCIO client doesn’t necessarily work for the next. Their consulting heritage will allow them to tap into the full universe of possibilities for their OCIO clients.

#3: Scale and access

We also contend that the combination of scale and access that comes from having a consulting mindset translates well into the offerings of an OCIO provider. This is because consultants have access to both household-name managers and niche managers. For instance, a consultant with strong manager research capabilities will often have niche managers come to them first to share new and interesting opportunities. And on the other side of the coin, the firm’s deep relationships with managers may afford them the opportunity to collaborate on product innovation to meet client needs. Last but not least, when these best-in-class firms design custom things for demanding investors, the resulting innovations will typically benefit a wide swath of investors—not unlike the story of OCIO’s origins.

And, to beat the drum on this once more—because we truly believe this is a significant differentiator— the same people advising on manager selection or asset allocation at these firms are also the ones implementing solutions for OCIO clients. This makes the relationships they build in the industry that much deeper. And we believe it’s those strong relationships and sense of partnership that allow these types of firms to design and implement innovative, bespoke solutions for their clients.

The bottom line

Innovation and flexibility are critical components to success in any line of work—be it space exploration or financial services. We believe that OCIO providers borne from consulting are uniquely situated to offer both.

These firms will have worked with a number of clients that have transitioned from pure consulting to partial or full OCIO. They’ll understand what organizations’ investment pain points are, and they’ll build discretionary capabilities to alleviate them. They’ll have seen the roadblocks and potholes along the journey and will understand that each organization’s goals and circumstances are unique. Likewise, these firms will know how to evolve and adapt to meet the rigorous demands of modern-day investing. And above all else, their consulting mindset will allow them to take a flexible and unconstrained approach to finding and implementing the right OCIO solution for any organization, big or small.

The end result? Organizations that partner with a provider with a rich consulting heritage and a world-class implementation toolkit may be off to the moon.